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
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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. |
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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. |
