Preferred and Structured Equity in the UAE and Saudi Arabia: Key Opportunities and Issues for Investors

Investors are making increasing use of preferred and structured equity instruments in global private equity transactions. While these instruments are well-established in the UK, US and European markets, their adoption and treatment in the Gulf – particularly in the UAE (including the DIFC and ADGM) and The Kingdom of Saudi Arabia – present unique legal and market considerations. This article explores the opportunities and practical issues relevant to private equity sponsors and capital providers considering preferred and structured equity investments in these jurisdictions.

Understanding Preferred and Structured Equity

Preferred equity typically refers to equity instruments that confer preferential rights over ordinary equity, such as priority in dividends, liquidation proceeds or voting. Structured equity encompasses a broader range of instruments, often combining debt and equity features, such as convertible notes, redeemable shares and instruments with bespoke covenants or exit rights. In comparatively mature markets such as the UK and US, preferred and structured equity are supported by well-developed legal frameworks, established market practices and a robust body of case law. These features underpin investor confidence and facilitate complex capital structures. In contrast, the Gulf presents a more nuanced landscape, with significant differences between common law financial free zones (DIFC and ADGM) and the civil law or Sharia-based regimes of Onshore UAE and Saudi Arabia.

DIFC and ADGM: Common Law Certainty and Flexibility 

Legal Framework and Market Practice

Both the DIFC and ADGM operate under English common law frameworks, with their own companies laws modelled closely on UK legislation. This provides a familiar environment for international investors and allows for the creation of sophisticated preferred and structured equity instruments, including: (i) redeemable and convertible shares; (ii) cumulative and non-cumulative preferred shares; and (iii) instruments with bespoke voting, dividend and liquidation rights.

The flexibility of the corporate statutes in both centres means that parties can contractually agree on a wide range of rights and obligations, subject to compliance with basic statutory requirements and public policy. The DIFC and ADGM courts have demonstrated a willingness to uphold complex shareholders’ arrangements, provided they are clearly documented and not contrary to law.

Market Trends

The number of high-profile private equity deals in the DIFC and ADGM utilising preferred and structured equity is increasing, particularly in growth capital and venture capital transactions. These deals often mirror UK and US market terms, including anti-dilution protections, liquidation preferences and drag-along/tag-along rights.

Key Issues

• Enforceability: The common law courts of the DIFC and ADGM provide reliable enforcement of shareholders’ agreements and equity arrangements, reducing execution risk.
• Regulatory Approvals: While generally business-friendly, certain sectors (e.g., financial services) may require regulatory approval for changes in ownership or control.
• Exit Mechanisms: Parties should ensure that exit rights (e.g., put/call options, IPO rights) are clearly drafted to avoid enforceability issues.

Onshore UAE: Civil Law Constraints and Evolving Practice

Legal Framework

Onshore UAE companies are governed by the UAE Federal Commercial Companies Law, which is based on civil law principles. Historically, this regime has been less flexible than the DIFC or ADGM in terms of the restrictions on share classes and the rights that can be attached to shares. For example, the law previously required all shares to have equal rights, limiting the ability to create true preferred equity.

Market Practice

Recent reforms have introduced greater flexibility, including the ability for public joint stock companies to issue preferred shares. However, for private companies, the position remains less clear, and bespoke arrangements are often implemented through shareholders’ agreements (where investors rely on contractual protections such as put options and anti-dilution clauses) rather than through companies’ constitutional documents. The issue is further complicated by the priority given by courts and public bodies to the terms of constitutional documents over shareholders’ agreements, resulting in enforceability risks. The market therefore remains less mature than in the DIFC or ADGM.

Key Issues

• Enforceability: UAE courts may not always enforce contractual arrangements that conflict with mandatory provisions of the Commercial Companies Law or public policy.
• Foreign Ownership: Whilst most commercial activities in the UAE now permit up to 100% foreign ownership for companies incorporated outside of free zones, restrictions on foreign ownership in certain sectors can complicate equity structuring. (These sectors include oil and gas exploration and production, security and defence, banking and finance, insurance, telecommunications and certain land and air transport activities).
• Exit Rights: Put and call options may be treated as unenforceable if deemed to contravene the prohibition on riba (interest) or as disguised loans.

Saudi Arabia: Sharia Principles and Market Modernisation

Legal Framework

Saudi companies are governed by the Companies Law and the Capital Market Law, both of which have undergone significant reform in recent years. While the law now permits the issuance of preferred shares, all such arrangements must comply with Sharia principles, which prohibit interest and certain types of contractual uncertainty (gharar).

Market Practice and Precedents

Preferred and structured equity instruments are increasingly used in Saudi private equity and venture capital deals, particularly in the technology and healthcare sectors. However, the structuring of these instruments often requires careful navigation of Sharia compliance, and the use of convertible or redeemable instruments may be subject to additional scrutiny.

Key Issues

• Sharia Compliance: All equity instruments must be structured to avoid prohibited elements such as guaranteed returns or interest-like features.
• Regulatory Oversight: The Capital Market Authority (CMA) closely supervises public offerings and may review the terms of preferred equity instruments.
• Enforceability: Saudi courts have become more sophisticated in enforcing shareholder arrangements, but uncertainty remains, particularly for novel or complex structures. As the market continues to evolve and mature, these issues are likely to ease over time.

Key Differences Compared to UK, US, and Europe

• Legal Certainty: The DIFC and ADGM offer legal certainty and predictability comparable to the UK and US, making them attractive for international investors. Onshore UAE and Saudi Arabia, while increasingly sophisticated and modernised, may present additional considerations around legal interpretation and enforceability, particularly for more complex or novel equity structures.
• Flexibility: Common law jurisdictions (DIFC, ADGM) provide a high degree of flexibility in structuring equity arrangements. In contrast, Onshore UAE and Saudi Arabia operate under civil law and Sharia-based systems, respectively, which may require a more tailored approach to ensure compliance with local laws and principles. These frameworks are evolving, and recent reforms have enhanced the ability to implement a wider range of equity instruments.
• Market Maturity: The market for preferred and structured equity is well established in the DIFC and ADGM, reflecting international practices. Onshore UAE and Saudi Arabia are experiencing rapid growth and increasing sophistication in this area, with a growing track record of successful transactions and an expanding pool of experienced market participants.
• Regulatory and Sharia Compliance: Investors should pay close attention to regulatory approvals and Sharia compliance, particularly in Saudi Arabia and Onshore UAE. These requirements are designed to ensure that transactions align with local legal and ethical standards, and with careful structuring, preferred and structured equity solutions can be effectively implemented.

Conclusion

Preferred and structured equity instruments are unlocking new possibilities for private equity investors in the Gulf, with innovative structuring options available across the DIFC, ADGM, Onshore UAE and Saudi Arabia. While the DIFC and ADGM offer familiar flexibility, Onshore UAE and Saudi Arabia present exciting growth prospects and evolving frameworks that reward thoughtful structuring. As regulatory and market landscapes continue to develop, understanding these nuances will be key to successful investments in the region.

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