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:
Ownership – Shareholders agreements
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
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
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 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!
A contract that regulates the relationship between shareholders and how certain fundamental decisions will be made
Election of Directors
Rights of First Refusal
Serves as a fall-back in the case of disputes
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:
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 Heaverserves 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.