A shareholder agreement stipulates the protections, rights, and obligations between company shareholders. The contract typically outlines terms pertaining to shareholder protection, leadership, management, and company stock.
Although a shareholder agreement in UAE is created to protect all kinds of shareholders, it’s often more important to the minority shareholders. The reason for this is because it gives minority shareholders a voice while protecting the company from abuse of power.
Tips for Creating a Shareholder Agreement in UAE
There are a lot of aspects and concerns that should be covered by a shareholder agreement for a company in UAE. Keep these tips in mind when creating a shareholders’ agreement:
1. Has it done from the onset?
The single biggest error that we see among shareholders is failing to prepare the shareholder agreement from the onset of the venture. There’s a couple of reasons for this, such as:
- It may not come across the minds of parties that they will need a shareholder agreement
- Legal costs associated to the creation of a shareholder agreement may be prohibitive
- One or more participants are trying to avoid the difficult conversations with regards to management, expectations, and control
The issue here is that when the time arrives that a shareholder agreement is actually necessary e.g. during a dispute or legal proceedings, it’s often already too late for shareholders to agree. An agreement can no longer be reached. Trying to get a consensus following the risk materializing will prove to be a very challenging task. By contrast, it’s far easier and more likely to get a reasonable consensus before a problem arises.
2. Know that not all shareholders are who they say they are.
This isn’t just about a relationship deteriorating, but it does happen and it’s a reason in itself for creating a shareholder agreement. The fact is that you may not end up having to deal with the same person. Absent agreed procedures or restrictions, a shareholder may choose to sell his/her stock to a third party that hasn’t been vetted. When a shareholder passes away, you’ll also have to deal with executors or the deceased shareholder’s spouse. When one of the shareholders becomes insolvent, you’ll end up dealing with a bankruptcy trustee.
A shareholder agreement in UAE will prove some level of protection against any third-party interference.
3. Confirm each party’s expectations.
Have clear expectations on what each participant is going to contribute to the company, as well as how the contributions will be repaid, if applicable. If a participant will contribute cash, then consider whether it’s a loan which has to be repaid or if it’s an initial share capital.
If a party will contribute labor in managing the business’ operations, then consider whether he/she will be employed or remunerated. But, remember that it’s not just with the setup stage. You’d also want to consider the business’ long-term requirements. For instance, when a participant is commissioned to be the supplier of the company, make sure you consider whether there’s going to be a service contract or supply agreement set in place. Consider whether a disproportionate contribution will warrant control or a different ownership interest.
4. Set a clear protocol for a deadlock.
A 50-50 ownership can be very lethal for a business. When there’s a breakdown of trust in between the owners, there will be no way in successfully managing the company. A resolution won’t be passed, legal documents can’t be signed, plus majority shareholders don’t exist.
Although it is rare, a deadlock can still happen when there are three or more shareholders but there are insufficient directors. A detailed process has to be implemented to alleviate a deadline in an at-risk company structure.
When there’s a complete impasse for the decision-making, in particular with a 50-50 agreement, the only option will be to apply court services for the company to be liquidated. Company liquidation can often devalue a business’ goodwill and its sale price.
5. Create an exit strategy for the shareholders.
It’s unlikely for all shareholders to want to exist a business simultaneously. There’s often a couple of personal factors that involve existing a business. Should you decide to leave a business, consider how the interests you own are going to be valued. Include terms on who will purchase your shares. When another shareholder will exit, consider whether or not you’ll have preemptive rights in buying the shares, at what price, and the feasible payment terms.
In what circumstances will a shareholder be forced in selling company shares? It will greatly depend on the kind of conduct which can warrant this particular course of action, as well as if it’s even practical.
For more information on how to create a legal and notarized shareholder agreement in UAE, contact here in Notary Public Dubai now!
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