Investing in a company is not only a financial decision but also a legal commitment. Many investors enter businesses without conducting proper legal due diligence and later face disputes relating to ownership, management control, profit-sharing, or exit rights.

Legal Checklist Before Investing in a Company

1. Verify Whether the Company is Legally Registered

  1. Check the validity of the trade license – A valid trade license is important for every business, or else it can cease operations by government authorities. A valid trade license also ensures that the business follows and operates legally. The absence of a valid trade license might lead to fines or other legal troubles.
  2. Investors should identify whether the company operates as a mainland or a free zone company. In the 2025 amendment, a statutory framework allowing the transfer of registration between mainland companies, free zones, and financial free zones was introduced while preserving the legal identity and existing contracts.The investors must make sure to check if the migration could affect the tax obligations, governance rules, licensing requirements and business operations.

2. Review the Memorandum of Association (MOA) and Constitutional Documents

An investor should carefully review the MOA to understand:

  1. Shareholding percentages
  2. Capital contributions
  3. Voting rights
  4. Profit-sharing arrangements
  5. Powers of managers and directors
  6. Procedures for transferring shares
  7. Decision-making authority
  8. Restrictions on shareholders

In many disputes, investors discover that verbal agreements differ from what is officially stated in the MOA.

Compliance Mechanism Under the 2025 Amendments

Federal Decree-Law No. 20 of 2025 has strengthened the importance of constitutional documents such as the Memorandum of Association (MOA), Articles of Association (AOA), and Shareholders’ Agreements by allowing LLCs to introduce multiple classes of shares with different rights and obligations.

The amendments also allow important investor protection mechanisms such as:

  1. Drag-along rights allow majority shareholders to require minority shareholders to sell their shares along with them during a company sale.
  2. Tag-along rights allow minority shareholders to sell their shares on the same terms when majority shareholders sell their stake in the company.

3. Sign a Proper Shareholders’ Agreement

The investor should make sure the shareholders’ agreement includes clauses such as:

  1. Exit rights
  2. Profit distribution
  3. Decision-making powers
  4. Deadlock resolution
  5. Share transfer restrictions
  6. Non-compete clauses
  7. Dispute resolution mechanisms

4. Conduct Financial Due Diligence

Investors should conduct a detailed review of the company’s financial position before committing funds. This includes reviewing:

  1. Audited financial statements
  2. Existing liabilities
  3. Outstanding loans
  4. Cash flow position
  5. Tax exposure
  6. Pending financial obligations

5. Review Existing Contracts and Obligations

The investor should make sure to go through the existing contracts such as:

  1. Supplier contracts
  2. Employment agreements
  3. Lease agreements
  4. Pending litigation
  5. Existing guarantees

6. Check for Regulatory Compliance

  1. AML compliance – In the UAE, businesses are required to establish internal controls and compliance procedures to ensure that illegal funds are not being routed through the company.
  2. UBO (Ultimate Beneficial Owner) compliance – UBO compliance refers to the obligation of companies to identify and disclose the real individuals who ultimately own or control the business.
  3. Licensing approvals – Licensing approvals refer to the official permissions granted by UAE regulatory authorities allowing a company to conduct specific business activities legally.
  4. Industry-specific permits – In addition to general trade licenses, many businesses require industry-specific permits or sectoral approvals before legally operating in the UAE.
  5. Corporate governance compliance – Corporate governance compliance refers to the systems, policies, and procedures that regulate how a company is managed and controlled.

7. Verify Intellectual Property Ownership

Investors have to make sure to check:

  1. Trademark ownership
  2. Website ownership
  3. Software/code ownership
  4. Brand registration
  5. Licensing rights

8. Evaluate Exit Options Before Investing

The following aspects must be reviewed:

  1. Buy-back rights – These give the company or existing shareholders the right to buy back an investor’s shares under certain conditions.
  2. Exit valuation mechanism – This is the method used to determine the value or price of shares when an investor exits the company.
  3. Lock-in periods – A fixed period during which shareholders are restricted from selling or transferring their shares.
  4. Drag-along rights – These allow majority shareholders to require minority shareholders to sell their shares together during a company sale.
  5. Tag-along rights – These allow minority shareholders to sell their shares on the same terms when majority shareholders sell their stake.

Conclusion

Conducting proper legal due diligence before investing in a company is essential to protect both the investment and the investor’s rights. Reviewing constitutional documents, regulatory compliance, financial records, contractual obligations, and exit mechanisms can help investors minimize risks and avoid future disputes.

We at Ayesha Aldhaheri Advocates and Legal Consultants, we assist investors, shareholders, and businesses in conducting legal due diligence, reviewing shareholder agreements, and structuring investments in compliance with UAE laws.