Shareholder and boardroom disputes in the GCC – evolving risks for foreign investors

July 2025 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2025 Issue

The Gulf Cooperation Council (GCC) markets are complex, dynamic and rapidly evolving as oil wealth is used to build and invest in key infrastructure. These characteristics make GCC economies among the most attractive markets globally for investors across multiple sectors.

Attracting such foreign investment is a key priority for GCC states as they seek to deliver on their eye-catching plans for economic transformation. For example, in early 2025, the United Arab Emirates’s (UAE’s) Ministry of Investment announced its intention for the UAE to be one of the world’s top 10 destinations for foreign investment by 2031. Similarly, Saudi Arabia's 'Vision 2030', the state's economic transformation strategy, outlines a desire to increase foreign investment.

Legal reform to support economic growth and attract foreign investment has been significant and, in many respects, regional laws now reflect (or are modelled on) those of more developed economies. Many of these reforms have reduced the risk of conflict between business owners. While such disputes are a fact of life, structural and region-specific issues remain which increase the risk of disputes arising and which may catch foreign investors unaware, while new threats emerge.

For example, it is common for a dispute resolution strategy in the region to involve both civil claims and criminal complaints, most notably in matters relating to breach of confidentiality, default on debts or defamation. In such situations, criminal complaints are used to exert acute pressure on another party to secure a favourable settlement or transaction terms. The use of such techniques is decreasing through legal reform and gradual changes to the treatment of such matters when complaints are made to the relevant authorities. Nevertheless, the risk of criminal proceedings remains.

The region has also witnessed high value and high profile corporate collapses that have raised concerns among foreign investors.

These have included large corporate failures that have caused vast shareholder and lender losses and claims against directors for mismanagement or fraud. Some have resulted from local family shareholders running businesses that they are not equipped to manage (often having inherited businesses from the founder) rather than ceding control to professional boards. Proactive corporate governance strategies to prevent or mitigate such situations would be of great value to those concerned.

Other major corporate failures and resulting disputes have arisen amid allegations of fraud, often committed by people within the business, raising questions about internal controls and the role of regulators, auditors and others.

We identify in this article some of the key factors that have contributed to significant corporate disputes in the region and how the landscape is evolving.

Liberalisation of business ownership

Liberalisation of local business ownership and control requirements has had an important, positive impact on the level of disputes between foreign investors and regional businesses or their owners. Prior to 2021, it was necessary for most UAE companies to have at least 51 percent Emirati shareholders. In 2021, this requirement was removed across many sectors of the economy. With the exception of Kuwait, the other GCC states have also liberalised in this area in the last few years.

The former regime often resulted in a lack of alignment between local and foreign shareholders, which resulted in disputes. Such disputes often arose over business objectives (since many local shareholders expected to only have to play a passive role in the company they had majority control of), contribution to funding, managing the business and exit terms.

The lifting of the 51 percent Emirati shareholder requirement is considered to have contributed to an increase in foreign investment, allowing investors to wholly own their business across most sectors of the economy, thereby reducing internal shareholder disputes caused by objective contribution misalignment. Such disputes still occur but many involve legacy businesses established prior to the 2021 reforms.

A similar reform was made in 2022 in respect of commercial agency distributorship arrangements, which historically permitted an international company to import products exclusively via a UAE-owned agent. Such agents enjoyed significant statutory protections that gave them an advantage in the event of a dispute. These included a very limited right for the international company to terminate the agency, an inclusive approach to awarding damages to agents upon termination and affording the agent the right to block the foreign principal’s imports pending the resolution of disputes, which could take many months. Statutory provisions require such disputes to be subject to the compulsory jurisdiction of a local agency disputes committee, even if the parties had agreed a different dispute resolution process in their agency contract.

Many of these preferential rights have been reduced (although not entirely removed), allowing for a more balanced, commercial relationship between foreign investors and commercial agents, increasing the attractiveness of the UAE as a business destination.

These areas of liberalisation have removed many of the circumstances that increased the risk of disputes between international and local businesses. Improvements to regional restructuring and insolvency laws have also enhanced the investment environment by making business exits (whether distressed or otherwise) more predictable. However, there remain several areas of significant challenge for investors and the boardroom alike.

Financial crime risk

The risk of fraud and financial crime is perceived to be high in the region. This has been a major policy agenda priority for the UAE in recent years, in particular because the Financial Action Task Force placed the country on its ‘Grey List’ in March 2022 due to it being perceived as having material shortcomings in its AML regime.

The UAE has made a significant investment in addressing the perceived issues, with a focus on ensuring that regulated financial services firms (as well as law firms and real estate brokerages) have rigorous compliance regimes in place and by ensuring regular and high quality monitoring of such firms. Such efforts have resulted in the UAE being removed from the 'Grey List'.

It remains, however, that many of the strengths and attractions of the UAE for legitimate businesses, such as the extensive banking and professional services sectors, trading freezones and regulatory environment, may also attract those wishing to commit financial crime. This is considered to be attributable to the ease of setting up company and trust structures with limited due diligence requirements, the ability to use cash for high value transactions, and the opportunity to invest in high value real estate and other asset types that are often used for money laundering.

Many of these concerns are being addressed. In particular there has been a focus on increasing regulatory scrutiny and enforcement, in order to deter abuse of the business environment the country provides.

However, GCC markets have experienced very significant frauds in recent years which have attracted global attention and resulted in an array of claims by investors and lenders as well as regulatory and criminal proceedings. The Dubai-based Abraaj Group was until 2018 the largest and highest profile private equity firm in the Middle East, with assets under management understood to have exceeded $14bn.

Questions arose in 2018 when suspicions emerged that investor funds had been mixed with operational accounts and that this was being done to manage cash flow shortfalls. Criminal and civil complaints followed, alleging that the principals behind the group had been committing fraud with investors’ funds, resulting in the group’s insolvency amid major investor losses.

Similarly, NMC Health was the largest UAE-based private healthcare business with operations in 20 countries. The company was listed on the London Stock Exchange, with a peak market valuation of over $10bn. Allegations arose in 2019 that it had fraudulently hidden debt to overstate its value, leading to the company being censured by the UK regulatory authorities for market abuse. The company entered administration, causing major losses to shareholders as well as damaging the perception of corporate governance and audit standards in the UAE.

In both cases the initial concerns that resulted in the exposure of fraud are understood to have come from investors and those representing them, not from regulators or auditors.

Investment in regulatory powers and capacity, as well as an increased focus on enforcement, have therefore been positive developments since these high profile corporate failures. These steps are positive, yet the risks for corporates of being inadvertently impacted by financial crime remain significant.

Another significant regional trend is the rise of disputes relating to data, cyber security, hacking, intellectual property infringement and privacy matters, often involving an element of fraud. These are complex areas and many companies, even with sophisticated technologies and rigorous systems and controls, have faced exposure in this area. This is only expected to rise and will lead to a clear distinction between companies that invest in the right people and systems, which will adapt and continue to thrive amid these evolving challenges, and those that do not.

Proactive investment in such areas, as well as investing in pre-transaction due diligence on counterparties and their assets, is often not seen as a priority by regional businesses. But failing to do so could have increasingly disastrous consequences.

Transparency and corporate information

A factor that makes inbound investment a greater risk than in many other regions is the limited, if any, publicly available company information regarding legal and beneficial ownership, the identify of directors and audited financial information.

This increases investment risk since investors may not be able to obtain reliable information about fundamental matters relating to a target company. Instead, investors must depend more heavily on the seller and target to disclose information. This creates a greater opportunity for fraud, and an increased likelihood of claims by the buyer against the seller for overstating the value of the business sold.

Introducing searchable registers accessible to the public and a requirement for UAE companies to provide current information to the registrars would help to address this problem. The absence of such registers is often attributed to a regional cultural preference for privacy, which is understandable and should be respected. However, the absence of standard company information will continue to be a factor that makes investment higher risk and more expensive.

Board members of regional companies owe duties to the company that appoints them, and often to shareholders. Such duties are similar to those of their counterparts in other advanced legal systems, and typically include a fiduciary duty (i.e., to act in the company’s best interests, to not act negligently and to avoid conflicts of interest). Specific duties arise when the company is at risk of insolvency.

However, there has been relatively little enforcement of claims against directors in the region, in particular by shareholders. This may be due to the perception that in most cases there is limited economic benefit to be gained from doing so, due to both the less developed market for insurance for directors and the perceived difficulty in establishing shareholder claims directly against directors.

However, this appears to be changing. Very recently a senior UAE court found directors personally liable to shareholders for failing to exercise their powers. Claims against directors in respect of companies in insolvency proceedings are also understood to be on the rise.

This trend toward individual director accountability may be viewed with concern. However, in the longer term it should drive improvements in corporate governance standards, and thereby promote investment as board are increasingly motivated to ensure compliance with applicable laws and regulations.

Stuart Paterson is a managing partner at Herbert Smith Freehills Kramer. He can be contacted on +971 4 428 6308 or by email: stuart.paterson@hsfkramer.com.

Stuart Paterson

Herbert Smith Freehills Kramer