Category Archives: Employment

How ESOPs are transforming employee compensation in the UAE and Saudi Arabia

Posted on November 24, 2025 - 9:26 am by

Learn how market trends and legislative changes are changing employee compensation in the UAE and KSA, encouraging startups to adopt equity-based rewards.

This article was co-created by HMCo team and Carta.

For MENA’s growing startup ecosystem, equity is shifting from a nice-to-have to a key part of competitive compensation. Founders increasingly see employee ownership as a way to attract top talent, improve retention, and align teams with long-term company growth.

Despite this momentum, many companies still find it challenging to craft a well-structured employee share ownership plan (ESOP) to incentivise employees. With so many moving parts to consider, from navigating implementation rules to designing the right vesting schedules, it can be difficult for founders if they don’t get it right the first time.

Carta works with thousands of global founders and understands the complexities involved in designing the right ESOP for their team. That’s why we partnered with HMCo to outline the legal, operational, and cultural considerations for ESOPs to help founders reshape their employees’ ownership journeys in the United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA).

What is an ESOP?

An ESOP is a long-term incentive plan (LTIP) that grants employees the right to buy shares at a predetermined strike price at a time in the future, subject to vesting. Typically, new shares are issued when the options are exercised.

When designed well, an ESOP can be a powerful tool for startups to build a culture of ownership. By giving employees a chance to own a portion of the company, you’re turning them into owners. This aligns the interests of employees with those of the company, which is an effective method to attract, motivate, and retain top talent. When you link rewards to the company’s long-term performance, ESOPs can foster sustained commitment and contribution to overall company growth.

Types of vesting structures

ESOPs typically include vesting structures which vary based on a company’s needs and may include:

  • Cliff vesting: This is the most common model where all granted options become exercisable after a defined period of time.
  • Graded vesting: This lets a portion of the options vest incrementally over time.
  • Ratable vesting: This ensures a consistent percentage of the granted options vest at regular intervals.

Many companies start with a cliff period followed by a graded or ratable vesting schedule.

Share vesting (UK article) – graph 1

Best practices for designing ESOPs

When designing ESOPs, companies must also consider various liquidity and exit strategies to help navigate key moments.

Key best practices include:

  • Implementing buyback clauses: This allows the company to repurchase shares if an employee leaves.
  • Tying exercise to a liquidity event: This ensures that options are exercisable only upon an IPO or acquisition.
  • Using alternative equity incentives: One example is to offer phantom shares, which provide cash rewards based on share price appreciation without actual equity transfer.

Companies should also consider the accounting impact of creating ESOPs, because these plans create an obligation to issue stock at a discount or pay employees in cash. Both items may require recording in the companies’ books as liabilities.

United Arab Emirates

The UAE’s legal system has multiple jurisdictions, so where you’re incorporated matters when you want to issue ESOPs.

Key jurisdictions include:

  • Onshore UAE (Mainland): Companies operating in onshore UAE are governed by the Federal Decree-Law No. 32 of 2021 on Commercial Companies. This law does not have specific rules for ESOPs, but companies can still implement such plans through internal corporate governance with the right approvals.

In onshore UAE, non-UAE nationals may face restrictions on holding shares in certain sectors. This is where options like phantom share schemes, where an entity holds the shares on behalf of the employee, can be used as alternatives.

  • Free zones: Jurisdictions like the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) offer more structured legal frameworks for ESOPs, often incorporating elements of common law. These jurisdictions make it easier to use trusts, nominee structures, and special purpose vehicles (SPVs) to hold shares on behalf of employees, ensuring compliance with foreign ownership restrictions.

Free zone companies may also need to comply with employment and securities laws relevant to their jurisdiction.

Kingdom of Saudi Arabia

In KSA, the key to issuing ESOPs is getting approval from your shareholders.

  • For a joint-stock company: This means getting approval of shareholders from at least three-quarters of the voting shares at an extraordinary general assembly meeting.
  • For a limited liability company: This means getting approval of one or more partners holding at least three-quarters of the capital.

Board approval may also be required, depending on your company’s bylaws or articles of association.

The good news is that ESOPs are generally considered an exempted offer and do not trigger filing requirements. This designation allows employers to issue unlisted, contract-based securities to employees without being subject to the full scope of applicable Capital Market Authority (CMA) regulations.

That said, the CMA does impose specific disclosures. These include quarterly notifications to the CMA detailing the total number and value of the exempted offers and reporting on any ongoing ESOP offers.

The MENA region embraces ESOPs

Most employee equity in APAC & ME is issued ...

Carta data shows that 67% of grants in Middle East (ME) startups follow a four-year vesting schedule with a one-year cliff, signaling that startups in the region are consistent in their equity vesting practices. The regional norm for structure is 25% of equity vests after the first year and the remaining 75% vests monthly thereafter.

This growing culture of ownership in the MENA region shows a fundamental shift in how companies approach talent and growth. If founders understand the process of designing a well-structured ESOP, they can not only attract and retain top talent, but also build a culture of shared success.

In MENA, where equity has become a must-have, sharing ownership is the new engine for growth.

 

DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. (“Carta”) and HMCo. This communication is for informational purposes only, and contains general information only. Carta and HMCo are not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta and HMCo do not assume any liability for reliance on the information provided herein.

© 2025 Carta. All rights reserved. Reproduction prohibited. Regulated by the Financial Services Regulatory Authority.
The contents of this article may contain attorney advertising under the laws of various jurisdictions. Prior results do not guarantee a similar outcome. By receiving this communication you understand and agree that no information is being provided in the context of any attorney-client relationship and that nothing herein is intended to constitute legal advice. This communication is solely informational in nature, not intended as a substitute for competent legal advice from a licensed and retained attorney in your jurisdiction, and should not be so used.

Structuring Cross-Border M&A: Saudi Legal Considerations for International Investors

Posted on September 29, 2025 - 10:14 am by

Saudi Arabia has emerged as one of the most dynamic markets in the Middle East, propelled by sweeping economic reforms under Vision 2030. Foreign direct investment (FDI) is a cornerstone of this transformation, with mergers and acquisitions (M&A) playing an increasingly important role in advancing corporate consolidation, capital deployment, and access to the Kingdom’s rapidly expanding sectors. For international investors, structuring a cross-border M&A transaction in Saudi Arabia requires careful navigation of the country’s regulatory, commercial, and cultural landscape.

 

Regulatory Framework and Approval Requirements

A combination of statutory laws and sector-specific regulations regulates cross-border M&A activity in Saudi Arabia. The Ministry of Investment of Saudi Arabia (MISA) is the primary authority for foreign investment licensing, while the Saudi Arabian General Authority for Competition (GAC) oversees competition clearances. Depending on the target company’s industry, approvals may also be required from sector regulators, such as the Saudi Central Bank (SAMA) or the Communications, Space & Technology Commission (CST).

Foreign investors must obtain a foreign investment licence from MISA before acquiring shares in a Saudi entity. This process involves assessing eligibility under the foreign investment rules, which restrict ownership in specific sectors while providing incentives in others. In parallel, transactions that result in an economic concentration require notification to the GAC, particularly if financial thresholds based on turnover are met. Early engagement with regulators can prevent delays and ensure smooth completion.

Due Diligence and Compliance

Comprehensive due diligence is fundamental to any cross-border M&A, but in Saudi Arabia, it takes on heightened importance given the evolving regulatory environment. Investors should assess corporate governance structures, compliance with licensing and regulatory requirements, employee obligations, tax exposures, and contractual commitments.

Particular attention should be paid to foreign ownership restrictions and the validity of existing licences. In some cases, local sponsors or partners may have contractual rights that impact the deal structure. Moreover, compliance with anti-bribery and anti-money laundering laws is strictly enforced, with Saudi Arabia aligning itself more closely with international standards in recent years.

Structuring Considerations

The choice of structure depends on the nature of the transaction, whether it is an asset purchase, share purchase, or merger. Share acquisitions are the most common route, offering continuity of contracts and licences, though they require regulatory consents. Asset acquisitions, while providing greater flexibility in isolating liabilities, can be more complex due to transfer formalities and additional approvals.

In some cases, international investors prefer to establish a Saudi holding or special purpose vehicle to facilitate the acquisition. This approach can simplify regulatory filings, allow for greater flexibility in financing arrangements, and provide tax efficiencies depending on the transaction’s cross-border elements.

Tax and Financial Implications

Tax structuring is another critical consideration. Saudi Arabia imposes a corporate income tax of 20% on foreign-owned entities, while Saudi and GCC shareholders are subject to zakat. Withholding tax applies to cross-border payments such as dividends, interest, and royalties, with rates varying depending on applicable double tax treaties.

The introduction of transfer pricing rules and increased scrutiny by the Zakat, Tax and Customs Authority (ZATCA) mean that related-party transactions must be carefully managed. Investors should also account for value-added tax (VAT) implications on asset transfers and service agreements linked to the acquisition.

Employment and Workforce Matters

Saudi labour law is protective of employees and mandates certain obligations on employers, including end-of-service benefits and Saudisation requirements. Any cross-border M&A transaction must evaluate the impact of workforce restructuring, continuity of employment, and compliance with mandatory localisation quotas. Employee-related liabilities should be factored into valuations and addressed in transaction documents to mitigate post-closing risks.

Dispute Resolution and Governing Law

While Saudi law will generally govern local entities and transactions, parties often seek to negotiate arbitration clauses for cross-border M&A. Saudi Arabia is a signatory to the New York Convention, and arbitration awards are enforceable through local courts, subject to compliance with Sharia principles. The Saudi Centre for Commercial Arbitration (SCCA) provides a modern institutional framework for dispute resolution, offering international investors greater predictability.

Cultural and Commercial Dynamics

Beyond legal considerations, cultural alignment is central to successful deal execution in Saudi Arabia. Relationship-building, negotiation styles, and local business practices can significantly influence transaction timelines and outcomes. International investors benefit from engaging with experienced local advisers who understand both regulatory nuances and the importance of cultural context.

Cross-border M&A in Saudi Arabia presents significant opportunities, driven by government reforms, growing capital markets, and a youthful consumer base. However, international investors must navigate a multi-layered legal framework, regulatory approvals, and commercial sensitivities to achieve successful outcomes. With careful structuring, rigorous due diligence, and proactive engagement with regulators, cross-border transactions can unlock long-term strategic value in one of the region’s most attractive markets.

Employment Litigation in KSA: What General Counsel Should Expect in 2025

Posted on August 11, 2025 - 6:24 am by

As the Kingdom of Saudi Arabia continues its ambitious Vision 2030 programme, the employment law landscape is transforming rapidly. For a General Counsel responsible for corporate compliance and risk management, staying ahead of legal developments is not a choice but a necessity. The year 2025 is expected to bring further shifts in employment litigation, driven by regulatory changes, a maturing legal framework, increased employee awareness, and intensified focus on Saudisation and labour market reform.

 

A Shifting Legal Landscape

Traditionally, employment litigation in Saudi Arabia has been governed by a mix of Sharia law, statutory labour codes, and regulatory guidance from the Ministry of Human Resources and Social Development (MHRSD). Recent years have seen these foundations modernised to support economic diversification, increase foreign investment, and promote greater Saudi workforce participation.

This regulatory evolution has introduced more transparent and structured employment practices but also placed heavier compliance responsibilities on employers. Legal departments must now operate within a more robust enforcement environment, where non-compliance is likely to result in swift legal and reputational consequences.

Rising Employee Awareness and Claims

Employees in the Kingdom are becoming increasingly aware of their rights, with improved access to legal resources, user-friendly complaint portals, and more efficient dispute resolution mechanisms. This has contributed to a steady rise in claims, especially around wrongful termination, delayed or unpaid entitlements, and contract breaches.

As this trend continues in 2025, General Counsel should expect a more proactive and legally empowered workforce. Employers must therefore maintain accurate records, follow clear and fair procedures, and promote transparent practices throughout the employment cycle.

Contractual Clarity and Legal Precision

Employment contracts are under greater scrutiny than ever. Evolving regulations demand that key contractual terms are precisely defined, including probation periods, termination conditions, remuneration structures, and end-of-service entitlements. Vague or outdated contracts may be challenged in court, especially in cases involving dismissal or financial claims.

General Counsel should oversee periodic reviews of employment contracts to ensure legal compliance and alignment with business operations. Contracts should also reflect sector-specific obligations and internal company policies to withstand potential legal scrutiny.

Saudisation and Workforce Management

Saudisation remains a key government priority in 2025, with increasingly stringent compliance mechanisms. Employers must strike a balance between achieving workforce localisation targets and maintaining operational efficiency. Failure to comply with Saudisation rules can result in penalties and expose employers to legal claims, especially those concerning discrimination or inequitable dismissal practices involving Saudi nationals.

Legal teams should work closely with HR to monitor Saudisation ratios, implement compliance systems, and ensure ongoing education and training to minimise litigation risks.

Workplace Environment and Employee Well-being

The Kingdom is placing greater emphasis on workplace safety, equality, and mental health. Regulatory focus is shifting towards ensuring inclusive and respectful work environments. As a result, litigation related to harassment, unsafe working conditions, and discriminatory behaviour is becoming more prevalent.

Employers must adopt comprehensive policies on health and safety, implement confidential reporting channels, and conduct regular training to reinforce expected standards of workplace conduct.

Growing Role of Alternative Dispute Resolution

Although labour courts remain the default venue for employment disputes, alternative dispute resolution (ADR) methods such as mediation and arbitration are gaining traction in the Kingdom. These mechanisms offer the potential for faster, more cost-effective outcomes, particularly in complex or sensitive disputes.

General Counsel should consider incorporating ADR clauses into employment contracts and internal grievance policies. Familiarity with ADR processes can significantly reduce legal costs and promote amicable dispute resolution.

Cross-border Employment Issues

For multinational corporations operating in Saudi Arabia, cross-border employment challenges add another layer of complexity. Issues such as expatriate employment rights, international secondments, and data protection obligations are subject to both local and global scrutiny.

In 2025, legal teams must ensure that group-wide employment policies are tailored to comply with Saudi labour law. This requires regular coordination between head offices and local legal teams, as well as real-time monitoring of both domestic regulations and international developments.

A Proactive Approach for General Counsel

As employment litigation in Saudi Arabia becomes more structured and employee-driven, General Counsel must move from a reactive to a proactive legal strategy. Key priorities for 2025 should include:

  • Regularly updating employment contracts and HR policies to reflect current regulations
  • Establishing transparent internal mechanisms for grievance handling and dispute resolution
  • Collaborating closely with HR and compliance departments on Saudisation, diversity, and inclusion
  • Leveraging mediation and arbitration to reduce formal litigation exposure
  • Addressing cross-border employment risks through integrated legal frameworks

By taking these steps, legal leaders can support their organisations in maintaining compliance while contributing to the broader national goals of a modern, fair, and dynamic labour market.