A shareholders’ agreement (SHA) is one of the most critical legal documents a UAE startup will ever sign — and yet, it’s often the most overlooked. While founders rush to register companies, launch products, and raise funding, many leave governance and equity arrangements vague or reliant on generic templates.
In the UAE, where laws differ significantly between the mainland and free zones — and even between free zones themselves — a well-drafted SHA does more than protect rights. It sets the tone for the startup’s entire growth journey.
We unpack how UAE startups should approach shareholder agreements, what clauses matter most, and why jurisdiction influences everything from investor protections to dispute resolution.
Why Shareholder Agreements Matter for UAE Startups
Many founders assume that their Memorandum of Association (MOA) or Articles of Association (AOA) are enough to define their business relationships. But these documents are either too rigid (in the mainland) or too standardised (in some free zones) to reflect the nuances of early-stage growth.
A well-drafted SHA:
- Defines capital contributions and ownership percentages
- Allocates decision-making rights
- Plans for exit events like buyouts, acquisitions, or founder departures
- Clarifies what happens in a deadlock
Without it, disagreements over control, funding rounds, or profit distribution can escalate into legal disputes that derail traction, investor confidence, or even the business itself.
Legal Framework: Mainland vs Free Zones
Mainland Companies – Rigid Rules, Limited Share Flexibility
Mainland companies are governed by Federal Decree Law No. 32 of 2021. While this law introduced several reforms — including the removal of the 51% local ownership requirement in most sectors — it remains restrictive when it comes to SHA flexibility.
- Single class of shares only (no preference shares or voting rights variations)
- Amendments to the MOA require notarisation and approval
- Share transfers must be formally registered and notarised
- Minority shareholder protections are limited
Because of this, mainland startups often rely heavily on the SHA to govern internal arrangements that can’t be captured in the official incorporation documents.
Free Zones – Why DMCC, DIFC, and ADGM Lead the Way
There are over 40 free zones in the UAE, but not all are equally suited for startups looking to raise funding or issue complex share structures.
- DMCC (Dubai Multi Commodities Centre): As of its 2022 regulations, DMCC explicitly allows multiple share classes, setting it apart from most other non-financial free zones. This is ideal for startups needing to issue preferred shares or equity incentives.
- DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market): These are the UAE’s only common law jurisdictions, with independent English-language courts.
Both allow:
- Multiple share classes
- Customisable Articles of Association
- Strong minority protections and director duties
- Efficient shareholder dispute resolution
While other free zones, such as DSO, JAFZA, and RAKEZ, have made incremental improvements, they largely follow mainland-style procedures and don’t offer the same level of legal flexibility or investor confidence. For startups planning to raise venture capital or structure multiple funding rounds, DMCC, DIFC, or ADGM provide a clear legal edge.
Key Clauses Every Startup Should Include
Ownership, Capital, and Share Classes
The SHA should clearly state who owns what, and what each party is contributing, whether cash, intellectual property, or “sweat equity.” If you’re in a free zone that allows it, define multiple share classes:
- Ordinary shares for founders
- Preferred shares for investors with rights to dividends, liquidation preferences, or veto powers
In the mainland, where share classes can’t be distinguished legally, equivalent terms must be contractually agreed upon in the SHA.
Control, Governance, and Decision-Making
Every startup faces the “who’s really in charge?” question. A solid SHA should:
- Specify board composition or manager appointment rights.
- Define reserved matters — decisions (e.g. hiring C-suite, acquiring new business lines) that need unanimous or majority shareholder approval.
- Establish clear voting procedures to avoid deadlocks
In DIFC or ADGM, these rights can be embedded into the Articles. In mainland and most free zones, the SHA becomes essential for governance control.
Share Transfer and Exit Mechanisms
To prevent unwanted shareholders from entering the cap table, every SHA should include:
- Pre-emption rights: Right of first refusal if a shareholder wants to sell
- Tag-along rights: Minority holders can join if the majority sells
- Drag-along rights: The Majority can force a minority to sell during an acquisition
Deadlock provisions — like mediation, Russian roulette, or buy-sell clauses — should also be considered, especially in 50/50 partnership agreements.
Distributions, Dividends, and IP Ownership
Founders should align early on whether profits will be reinvested or distributed. The SHA should also:
- Set dividend policies
- Assign any founder-created intellectual property to the company
- Clarify confidentiality obligations
In tech and IP-heavy ventures, this is vital for future investor due diligence.
Dispute Resolution Pathways
Your SHA should clearly state:
- Governing law (e.g. UAE law, DIFC law)
- Forum for disputes (e.g. arbitration under DIAC, DIFC Courts)
Arbitration is widely preferred in the UAE, particularly for disputes involving private shareholders. DIFC and ADGM courts offer reliable enforcement and faster rulings in English.
SHA Drafting Mistakes That Could Cost You Time and Equity
Startups in the UAE often fall into these traps:
Copy-Pasting Foreign Templates
UK or US SHA templates often contain provisions (like anti-dilution formulas or option pool mechanisms) that are invalid or unenforceable in the UAE. Always localise.
Relying on the MOA Alone
In mainland company setups, especially, the MOA lacks nuance. Profit-sharing deviations, vesting clauses, and voting rights should be included in a private SHA.
Ignoring Future Investors
Early SHAs that fail to anticipate funding rounds can cause investor hesitation or renegotiation later. Include clauses that allow for SHA amendments or onboarding new shareholders.
Misalignment With the Articles of Association
If the SHA conflicts with the AOA or MOA, particularly in the mainland courts, regulators may ignore the SHA in favour of official documents. Keep them synchronised.
Choosing the Wrong Jurisdiction for Disputes
Opting for a UAE mainland court without considering factors such as language, timing, or enforceability can often backfire. Arbitration or DIFC/ADGM jurisdiction is usually a safer route.
How SHAs Differ by Startup Type
Fintech Ventures in DIFC
- Investor protections like liquidation preferences and anti-dilution are embedded directly into share classes
- Disputes resolved via DIFC Courts, increasing legal certainty
- Common to include compliance-triggered buyback clauses (e.g. if a shareholder breaches DFSA rules)
E-Commerce Startups in Mainland UAE
- All shares are legally equal — preferences must be contractually defined
- SHA often includes buyout options, valuation formulas, and exit rights
- Changes to ownership require notarisation and Economic Department approval
Tech Startups in DMCC
- Class A and B shares can be used to separate founder control from investor rights
- SHA governs equity incentives, board observer seats, and drag-along rights
- Share transfers are faster than in the mainland, but still need DMCC Authority approval
How to Future-Proof Your Shareholder Agreement
The best SHA isn’t static — it evolves with the business. Plan for:
- Convertible instruments (e.g. SAFE notes, convertible loans)
- Employee option pools
- Amendments upon future investment rounds
- Alignment with updated laws (e.g. UAE’s shift to allow 100% foreign ownership)
Keeping your SHA updated ensures new capital, new shareholders, and new governance models can be adopted without friction.
What Happens If There Is No Shareholder Agreement?
Startups that skip the shareholders’ agreement take a significant legal and operational risk, often without realising it until it’s too late.
Without an SHA in place:
- Disputes become personal: There’s no agreed-upon process for resolving disagreements, handling exits, or valuing shares. What starts as a business issue quickly turns into a personal standoff.
- Founder departures become messy: If a founder leaves the company, there’s no clause to force them to sell their shares, even if they’re no longer contributing. This can paralyse decision-making and stall future funding.
- Investors may walk away: Sophisticated investors won’t invest in companies where equity and governance terms aren’t clearly structured. A missing SHA signals disorganisation and legal risk.
- Deadlocks have no solution: In 50/50 partnerships, especially, the absence of deadlock resolution mechanisms means a single disagreement can freeze bank accounts, hiring decisions, or product launches.
- Courts revert to default law: In the mainland, UAE law treats all LLC shareholders equally, unless otherwise stated, regardless of their efforts, capital, or responsibilities. Courts will enforce the MOA or default to civil law, rather than relying on verbal promises or emails.
Ultimately, skipping the SHA leaves your startup exposed — without a safety net, without a rulebook, and without any agreed way to move forward when things get hard.
Shareholder Agreements: Don’t Launch Without One
A shareholders’ agreement isn’t just a legal document — it’s your startup’s governance blueprint. It ensures alignment, protects founders and investors, and prevents destructive disputes down the track.
Whether you’re building a bootstrapped SaaS platform in DMCC or launching a consumer brand on the mainland, the SHA is the contract that defines the life (and death) of your venture. Get it right from day one.
If you’re setting up your startup in the UAE and want to get your SHA right the first time — with the right structure, the right jurisdiction, and the right partner — Virtuzone can help. From company formation to legal structuring, our experts make sure your business is set up for long-term success. Reach out to us at Virtuzone today for further information.
Shareholder Agreement FAQs
1. Can I Write My Own Shareholder Agreement?
Yes, technically, you can write your own shareholder agreement, but it’s not recommended, especially in the UAE. While there are no legal restrictions on who drafts the agreement, a poorly written or non-compliant SHA can lead to serious legal complications. UAE law varies significantly between mainland and free zone jurisdictions, and many standard clauses from foreign templates may be unenforceable locally.
For example, certain rights (like preferred shares or drag-along clauses) must be structured differently depending on where your company is registered. Without legal expertise, you risk drafting a document that either conflicts with your MOA/AOA or fails to protect your business interests. It’s always best to consult a UAE-qualified legal professional who understands startup structures and local regulations.
2. What Are The Rights of Shareholders in The UAE?
Shareholder rights in the UAE depend on the company’s legal structure and jurisdiction (mainland or free zone). In general, shareholders are entitled to:
- A share of profits in proportion to their ownership
- Voting rights on key decisions, such as appointing managers or amending the MOA
- Access to company records and financials
- The right to transfer or sell shares, often subject to pre-emption or approval clauses
In the mainland, rights are more limited and must often be expanded contractually via a shareholders’ agreement. Free zones, such as DIFC and ADGM, provide stronger default protections, including statutory remedies for unfair prejudice and the ability to issue multiple share classes. Shareholder rights can also be tailored through customised Articles of Association or SHA clauses — especially important for startups structuring investor protections.
3. What is the 10% Shareholder Rule?
The “10% shareholder rule” in the UAE generally refers to the statutory threshold that grants shareholders holding at least 10% of the capital certain corporate rights. In mainland companies, these include:
- The ability to call a general assembly if the board fails to do so
- The right to inspect company accounts and records
- The power to initiate legal action if company affairs are mismanaged or conducted in bad faith
These protections are designed to safeguard minority shareholders, particularly in limited liability companies. However, the exact application of the rule can vary by company type and jurisdiction. In free zones like DIFC or ADGM, similar thresholds exist, often with even broader protections under common law frameworks. For startup founders and investors, this rule highlights why equity split and governance rights must be clearly defined early, ideally in a well-drafted SHA.
