Doing business in the UAE: acquiring a minority stake in a UAE company

It is important for investors to undertake upfront due diligence of their UAE target companies and ensure that any subscriptions for shares in UAE companies are underpinned by a robust contractual framework to secure future profitability. There are a number of important things for foreign investors to consider.

Jurisdiction of incorporation

For a prospective investor, it is important to first understand where in the UAE the target is incorporated. Broadly speaking, a target company will either be based in one of the many free zones or in mainland UAE.

Due diligence will be required to analyse and verify the jurisdiction of incorporation of the target company as this will have a significant impact on the target’s ownership structure (see below) and the formalities for affecting the issuance of shares.

There is limited publicly available information in the UAE, and so there is a reliance on the target company providing up-to-date and accurate information. Constitutional documents need to be carefully analysed.

Foreign ownership restrictions

Where an investor is taking a minority stake in a free zone company, foreign ownership restrictions are less of a concern. This is because a free zone entity can generally be 100% owned by non-UAE nationals. 

However, where an investor is taking a minority stake in a mainland UAE target company, a core considerations are whether that entity is, or is capable of being, 100% foreign owned and whether there is a majority UAE shareholder in place. 

Historically, UAE law provided that foreign investors could only own up to 49% in an limited liability company (LLC), subject to limited exceptions. At least 51% of the shares in a LLC had to be owned by one or more UAE nationals, or a company which was itself wholly owned by one or more UAE nationals.

This regime was relaxed in September 2020 pursuant to the amendments to the Commercial Companies Law No. 2 of 2015 (CCL). The CCL amendments now permit 100% foreign ownership of onshore companies unless a restriction applies – see our separate guide on foreign direct investment in the UAE for more details.

However, due to the previous foreign investment restrictions under the old law, and to overcome the disadvantages associated with those restrictions, many foreign investors historically carried out business in the UAE mainland by engaging a UAE national to hold 51% of the share capital of the UAE company, effectively as a nominee. As a result, a common practice developed over the years to put in place private “side agreements” between the foreign, minority, shareholder and the UAE, majority, shareholder. In these agreements, the UAE shareholder would agree to limit either partially or in whole their rights to participate in the profits or running and management of the company, typically in return for an annual fee. 

Having a majority UAE shareholder in a target company would give rise to obvious concerns around control, financing, and profit distribution. Therefore, understanding the target is vital and should entail undertaking thorough due diligence on the contractual arrangements between existing shareholders.

Corporate structure

It is common for the ultimate target company, and the main operating company, to be a mainland LLC. However, as the UAE is a civil law jurisdiction, shareholders will often put in place sophisticated corporate structures – above the mainland entity – involving free zone holding companies, such as special purpose vehicles SPVs in the Abu Dhabi Global Markets Free Zone (ADGM) or prescribed companies in the Dubai International Financial Centre Free Zone (DIFC).

This two-tier structure enables the shareholders to take advantage of the common law regimes available within free zones, which allow for more sophisticated contractual arrangements between shareholders. The share transfer process is also generally more streamlined within free zones than the process in UAE mainland, which is a benefit to investors taking a minority stake at the free zone holding company level.

As the mainland operating company would typically be wholly owned by the free zone holding company, undertaking thorough due diligence of both entities is important for foreign investors taking a minority stake.

Existing investor pre-emption rights

Depending on the number of investment rounds a target company might have undertaken, there may be a number of other existing shareholders. Where this is the case, it is important for incoming investors to consider the constitutional documents and the existing shareholder arrangements.

Proper due diligence will enable an incoming investor to ascertain important matters such as the existence of any pre-empting rights enabling existing shareholders a right of first refusal over the new shares or any special preferential rights or alternative classes of shares offered to the existing shareholders.

It is also likely that an incoming shareholder will be required to accede to an existing shareholders agreement, usually by way of a deed of adherence, which will make the incoming shareholder a party to that agreement. Therefore, all contractual documentation in place between existing shareholders should be carefully reviewed and considered prior to signing.

Reliance on disclosures

As there are no public registers in the UAE where corporate information can be independently verified, incoming investors rely on disclosures made by the target company. Therefore, more extensive warranties in the transaction documentation – commonly contained in a subscription agreement – are expected to confirm certain constitutional matters, corporate structures, the status of licenses and authorities and other operational and managerial matters associated with the target company. The time limitation on warranty claims is often a point of negotiation.

Completion formalities

Steps required to issue shares in free zone companies will differ from free zone to free zone. Incoming investors are often required to submit resolutions and details of ultimate beneficial ownership to the free zone registrar for approval.

To formalise a transfer of shares in the UAE mainland, certain approvals are required from the relevant government authorities, and certain documents will need to be signed before a UAE notary public. Depending on the specific jurisdiction within the UAE, this process can sometimes take several days, and potentially weeks to complete.

For a foreign-based buyer, powers of attorney will need to be granted to a person or persons on the ground in the UAE, authorising them to sign the necessary transaction documents in the UAE – such documents will need to be notarised and legalised for use in the UAE. It can often take several weeks to have fully notarised and legalised documents in place, which may also then require further attestation in the UAE, and so this should be factored into any deal timelines and timing for payment of the shares.