A shareholder agreement (SHA) is a private contract between the owners of a UAE company that governs how the company is run, how profits are distributed, and what happens when shareholders disagree or want to exit. Here is what every UAE free zone FZCO shareholder agreement should include.
Why a Shareholder Agreement Is Essential
The UAE free zone FZCO Memorandum of Association (MOA) is a public document registered with the free zone authority — it specifies shareholders and shareholding percentages, but it does not govern most of the important governance questions. A shareholder agreement: is private (not filed with the free zone authority), can be governed by any chosen law (typically UAE, DIFC, or English law), overrides the MOA on matters of governance and shareholder relations, and provides critical protections that the MOA alone cannot give.
Essential SHA Provisions for UAE Companies
1. Reserved Matters (Supermajority Decisions): A list of decisions that require more than a simple majority to pass — e.g., changing the MOA, diluting existing shareholders, incurring debt above a threshold, or entering a new business line. Typically require 75% or unanimous shareholder vote. 2. Dividend Policy: When and how profits are distributed — the percentage of net profit that must be distributed annually vs. retained, and the timeline for payment after distribution approval. 3. Non-Compete Clause: Restricts each shareholder from starting a competing business while a shareholder and for 1–2 years after exit. Must be reasonable in geographic scope and duration to be enforceable under UAE law. 4. Pre-Emption Rights (Right of First Refusal): Before a shareholder can sell their shares to a third party, they must first offer the shares to the existing shareholders at the same price. Prevents unwanted third parties from entering the company. 5. Drag-Along Rights: If shareholders holding 75%+ want to sell the entire company, they can compel the minority shareholders to sell their shares on the same terms. Prevents a minority shareholder from blocking a strategic sale. 6. Tag-Along Rights: If a majority shareholder sells their stake to a third party, minority shareholders have the right to sell their shares on the same terms and price (protection for minorities). 7. Deadlock Resolution: What happens if 50/50 shareholders cannot agree on a material decision — mediation, arbitration, forced buy-sell (Russian roulette clause), or dissolution.