NEW CORPORATE GOVERNANCE RULES FROM THE SECURITIES AND COMMODITIES AUTHORITY
Authored by: Bilal Snaineh
- Considers the New Rules issued by the SCA covering corporate governance and corporate discipline standards for public joint stock companies.
- The New Rules include requirements for the calling of General Assemblies, the use of technology in board meetings, clarification of the definition of the term “related party” and requirements for the maintenance of registers.
- The New Rules provide for significant improvements to the corporate environment, compared to the situation under the old rules.
On 28 April 2016 the Securities and Commodities Authority (“SCA”) issued a resolution (7/R.M.) which sets out new corporate governance rules and corporate discipline standards for public joint stock companies (“the New Rules”).
Issued pursuant to the new Commercial Companies Law of 2015 (“CCL”), the New Rules, which came into force on 1 May 2016, are intended to provide a comprehensive overhaul of the existing corporate governance regime applicable to public joint stock companies. The New Rules replace all relevant provisions in existing resolutions, circulars or regulations (“the Existing Rules”) to the extent that there is contradiction. The New Rules are intended to enhance the way public joint stock companies are managed and will therefore give investors greater confidence in the capital markets of the UAE.
The New Rules combine the Existing Rules into a single piece of legislation which will make it easier for companies to comply with the new Rules, and at the same time allow the regulator to monitor compliance, and to ensure companies are run more effectively.
The applicability of the New Rules has been clarified so that it now clearly applies to all listed UAE companies, their board members, managers, chairman, and auditors. An exception is that Chapter Two of the New Rules in relation to corporate governance does not apply to banks, financial investment companies, money exchange and financial brokerage firms where these are subject to the regulation of the central bank and its corporate governance regulations.
Key Features of the New Rules:
The New Rules address a number of areas that were previously not codified. For example, clear rules have been introduced in relation to calling a general assembly. Unless approved by 95% of the shareholders, a board can no longer call a general assembly with less than 30 days’ notice. The Notice convening the general assembly must be disclosed to the market via the market’s regulatory news service and published on the company’s website. The Notice must also provide shareholders with sufficient detail to understand the purpose and agenda of the meeting. Although SCA approval will still be required to convene the general assembly, the creation of the 30-day notice period should help maximise shareholder participation in the decision-making of the company.
The way in which businesses operate today has changed significantly. The quickening pace and international nature of work, combined with the introduction of new technologies, means that working methods in all companies have changed. The procedures of many boards are therefore materially different from those boards that existed previously. Under the New Rules only a majority of directors are required to hold board meetings in person. Subject to the Articles of Association of a company, board meetings may be held using methods such as video conferencing. The SCA clearly views technology as an enabler which serves the corporate governance needs of fast-moving corporations.
The definition of ‘related party’ has been widened under the New Rules. This means that more transactions will fall within the scope of the ‘related parties transaction’ restrictions. Under the New Rules, when deciding if a counterparty to a transaction is a related party, consideration must be given to whether the counterparty is a board member, chairman, director, senior executive or employee (each a “Relevant Person’) or any company (‘Relevant Company’) in which any Relevant Person has a 30% (or greater) interest and any affiliate, subsidiary or parent of any such company. This replaces the previous test as to whether a Relevant Person maintained a controlling interest in a Relevant Company. This is a subtle but important change and will require listed companies to maintain up-to-date lists of Relevant Companies as well as lists of their parent companies, subsidiaries and affiliates.
Under the New Rules, listed companies are also now required to maintain registers of conflicts of interest, insiders and related party matters. These registers are to be maintained by the companies themselves to ensure effective compliance. This will create further transparency to shareholders and provide further confidence to investors.
In summary, the New Rules represent a significant improvement on the previous legislation, and bring with them several welcome changes and clarifications. Companies affected by the New Rules are recommended to seek legal advice and update their internal policies and checklists as soon as possible.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.