When two or more people form a company in Jordan, they sign a memorandum of association, register with the Companies Control Department, and assume everything is settled. In many cases, the real problems surface years later, when a partner wants to exit, a new investor enters, or the founders simply disagree on direction. A shareholder agreement is the document that addresses these situations before they become disputes. This guide explains what it should contain, what Jordanian law requires, and the mistakes we see most often.
Why the Memorandum of Association Is Not Enough
Under Jordan's Companies Law No. 22 of 1997 (as amended), every limited liability company (LLC) and private shareholding company must file a memorandum of association (MOA) with the Companies Control Department (CCD). The MOA is a public document. It records the company's name, objectives, capital, the partners' names and ownership percentages, and the identity of the manager or board members.
What the MOA does not do, and is not designed to do, is regulate the private commercial relationship between the shareholders in any detail. It does not address what happens when shareholders disagree on a fundamental business decision, how a departing shareholder's interest should be valued, whether a shareholder can sell to a third party without the others' consent, or how the company should handle a deadlock at the management level.
These gaps are intentional. The Companies Law provides a basic governance framework and leaves room for shareholders to agree among themselves on everything else. The shareholder agreement fills that space. It is a private contract, not filed with the CCD, that governs the relationship between the shareholders in a way the MOA cannot.
Businesses that rely solely on the MOA often discover its limitations only when a dispute arises. By then, the options are limited, expensive, and slow. A shareholder agreement drafted at the outset costs a fraction of what a shareholder dispute costs to resolve.
Legal Basis for Shareholder Agreements in Jordan
Jordanian law does not have a standalone statute governing shareholder agreements. Instead, they derive their enforceability from the general principles of contract law under the Jordanian Civil Code No. 43 of 1976 and from the Companies Law itself, which permits shareholders to regulate matters among themselves provided they do not contravene mandatory provisions of the law.
Key points to understand about enforceability:
- A shareholder agreement is binding between the parties who sign it. It is not binding on the company as a separate legal entity unless the company is also made a party to the agreement.
- Where a shareholder agreement conflicts with the MOA, the MOA prevails as far as the CCD and third parties are concerned. Between the shareholders themselves, the shareholder agreement prevails, but its enforcement may require a court action for specific performance or damages.
- Certain provisions of the Companies Law are mandatory: for example, the minimum capital requirement for an LLC and the prohibition on certain activities. A shareholder agreement cannot override these. Note that a Jordanian LLC may now be formed with a single shareholder, subject to the approval of the Companies Registrar, so the older requirement for at least two partners no longer applies.
- The agreement should be drafted in Arabic (the language of the courts) or in both Arabic and English with a clause specifying which version prevails in case of discrepancy.
Key Clauses Every Shareholder Agreement Should Include
A well-drafted shareholder agreement for a Jordanian company typically addresses the following areas. The specific terms depend on the nature of the business, the number of shareholders, and the relative bargaining positions of the parties.
Pre-Emption Rights (Right of First Refusal)
A pre-emption clause gives existing shareholders the right to purchase the shares of a departing shareholder before those shares can be offered to a third party. This is one of the most important protective mechanisms in a closely held company. It prevents an unwanted outsider from acquiring an interest in the business without the consent of the remaining shareholders.
The clause should specify the notice period, the mechanism for determining the price (see valuation below), the timeframe within which the existing shareholders must exercise or waive their right, and what happens if only some shareholders wish to exercise their pre-emption right (pro-rata allocation or otherwise).
Note that the Companies Law already provides a limited form of pre-emption for LLCs, but the statutory mechanism is often insufficient and lacks the detail needed for a complex ownership structure.
Tag-Along Rights
Tag-along rights protect minority shareholders. If a majority shareholder agrees to sell their stake to a third party, the minority shareholders have the right to join the transaction on the same terms and at the same price per share. Without this clause, a majority shareholder could sell their controlling interest at a premium, leaving the minority locked in with a new, and potentially less cooperative, majority partner.
Drag-Along Rights
Drag-along rights benefit majority shareholders. If a buyer wants to acquire the entire company and the majority has agreed to sell, the drag-along clause requires the minority shareholders to sell their shares on the same terms. This prevents a small minority from blocking a transaction that the majority has approved. The clause typically requires a minimum ownership threshold (for example, shareholders holding at least 75% of the shares) before the drag-along can be triggered, and it may include a floor price or a requirement that the terms be no less favourable than a prior independent valuation.
Deadlock Resolution
A deadlock arises when the shareholders or directors cannot reach agreement on a matter that requires their collective approval: for example, a 50/50 company where both partners must agree on major decisions. Without a deadlock resolution mechanism, the company can become paralysed.
Common deadlock resolution mechanisms include:
- Escalation: Requiring the matter to be escalated to the shareholders' senior management or principals for a defined negotiation period.
- Mediation: Referring the dispute to a mediator before any binding mechanism is triggered.
- Expert determination: Appointing an independent expert to decide the matter (suitable for valuation or technical disputes).
- Russian roulette (shoot-out): One shareholder offers to buy the other's shares at a stated price; the other must either accept or buy the offering shareholder's shares at the same price. This mechanism is dramatic but effective in forcing a resolution.
- Texas shoot-out: Both shareholders submit sealed bids; the higher bidder buys the other's shares at the price they bid.
- Winding up: As a last resort, the agreement may provide for the voluntary dissolution of the company if a deadlock cannot be resolved within a specified period.
The absence of a deadlock clause is one of the most common, and most damaging, omissions we encounter. In a 50/50 company with no deadlock mechanism, the only recourse may be litigation, which is time-consuming, costly, and destructive to the business.
Reserved Matters
Reserved matters are decisions that require the unanimous consent (or a super-majority vote) of all shareholders, regardless of their ownership percentage. They protect minority shareholders from being overruled on matters that fundamentally affect their investment. Typical reserved matters include:
- Amending the MOA or the shareholder agreement itself
- Increasing or decreasing the share capital
- Issuing new shares or admitting new shareholders
- Approving the annual budget or expenditures above a specified threshold
- Entering into related-party transactions
- Changing the nature of the company's business
- Appointing or removing the general manager or key officers
- Taking on debt above a specified amount
- Declaring or withholding dividends
- Dissolving the company or disposing of substantially all of its assets
The list should be tailored to the specific business. Too many reserved matters can create governance gridlock; too few can leave the minority exposed.
Non-Compete and Non-Solicitation
A non-compete clause prevents shareholders from engaging in activities that compete with the company's business during the term of their shareholding and for a specified period after they exit. In Jordan, non-compete clauses are enforceable provided they are reasonable in scope (geographic area and business activities) and duration. Courts have discretion to reduce an unreasonable non-compete to what they consider fair.
A non-solicitation clause prevents departing shareholders from soliciting the company's employees, clients, or suppliers for a defined period. Both clauses are particularly important when the shareholders are also actively involved in the management of the business.
Dividend Policy
The shareholder agreement should specify when and how dividends are declared and distributed. Without a dividend policy, a majority shareholder who also draws a management salary may have little incentive to declare dividends, effectively starving the minority of any return on their investment. The agreement may provide for a minimum dividend (for example, a percentage of distributable profits), the frequency of distribution (annual, semi-annual, quarterly), and the conditions under which dividends may be withheld (for example, to fund capital expenditure or to maintain a minimum cash reserve).
Exit Mechanisms
Every shareholder should know how they can exit the company and on what terms. Exit mechanisms typically include:
- Voluntary sale: Subject to pre-emption rights and any lock-up period.
- Put option: The right of a shareholder to require the other shareholders or the company to purchase their shares at a defined price or a price determined by a specified valuation method.
- Call option: The right of the other shareholders or the company to require a shareholder to sell their shares (often triggered by breach, death, incapacity, or insolvency).
- Initial public offering (IPO): If the company reaches a certain size, the agreement may contemplate an IPO as an exit route.
- Trade sale: The sale of the entire company to a third party, subject to drag-along and tag-along rights.
Valuation Mechanisms
Wherever the agreement provides for a transfer of shares, whether through pre-emption, put/call options, or a deadlock shoot-out, it must specify how the shares will be valued. Vague or missing valuation clauses are a major source of shareholder disputes. Common approaches include:
- Agreed formula: A multiple of EBITDA, net asset value, or another financial metric, applied to the most recent audited accounts.
- Independent valuation: Appointment of an independent valuer (often one of the Big Four accounting firms or a licensed Jordanian valuation firm) whose determination is binding.
- Agreed price: A fixed price or a price determined annually by agreement of the shareholders and recorded in a schedule to the agreement.
The agreement should also address whether the valuation includes a discount for minority interests or a premium for control, whether it is based on a going-concern or liquidation basis, and the timeline for completing the valuation.
What the Jordanian Companies Law Requires vs What It Leaves to Private Agreement
Understanding the boundary between mandatory law and contractual freedom is essential when drafting a shareholder agreement in Jordan.
Mandatory provisions (cannot be overridden):
- An LLC may now be formed with a single shareholder, subject to the approval of the Companies Registrar, and may have up to fifty partners.
- Under Article 54 of the Companies Law No. 22 of 1997, an LLC must have capital of at least JOD 30,000, divided into shares of at least one Dinar each, though certain regulated activities require higher capital.
- Shares in an LLC cannot be offered to the public.
- The company must appoint at least one manager.
- Partners' liability is limited to the extent of their contributions to the capital.
- Certain decisions require specific majorities under the law (for example, amending the MOA typically requires a resolution of partners holding at least 75% of the capital).
- The company must file annual returns and audited financial statements with the CCD.
Matters left to private agreement:
- The detailed governance structure beyond what the law mandates (committee structures, observer rights, information rights).
- Transfer restrictions beyond the basic pre-emption right in the law.
- Deadlock resolution mechanisms.
- Dividend policy.
- Non-compete and non-solicitation obligations.
- Valuation methodology for share transfers.
- Tag-along, drag-along, put, and call options.
- Reserved matters and super-majority requirements beyond the statutory minimums.
- Confidentiality and intellectual property ownership.
The shareholder agreement is the instrument through which these matters are addressed. Without it, the default rules of the Companies Law and Civil Code apply, and those defaults rarely reflect the actual expectations of the parties.
Common Mistakes We See
Based on our experience advising businesses across Jordan, these are the mistakes that most frequently lead to shareholder disputes.
1. Relying Solely on the Memorandum of Association
As discussed above, the MOA is a registration document with limited scope. Many business owners treat it as the only governing document for their company and are surprised when it does not address the situation they face. A shareholder agreement should be prepared alongside the MOA, not as an afterthought.
2. No Deadlock Clause in 50/50 Companies
Equal partnerships are common in Jordan, particularly among family businesses and joint ventures. Without a deadlock clause, a disagreement between the two partners can paralyse the company entirely. We have seen businesses with significant revenue and strong market positions brought to a standstill because the partners could not agree on a single decision and had no contractual mechanism to break the impasse.
3. Vague or Missing Valuation Mechanisms
An agreement that says shares should be transferred at "fair market value" without specifying who determines that value, on what basis, and within what timeframe is an agreement that invites dispute. Valuation is inherently subjective, and the absence of an agreed methodology means the parties will almost certainly disagree when the time comes to apply it.
4. Ignoring Minority Protections
A minority shareholder who has no reserved matters, no tag-along rights, no dividend policy, and no put option is a shareholder with very little practical leverage. The majority can make all decisions, decline to distribute profits, and effectively force the minority to accept whatever terms the majority dictates. This imbalance is a recipe for litigation.
5. Failing to Address Management Roles and Compensation
When shareholders are also managers, as is common in owner-managed businesses, the agreement should clearly define their roles, responsibilities, and compensation. Disputes frequently arise when one shareholder-manager draws a salary that the other considers excessive, or when one shareholder contributes more effort than the other but receives the same share of profits.
6. Not Updating the Agreement
A shareholder agreement drafted when the company was a startup with two founders and JOD 10,000 in capital may be wholly inadequate five years later when the company has ten shareholders, JOD 2 million in capital, and operations in multiple countries. The agreement should be reviewed and, if necessary, amended whenever there is a material change in the ownership structure, the business, or the applicable law.
7. Inconsistency Between the Shareholder Agreement and the MOA
If the shareholder agreement provides for a reserved matter requiring unanimous consent, but the MOA allows that matter to be decided by a simple majority, the CCD will apply the MOA. The two documents must be aligned, and any changes to one should be reflected in the other.
How Shareholder Disputes Escalate
Shareholder disputes in Jordan typically follow a predictable pattern. Understanding this pattern can help business owners appreciate why a shareholder agreement is not merely a legal formality but a practical necessity.
The dispute usually begins with a disagreement over a specific business decision: the appointment of a new manager, the terms of a contract with a related party, or the distribution of profits. If there is no agreed mechanism for resolving the disagreement, positions harden. Communication breaks down. One or both parties begin to act unilaterally, withholding information, refusing to sign resolutions, or attempting to remove the other from management.
At this stage, the dispute often escalates to formal legal proceedings. The options available under Jordanian law include:
- Civil litigation: Filing a claim in the Court of First Instance for breach of the MOA or the shareholder agreement, seeking specific performance, damages, or both.
- Arbitration: If the shareholder agreement contains an arbitration clause, the dispute must be referred to arbitration rather than the courts. Jordan's Arbitration Law is based on the UNCITRAL Model Law and provides a well-established framework.
- Urgent proceedings: Applying to the urgent matters judge for interim measures: for example, appointing a temporary manager, freezing bank accounts, or preventing the registration of a share transfer.
- Criminal complaints: In extreme cases, shareholders file criminal complaints alleging breach of trust, embezzlement, or fraud. While these complaints sometimes have merit, they are also used as leverage in commercial disputes.
- Petition for dissolution: As a last resort, a shareholder may petition the court to dissolve the company on the grounds that it can no longer achieve its objectives or that there is a fundamental breach of the partnership relationship.
Litigation and arbitration are expensive, time-consuming, and damaging to the business. A well-drafted shareholder agreement with clear governance rules, a deadlock mechanism, and enforceable exit provisions can prevent most disputes from reaching this stage. For more on dispute resolution options, see our Litigation & Dispute Resolution practice area.
Protecting Minority Shareholders
Minority shareholders in Jordanian companies face particular risks. The Companies Law provides some protections: for example, minority partners holding at least 25% of the capital of an LLC can block certain resolutions that require a 75% majority. However, these statutory protections are limited, and a minority shareholder with less than 25% has very little leverage under the law alone.
A shareholder agreement can significantly improve the minority's position through:
- Reserved matters: Requiring unanimity or a super-majority for critical decisions, giving the minority an effective veto.
- Board or management representation: Granting the minority the right to nominate a manager, a board member, or an observer.
- Information rights: Requiring the company to provide regular financial reports, access to books and records, and advance notice of material transactions.
- Tag-along rights: Ensuring the minority can exit on the same terms as the majority.
- Put options: Giving the minority the right to force the majority to buy them out at a fair price in specified circumstances (for example, breach of the agreement, deadlock, or a change of control).
- Dividend policy: Preventing the majority from indefinitely reinvesting profits and denying the minority any return.
- Anti-dilution protections: Preventing the majority from issuing new shares at below-market value to dilute the minority's percentage.
These protections are not automatic. They must be negotiated and documented in the shareholder agreement. A minority shareholder who does not negotiate these terms before investing may find it far more difficult to obtain them later.
When to Speak With a Lawyer
A shareholder agreement is not a document that should be assembled from online templates. The clauses must reflect Jordanian law, the specific structure of the company, and the commercial reality of the shareholders' relationship. Legal advice is generally useful when:
- A new company is being formed with one or more partners and no shareholder agreement has yet been drafted.
- An investment is being made in an existing company and the protection of minority shareholder rights needs to be ensured.
- A joint venture is being entered into, whether with a local or foreign partner, and a governance framework that goes beyond the MOA is needed.
- A dispute has arisen between shareholders, and an assessment is required of the options under the agreement, the MOA, and the law.
- An exit from the company is sought and the process, the shareholder's rights, or the value of the shares is uncertain.
- The company has grown or changed materially since the shareholder agreement was last reviewed.
- A new investor is being brought in, and the terms of entry, including dilution, governance, and exit, must be negotiated.
How Abdullah & Partners Can Help
The firm drafts, reviews, and negotiates shareholder agreements for companies of all sizes, from two-partner startups to multi-shareholder joint ventures with international parties. The team combines knowledge of Jordan's Companies Law with practical experience in corporate structuring, governance design, and shareholder dispute resolution.
The firm also advises on the full range of corporate and commercial matters and represents shareholders in litigation and arbitration when disputes cannot be resolved amicably.
For advice on a specific matter, you may contact the firm.
