Legal Basics for the Startup and Small Business Setup in UAE

Introduction – why is it important to have the right structures in place from the start.

• Selecting the correct business structure that will enable and support future growth and funding.
• Will help with partnership considerations, particularly in light of potential splits.
• Commercial Agreements should be set up specific to Startups and Small Businesses.
• Effective dispute avoidance.

Incorporation

Where: Options for corporation

• Offshore – eg British Virgin Islands (BVI), Ajman Free Zone (AFZ), Jebel Ali Free Zone (JAFZ)
• Onshore UAE (Dubai DED or Abu Dhabi DED), under the UAE Commercial Companies Law (01.06.15)
• Limited Liability Companies (LLC)
• Joint Liability Companies
• Public Joint Stock Companies – Regulated by Emirates Securities and Commodities Authority (ESCA)
• Private Joint Stock Companies
• Holding Companies
• Investment Funds

Numerous UAE Free Zones: 

• Fujairah Creative City Free Zone
• Ajman Free Zone
• Dubai South
• Dubai Design District
• Dubai Multi Commodities Centre
• UAQ Free Trade Zone

Incorporation / Business Set-up

Considerations to take into account –

• Future Funding & Growth (investors’ preference)
• Compliance with UAE laws
• Licensing Requirements
• Liability

So, you’re incorporated – now what?

• Main features of corporation
  • Separate legal entity for all purposes including financing, employment, contracts, liabilities, etc
  • Business assets should be owned by the corporation, not the founders
  • Corporation hires employees/engages contractors
  • Corporation enters into commercial and financing agreements in its own name
•  Corporation is made up of three distinct groups:
  •  Shareholders
  • Directors
  • Officers/ Managers

Ownership – Shareholders agreements

Stakeholders

• Shareholders
  • The owners of the company
  • Can have more than one class of shares (e.g., common & preferred)
  • Shareholders elect directors
  • Shareholders can also be directors and/or officers (particularly at earlier stage)
  • Shareholder approval typically required for fundamental changes to the business including major changes in the business, new financings and exit

Stakeholders/Administrators

• Directors:
  • Responsible for overall management and direction
  • Usually a part-time role – directors are not usually employees (except for the CEO who is often a director)
  • Directors must act honestly and in good faith in the best interests of the company and exercise the diligence and skill that a reasonably prudent person would exercise in comparable circumstances
  • There can be “inside” directors (who are also employees) or “outside” directors (often investors or persons with industry expertise)
  • Directors have many personal liabilities -> as the company grows bigger, outside directors will expect to receive D&O insurance

Officers/Managers:

• Appointed by the directors
• Responsible for day-to-day management
• Officers are often also employees (CEO, CFO, VPs)
• Officers can also be shareholders and/or directors (particularly at earlier stage)

Ownership:

• Share ownership
  • Ownership interests represented by shares, of which there can be different classes
  • Rights of the shareholders regulated by Constitutional Documents and/or Shareholders Agreement
  • Relationship between shareholders usually governed by a Shareholders Agreement
  • Always be aware that share ownership percentages change when new shares are issued. “You will own 5% of the company.” This may be true at a moment in time, but will stop being true if the company ever issues more shares!
  • Shareholders Agreements
  • A contract that regulates the relationship between shareholders and how certain fundamental decisions will be made
  • Typically addresses:
  • Election of Directors
  • Rights of First Refusal
  • Drag along
  • Protective Provisions
  • Serves as a fall-back in the case of disputes

Commercial Agreements

• Many business people prefer to ignore the legal terms and “leave them to the lawyers to sort out”.
• However, the so-called legal terms can have a major impact on your business and business people are advised to have at least a basic understanding of these common clauses in commercial agreements.
• After price, the following are the most negotiated clauses in commercial agreements for the provision of technology products and services:
  • Acceptance
  • Warranties
  • Indemnities
  • Limitation of Liability

These clauses are all interrelated.

Conclusion – Some Simple Advice

• Put it in writing
• Invest in Employee/Contractor Agreements and Confidentiality Agreement and use it with all employees and contractors involved in the development of your intellectual property
• Create a bespoke customer agreement
  • Helps you to focus on and articulate your business model
  • If you don’t have one you will always be starting with the customer’s form of agreement (which will be biased in the customer’s favor)
  • Even if you do have to start with your customer’s agreement, you will at least have a checklist of those clauses in your agreement that you will want to try and get into the customer’s agreement
• Check your templates and precedent agreements for UAE law compliance
• Review/ include clear dispute resolution provisions

If you would like to receive more information,  please contact AdRem Legal

	Irina Heaver  serves as Managing Director & Chief Legal Advisor of AdRem Legal, a legal services provider established based on demand for cost effective and flexible legal services.
	AdRem Legal is an innovative legal services provider established based on client demand for cost effective legal services.Entrepreneurs and Startups save over 75% of the traditional law firm costs.