Partner Exit from the Company: How to Protect Your Interests

The withdrawal of a partner or the expulsion of a partner (exit) from a company is one of the most common issues facing business partners in the United Arab Emirates, whether in a general partnership or a limited liability company. A partner may decide to withdraw voluntarily due to personal or commercial circumstances, or a company may need to expel a partner who has breached their obligations or obstructed the company's operations. In both situations, a lack of proper understanding of the legal framework can lead partners into lengthy disputes that affect the continuity of the business. This article reviews the legal provisions governing these matters, the available exit mechanisms, how the fair value of a partner's share is determined, and the statutory procedures that must be followed.

🤝The Difference Between Voluntary Withdrawal and Compulsory Expulsion of a Partner

Voluntary withdrawal is a decision a partner takes on their own initiative to leave the company, either through a written agreement with the remaining partners or through a court ruling where no agreement is reached. Compulsory expulsion (exit), on the other hand, occurs when serious grounds arise justifying the removal of a partner, such as a breach of their contractual obligations or conduct harmful to the company's interests. In such cases, the competent court may order the partner's expulsion while the company continues to exist among the remaining partners.

⚖️Available Legal Exit Mechanisms

There are several legal routes through which a partner's relationship with a company can be terminated, most notably:

1. Withdrawal by written agreement: In general partnerships, a partner may withdraw by written agreement with the remaining partners, provided they are notified at least sixty days before the date set for withdrawal.

2. Transfer of the share: A partner in a limited liability company may transfer their share to another partner or to a third party, provided the other partners are notified of the terms of transfer, and they retain a pre-emption right to redeem the share within a specified period before it may be transferred to an outside party.

3. Judicial dissolution and expulsion: Where serious grounds exist, any partner may petition the court for dissolution of the company. If those grounds arise from the conduct of a specific partner, the court may order that partner's expulsion alone, with the company continuing among the remaining partners.

4. Enforcement against the share: Where a creditor of a partner initiates enforcement proceedings against that partner's share, the share may be offered for sale at public auction, with the remaining partners retaining the right to redeem it on the same terms on which the auction was awarded.

💰How Is the Fair Value of a Partner's Share Determined?

Valuing the share of a withdrawing or expelled partner is, in practice, one of the most contentious points, and the following steps are generally followed:

Refer to the memorandum of association first: If the memorandum of association or a shareholders' agreement specifies a particular valuation method, it must be followed before resorting to any other means.

Valuation by technical and financial expertise: Where the price is disputed, the share is valued by one or more experts with technical and financial expertise, appointed by the competent authority at the request of, and at the expense of, the interested party.

The company's latest inventory: In cases of judicial expulsion, the expelled partner's share is valued according to the company's latest inventory, or by any other method the court deems appropriate to ensure fairness between the parties.

📋Statutory Procedures for Withdrawal or Expulsion

1. Notify the remaining partners in writing by registered mail, observing the statutory notice period before the withdrawal date.

2. Document the withdrawal agreement or share transfer through a notarized official instrument in accordance with the legal provisions.

3. Register the withdrawal or transfer with the commercial register at the competent authority, and publish it in two daily local newspapers, one of which is in Arabic.

4. Amend the memorandum of association to reflect the change in the partnership structure and capital.

5. Where court action is necessary, file the claim before the competent court, supporting it with documentation and the serious grounds justifying dissolution or expulsion.

⚠️Common Disputes and How to Address Them

Among the most common disputes in this area: the remaining partners' refusal to purchase a withdrawing partner's share, disagreement over the fair value of the share, and a partner obstructing general assembly resolutions in order to pressure the other partners. In these situations, resorting to litigation or arbitration (where an arbitration clause exists in the memorandum of association) remains the effective means of resolving the dispute, and it is important to document every correspondence and meeting minute to support the legal position later on.

💡Practical Tips for Partners

📚Legal References

• Federal Decree-Law No. 32 of 2021 on Commercial Companies, as amended.

• Federal Law No. 5 of 1985 promulgating the Civil Transactions Law of the United Arab Emirates, as amended.

• Federal Law No. 11 of 1992 promulgating the Civil Procedure Law, as amended.

❓Frequently Asked Questions