Tim Elliott
Hello and welcome to Lawgical, the UAE’s first and only weekly legal podcast from the Dubai-based law firm HPL Yamalova & Plewka. I’m Tim Elliott, here once again at Reef Tower in Dubai’s JLT district with the firm’s managing partner, Ludmila Yamalova. As ever, Ludmila, good to see you.
Ludmila Yamalova
It’s great to see you too, Tim. Thanks for being here, and always lovely chatting with you.
Tim Elliott
In this edition of Lawgical, we’re discussing disputes in business—specifically shareholder disputes. Ludmila, you’ve advised many clients who are setting up businesses here in the UAE. It’s an attractive place to do business with lots of opportunities. The current legal framework, however, often requires overseas parties wishing to operate onshore to enter shareholder arrangements with a local partner. Offshore, of course, is a different situation.
Here’s the thing—no matter how the company is structured, people are people, and disputes are inevitable. So, an ironclad legal agreement, if such a thing exists, is the first thing you need, right?
Ludmila Yamalova
Indeed. You’re correct that for onshore businesses, you’ll generally need a local partner who owns 51% of the company shares and is a UAE national. This isn’t just a nominal partnership; the local partner’s ownership is reflected in government-registered documents, such as share certificates.
In free zones, the situation is different. You and I, for example, could establish a company as 50-50 shareholders without needing a local partner. The free zone would register our arrangement, and it would be reflected in documents like the Memorandum of Association (MOA) and Articles of Association (AOA). These documents are registered with the licensing authority—whether it’s the Department of Economic Development (DED) onshore or the relevant free zone authority.
Tim Elliott
So, what happens when disputes arise? Let’s take a scenario where partners are equal shareholders—50-50. Who prevails in a dispute?
Ludmila Yamalova
Disputes between equal shareholders can create a deadlock because neither party has majority control. In cases where shareholders hold unequal shares, say 90-10, things may seem simpler. The majority shareholder would theoretically have more control. However, in practice, it’s not so straightforward.
For example, even if your governing documents outline mechanisms for resolving disputes—like giving the majority shareholder the right to buy out the minority shares—the transfer of shares still requires the minority shareholder’s approval. Without this approval, the licensing authority won’t process the transfer. If the minority shareholder refuses, the majority’s only recourse is the court.
Tim Elliott
That sounds complicated. What’s the typical outcome if disputes reach the court?
Ludmila Yamalova
In most cases, the court doesn’t order a transfer of shares but instead issues a decision to liquidate the company. This can be highly disruptive to the business. While the company awaits resolution, operations often come to a standstill, exacerbating financial and operational challenges.
Some free zones, like DMCC (Dubai Multi Commodities Centre), are introducing mechanisms to address these issues. For example, under DMCC regulations, you can apply to disqualify an officer who is acting against the company’s interests. This is one way to preserve the business while resolving disputes.
Tim Elliott
What kind of evidence would you need to disqualify an officer under DMCC regulations?
Ludmila Yamalova
Evidence could include examples of abuse of power, such as unilateral termination of key employees, misuse of company funds, or actions detrimental to the company’s interests. While you don’t need a court judgment, you must present compelling evidence to the registrar to support your claims.
Tim Elliott
What about disputes between shareholders who are also family members? Do you see those often?
Ludmila Yamalova
Yes, family-run businesses are common in the UAE, and disputes within families—especially between spouses or parents and children—can be particularly painful. These cases often involve informal practices, which complicate matters during disputes. For example, a lack of proper documentation or financial reporting can make it difficult to resolve disagreements amicably.
Tim Elliott
Final thoughts, Ludmila? What’s your advice to anyone entering a shareholder arrangement?
Ludmila Yamalova
First, choose your partner carefully. Conduct thorough due diligence—not just legal but also practical. Second, manage expectations and ensure you fully understand both the law and the practicalities of operating in the UAE.
Seek professional advice early and regularly. Having competent advisors—lawyers, accountants, and financial experts—can help prevent disputes and ensure the business runs smoothly. Finally, keep proper documentation and maintain transparency in all business dealings. These measures can save significant time, money, and stress in the long run.
Tim Elliott
Ludmila Yamalova is the managing partner of the Dubai-based law firm Yamalova & Plewka. As ever, Ludmila, your insights are much appreciated.
Ludmila Yamalova
Thank you, Tim. Always a pleasure.
Tim Elliott
That’s another edition of Lawgical. If you have a legal question or would like a consultation with an experienced UAE legal professional, visit LYLawyers.com or WhatsApp us at +971 52 525 1611. Until next time!
