Call & Put Options in Shareholder Disputes

Call and put options in shareholder disputes are only as valuable as their ability to complete. A call option gives a shareholder the right to buy another shareholder’s shares on defined terms. A put option gives a shareholder the right to require another party to buy its shares. Both are drafted in calm conditions and exercised in hostile ones, which is exactly why so many fail at the moment they are needed. Within Term Sheet & Shareholder Disputes, these clauses decide whether a breakdown in the relationship ends in an orderly change of ownership or in years of argument over triggers, price and payment. The question is not whether the agreement contains an option. It is whether the option can be exercised, priced, funded and registered against a counterparty who has every reason to resist. An option that cannot close is not a right. It is a claim.

What Call and Put Options Actually Do in a Dispute

In a functioning company, options sit unused. They matter when governance has failed: a founder has breached a non-compete, a deadlock has frozen the board, an investor’s exit horizon has passed without a liquidity event, or a shareholder has become insolvent. At that point the option replaces negotiation with a pre-agreed outcome.

A call option moves shares towards the party exercising it. It is typically held by an investor or controlling shareholder and used to remove a defaulting or departing shareholder. A put option moves shares away from the party exercising it. It is typically held by a minority investor and used to force liquidity from a founder, a sponsor or the company’s other shareholders.

Call Options Versus Put Options: Which Risk Moves Where?

Which Trigger Events Hold Up Under Challenge?

Most option disputes begin with the trigger. The party resisting the transfer will argue that the event has not occurred, that it was caused by the other side, or that notice was defective. Triggers that depend on judgement are the most exposed.

Objective triggers include insolvency proceedings, a change of control of a corporate shareholder, the passing of a fixed exit date or the termination of an employment contract. They can be proved from documents and are rarely contested on substance.

Breach triggers require a finding that an obligation was broken. Material breach, competition with the company or misuse of confidential information all involve facts that the defaulting party will dispute. A cure period, a clear materiality threshold and a defined process for determining whether the breach occurred reduce that exposure.

Performance triggers rely on financial results. They are vulnerable where accounts are prepared by the party who benefits from the result, or where accounting policies can be changed. Linking the trigger to audited figures and fixed policies removes much of the room for argument.

Deadlock triggers must define what a deadlock is: how many failed meetings or votes, on which matters, and after what escalation. A put option that activates on an undefined deadlock invites an argument that no deadlock ever existed.

How Should the Exercise Price Be Set?

Price is the second battleground. An option with an agreed trigger but a disputed price delivers a valuation dispute rather than a transfer. Shareholder agreements generally use one of four approaches: a fixed price or formula, a multiple of an audited metric, an independent expert valuation, or fair market value determined by an agreed process.

Expert determination is the most common route in private companies. Its effectiveness depends on detail: who appoints the expert if the parties cannot agree, what valuation date applies, whether minority or illiquidity discounts are permitted, what information the expert may require, and whether the determination is final and binding except for manifest error. Each missing element becomes a point of dispute.

Breach calls often apply a discount, sometimes pricing a bad leaver’s shares at the lower of cost and fair value. In the UAE, the enforceability of such discounts depends on the governing law and forum. Onshore courts have statutory power to adjust agreed compensation so that it reflects the actual loss suffered, and a steep discount may be characterised as a penalty and revised. Discounts are more predictable where the shareholder agreement is governed by a common law system and disputes are resolved in the DIFC, the ADGM or by arbitration, although even there a discount should be justified by legitimate commercial interest rather than punishment alone.

A Worked Example: The Put That Could Not Be Paid

The following example is illustrative. An investor acquires 30 percent of a UAE operating group for AED 45 million. The shareholder agreement grants the investor a put option against the founder, exercisable if no exit occurs within five years, at the higher of original cost plus 8 percent simple annual return and fair value.

Five years pass without an exit. The cost-plus price is AED 45 million plus AED 18 million (8 percent of AED 45 million for five years), giving AED 63 million. An independent expert values the stake at AED 52 million, so the higher figure of AED 63 million applies.

The founder’s personal liquidity is around AED 15 million. The rest of the founder’s wealth is held in the shares of the company itself. Without security, the investor holds a contractual debt of AED 63 million against a counterparty who cannot pay it. The likely outcome is litigation or arbitration, followed by enforcement against assets that are largely the same shares the investor already part-owns.

Had the agreement included a pledge over the founder’s remaining shares, a drag-along right exercisable if the put was not honoured within a defined period, and a step-in right allowing the investor to run a sale process, the same trigger would have produced an exit rather than a claim. The price was never the problem. Funding was.

Funding and Security: Making the Obligor Able to Pay

Options fail more often on payment than on law. The drafting should match the obligation to a source of funds. Common tools include escrow of part of the price at signing, bank guarantees, share pledges, staged payment schedules with acceleration on default, and fallback rights that convert an unpaid put into a forced sale of the whole company.

Where the company itself is the intended buyer, additional care is needed. Restrictions on companies acquiring their own shares and on distributions out of capital differ between onshore UAE law, the DIFC and the ADGM, and a share buy-back may require specific shareholder approvals, solvency statements or capital reduction procedures. A put option drafted against the company without checking these rules may be unenforceable in exactly the scenario in which it is exercised.

Completing the Transfer in the UAE

An exercised option is a contractual right to a transfer. The transfer itself must still be completed under the rules of the place where the company is registered.

For onshore limited liability companies under the Commercial Companies Law (Federal Decree-Law No. 32 of 2021), share transfers are generally notarised and recorded with the relevant licensing authority, and the memorandum of association is amended to reflect the new ownership. The outgoing shareholder’s cooperation is usually required. Where that cooperation is withheld, the holder of the option must obtain a court judgment or an arbitral award and then have it recognised and enforced before the registry will act. Pre-signed transfer documents and irrevocable powers of attorney are commonly used to reduce this dependence, but registries may not accept them in every case, and their status should be confirmed in advance.

Companies incorporated in the DIFC (DIFC Companies Law No. 5 of 2018) or the ADGM (ADGM Companies Regulations 2020) operate with articles of association and share registers closer to common law practice. Transfer provisions can be built into the articles, and the company’s own register is the operative record. This is one reason many investors hold their UAE operating interests through a DIFC or ADGM holding company: the option is exercised over holding company shares, and the operating licence below does not need to change.

Original Analysis: The Option Executability Chain

An option converts a dispute into a transfer only if every link between the trigger and the updated register holds. We describe this as the Option Executability Chain: five sequential links, each of which must be capable of being proved or performed without the counterparty’s cooperation.

The chain is only as strong as its weakest link. In our experience the funding link is the one most often left unprotected, because it is negotiated at signing when both parties expect the option never to be used. The chain gives boards and investors a simple review discipline: test each link against a hostile counterparty and ask what happens if that party refuses to cooperate.

Interaction With Governance, Deadlock and Other Transfer Rights

Options alter ownership, and ownership drives voting, board appointment rights and reserved matter thresholds. A call that moves a shareholder from 26 percent to zero may remove a veto. A put that moves an investor out may leave a founder with control and no remaining check. The agreement should state how board seats, reserved matters and information rights adjust when an option completes.

Options must also be reconciled with pre-emption rights, rights of first refusal, tag-along and drag-along provisions. Without express carve-outs, a call option exercise may arguably trigger other shareholders’ pre-emption rights, and an option buyer may find that a tag-along obliges it to buy more shares than intended. The interaction should be addressed clause by clause rather than left to interpretation.

Finally, the dispute resolution clause decides where all of this is tested. Arbitration seated in the DIFC or the ADGM, or onshore under the Federal Arbitration Law No. 6 of 2018, offers confidentiality and an award enforceable under the New York Convention, to which the UAE acceded in 2006. Some reliefs, such as changes to an onshore commercial register, will still require a local court step once the award is obtained. The forum should be chosen with that final step in mind.

Common Failures in Call and Put Option Drafting

• Triggers are drafted as broad concepts such as material breach without a process for deciding whether the breach occurred, so the dispute shifts from the transfer to the trigger.
• Pricing clauses name an expert but omit the appointment fallback, valuation date or discount rules, leaving the parties to litigate the method before anyone values the shares.
• Put options are granted against founders or companies with no security for payment, so the investor wins a claim rather than an exit.
• Punitive discounts are used without considering the governing law, and an onshore court later reduces them to the actual loss.
• The transfer step is ignored, and the option holder discovers after an award that the registry still requires the counterparty’s signature or a further court order.
• Options conflict with pre-emption, tag-along or drag-along provisions because the shareholder agreement was assembled from separate templates.

Each of these failures is visible at signing. None is visible to a counterparty who assumes the option will never be used.

Conclusion

Call and put options are among the most effective tools a shareholder agreement can contain, but only when they are drafted to operate against an unwilling counterparty. A call moves control risk onto the shareholder who can be bought out. A put moves liquidity risk onto the party obliged to buy. In both cases the right is worth what it delivers on the share register, not what it promises on paper. That requires an objective trigger, a valid notice, a price that can be fixed without agreement, funding that is secured in advance and a transfer mechanism that does not depend on the other side’s signature. In the UAE, the choice between onshore, DIFC and ADGM structures, and between courts and arbitration, shapes each of those links. Test every link before signing. Secure the payment. Plan the registration. The option then resolves the dispute instead of starting one.