Foreign investors prefer to set up a Limited Liability Company (LLC) in Dubai mainland due to the lucrative business opportunities it offers especially the unlimited access to the wider UAE market. Though a highly profitable business prospect, the mandatory requirement of local sponsorship has been a pebble in the shoe associated with LLC company formation in the UAE. Most foreign investors find the local sponsorship concept hard to digest as the law mandates that the partner (UAE national) must have at least 51% shares in the company.
Also read: Why LLC Company is Still a Preferred Choice for Businessmen in Dubai?
Foreign investors use the side agreements to circumvent these restrictions on ownership and to control their financial interests in the UAE LLC companies. A side contract protects the ownership of the foreign investors as in the documents, the UAE national agrees to transfer his entitlement and control of the 51% shares in the company to the foreign shareholder. The side contracts make such an agreement look valid thereby protecting the financial interests of the foreign investors. Foreign investors will be keen to know about the validity of side contracts in the UAE and also whether the court will uphold the side agreements in case a dispute arises between the foreign investors and the LLC local sponsor. Business setup consultants in Dubai have answers to these doubts and read on to know further about side contracts.
Side Contracts in the UAE: What are They?
A side agreement becomes invaluable to the foreign shareholders in crucial disputes when the UAE national declares that he does not own 51% shares in the company. The UAE shareholder can file a case in the court asking confirmation for his privilege of the 51% shares as per the MoA. The local sponsor can also ask the court to remove the foreign shareholders citing that the expat shareholders are not cooperative amounting to losses in the company. If the foreign shareholders have a side contract on the shareholding agreement with the UAE sponsor, the court may consider it as a record to deny the claim of the UAE sponsor.
Related: Businesses in Dubai Mainland Exploring Opportunities For 100% Ownership
The legal validity of side agreements, also known as a side letter in common parlance, is a pressing question that haunts the foreign investors wishing to set up an LLC in Dubai or UAE. The investors should not be under the misconception that the side agreement is a part of the primary contract. A side contract is in fact an agreement that is ancillary to the primary contract. The side contract is used for formalizing additional details that were not known during the time when the parties agreed to finalize the primary contract. A side contract can be useful when the parties want to make some amendments to the contract but are reluctant to redraft the clauses. The process of re-drafting consumes time and the parties can instead set out the amendments in a side agreement to ease the process of business setup in Dubai mainland.
Drafting a Side Contract in the UAE: Key Considerations
A side agreement is normally drafted for use in commercial contracts and it comes in the form of a letter signed by parties who are signatories in the primary contract. A side contract becomes binding only if it contains mandatory requirements such as an offer, acceptance, consideration, certainty, and an intention to create legal relations.
While drafting a side agreement, the shareholders of the LLC business setup in Dubai must provide a consideration, which is a payment in any form under the agreement. The condition of consideration is an integral part of the side contracts and it could be in any form including a reciprocal benefit. If the contract is lacking conditions for payment or benefit, it should be executed as a deed to make it legally binding. This makes the case for exercising immense vigilance while drafting a side contract while preparing the documents for the process of the LLC business setup in Dubai.
Are Side Contracts Legally Valid in the UAE?
There were many cases in the recent past in which the courts chose to uphold the validity of the side agreements. The general notion in the UAE is that the side contracts generate rights and obligations that can be legally enforced and has the same force as the MoA and Articles of Association. However, in some cases, the courts have also rejected the validity of side agreements in the UAE stating that such agreements only have a moral effect. However, one could easily assert that UAE courts will take the side agreements into consideration while hearing the cases related to disputes between partners in an LLC business setup in Dubai or UAE.
Best Business Setup Consultants in Dubai
Setting up an LLC in Dubai involves the mandatory requirement of having a UAE national as a local sponsor who will hold at least 51% shares in the company. The clauses and conditions pertaining to the agreement with the local partner especially the shareholding structure will be mentioned in the primary contract. However, the foreign investors use a side contract for clarifying certain points mentioned in the contract. The side agreements help the foreign shareholders in safeguarding their interests and ensuring their control over the LLC Company in the UAE.
The legal validity of the side agreement was always a question for foreign investors who initiate the LLC business formation in Dubai. Business setup consultants in Dubai such as Jitendra Business Consultants (JBC) offer expert advice for the foreign investors about the contracts involved in LLC formation apart from assisting them with the company incorporation process. JBC’s business setup consultants in Dubai are well-versed in UAE laws and assist the expat businessmen with the drafting of documents including the MoA.