Share classes in the UAE

Many companies worldwide have several classes of shares, allowing shareholders to hold unequal rights. Each share class usually has different amounts of rights in respect of voting, dividends, and distribution of capital upon company dissolution. 

A key advantage of having different classes of shares for founders is the ability to structure relationships with investors and key employees with stock options while retaining control over the company at the same time.

For instance, a startup that goes through several funding rounds may encounter different types of investors:

• business angels who invest in pre-seed rounds and wish that their rights will rank above certain other investors;
• venture capital funds, family offices, or similar institutional investors seeking voting power to be able to control companies they invest in;
• other investors who prioritise dividends and returns on sale of shares, but do not wish to participate in corporate governance. 

To accommodate these varied preferences, a company can issue a separate class of shares with different amounts of rights for each of these types of investors.

Another example is a startup issuing stock options for its key team members. For this purpose it can create a separate class of shares for its team members. That class of shares will probably not have voting rights, but the dividend rights can be comparable to the rights of the founders.

A sound corporate governance practice is to organise such classes of shares in alphabetical order: Class A, Class B, Class C, and so on.

In order to issue different classes of shares, companies must ensure compliance with:

• applicable legislation; and
• constitutional documents of a company, such as Memorandum of Association and Articles of Association.

Below we summarise the relevant regulations in various jurisdictions in the United Arab Emirates, including the mainland and select free zones.

U.A.E. Background

There is no single source of corporate law in the U.A.E. Regulations on the mainland are different from regulations existing in various U.A.E. free zones. Each of the more than 40 free zones typically has its own internal regulations applicable to companies incorporated within them. Moreover, there are two financial free zones: Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). These two free zones operate under common law and each has its own extensive corporate regulations.

Mainland

The default rule under the Federal Decree-Law No. (32) of 2021 “On Commercial Companies” prohibits mainland companies from issuing different share classes. However, this law allows the Securities & Commodities Authority to propose to the U.A.E. Cabinet to issue a resolution specifying regulations for issuing multiple classes of shares.

Additionally, Federal Decree by Law No. (37) of 2022 “Concerning the Family Businesses” permits issuing two different classes (categories) of shares:

• Class A shares that entitle their owner to obtain profits and vote in the company’s General Assembly; and
• Class B shares that entitle their owner to exclusively obtain profits without the right to vote.

Free Zones

Many U.A.E. free zones allow multiple classes of shares subject to approval of registration authorities of such free zones. If founders wish to use this tool to structure relationships with investors and key employees, it is important to review regulations of a chosen free zone before making a decision to incorporate a company.

The following free zones permit multiple classes of shares and permit detailed regulation of this matter to be provided in the Articles of Association of companies:

• Dubai International Financial Centre;
• Abu Dhabi Global Market;
• Dubai Multi Commodities Centre;
• Dubai World Trade Centre;
• IFZA, Dubai Silicon Oasis;
• RAKEZ;
• Sharjah Media City;
• JAFZA.

The above list is not exhaustive. In particular, the Meydan Free Zone in its Companies and Licensing Regulations 2022 states that share capital of a company shall consist of one class of shares. On the other hand, there is a provision that a Memorandum of Association of the company must include description of share classes (if any). It is advisable to liaise with the Meydan Free Zone and to clarify their position on share classes.

Should you have any questions, please feel free to contact CHENINS via www.chenins.ae.

This article is based on laws and regulations existing on 19 December 2024. It is intended for general informational purposes only and does not constitute legal advice or create client relationships.