13 Jul 2020

New Corporate Governance Rules in the UAE - what should directors of publicly listed companies be wary of?

Authored by: Yasser Omar

In brief:

  • In February 2020, the Securities and Commodities Authority adopted new corporate governance regime for public joint stock companies.
  • The new corporate governance regime contains more roles and responsibilities for the board members to fulfill.
  • Directors should be aware of the new duties and take the necessary action to be in compliance with the new corporate governance regime. Failure to comply with the duties and responsibilities of the directors could trigger the directors’ liability under the Commercial Companies Law.

Background

A recent resolution of the chairperson of the Securities and Commodities Authority (SCA) No. 3/RM of 2020 adopted the Corporate Governance Guide for Joint Stock Companies (the CG Resolution). This resolution was passed on 27 February 2020 and came into effect on 27 April 2020 and contains new set of regulations for the corporate governance of the public joint stock companies. The CG Resolution abolished and replaced the previous corporate governance rules that were adopted under the chairperson of SCA resolution No. 7/RM of 2016.

The CG Resolution includes many innovations and new rules. However, in this Article will focus on the new rules that concern the roles and responsibilities of the board of directors in managing joint stock companies. The CG Resolution clearly specifies the duties of the board of directors as a whole body, the chairperson, each director and the non-executive directors.

 

Collective duties of the Board of Directors

Article 14 addresses the duties of the board of directors as a collective body and enumerates the specific duties that the board of directors has to perform.  In this regard, it is noted that the CG Resolution has wider scope of the duties of the board of directors by adding new duties that the board of directors has to perform such as the duty to:

  1. put in place a code of conduct for board members, employees and auditor of the company;
  2. put in place procedures that prevent the insiders from using the company’s internal and confidential information to gain benefits, whether monetary or otherwise; and
  3. ensure that a compliance function exists within the company to achieve compliance with the rules, regulations and company’s policies as well as compliance with the requirements set by the relevant regulatory authorities.

 

Individual duties of the Board of Directors

In respect of the duties of individual board members, the CG Resolution elaborates on certain duties of the board member such as the duty of acting in good faith and avoiding conflicts of interest as well as the duty to exert due care in the performance of his/her role as a board member. The new provisions contained in the CG Resolution aim at clarifying the scope of the said duties to ensure proper understanding by board members of what is required of them. Furthermore, the CG Resolution added new specific duties to the duties of the individual board members, which in essence aim at ensuring an active participation by board members in the decision making process at the board level. Therefore, it is now required that each board member should objectively analyse matters presented to the board, use his/her knowledge and experience to support the decisions making process by sharing such knowledge and experience as well as formulating an independent objective opinion on all matters presented to the board.

 

Duties of the Chairperson of the Board

Likewise, it is noted that the CG Resolution widens the scope of the duties of the chairperson of the board of directors. The new duties added to the roles and responsibilities of the chairperson indicate the view of the legislator that the chairperson should play an active role as the leader of the board of directors to ensure that the board of directors does fulfill its role in leading and directing the company’s executive management to the benefit of the company and its business.

The new duty of the chairperson to hold regular meetings with the non-executive directors in the absence of the executive management of the company seeks to help the chairperson get the independent views of the non-executive members of the board on the business and affairs of the company outside the formal proceedings and limited agenda of the scheduled board meetings. Moreover, the chairperson is now responsible for ensuring that the performance of the executive management and board members is evaluated at least on annual basis. Not only is the performance of the individual members required to be evaluated, but also the performance of the board as a whole is required to be evaluated on annual basis. Accordingly, it is now the duty of the chairperson to ensure that such annual evaluation of performance is done. Such evaluation of the performance of individual board members and the board as a whole is a complete innovation as it has never been the case before that the performance of board members or the board is required to be evaluated.

 

Trading by Board Members

Trading by board members in the shares of the company requires a prior approval from the stock market in which the company’s shares are traded. It is the responsibility of the board member himself/herself to fulfill this obligation. However, the CG Resolution made it a duty of the chairperson to ensure that board members comply with this obligation. Thus, the legislator created this duty as a second layer of protection to safeguard against board members undertaking a trading in the company’s shares in violation of the trading rules. In this regard, the chairperson will exercise a supervisory role over other board members and the chairperson will need to devise a mechanism or process that will ensure that the chairperson will perform this duty.

To further strengthen the governance and transparency, it is now a duty of the chairperson to inform the general assembly of shareholders of the transactions and contracts in which a board member has a direct or indirect interest. A full report needs to be submitted by the chairperson in this regard. Such report should include the details of the transaction or contract, explanation of the direct or indirect interest of the concerned board member and a report from the company’s external auditor on such transaction or contract.

The SCA noted that the board of directors in some companies elect a chairperson and ignore or avoid the election of a vice chairperson. To address this issue, it is now a specific duty of the chairperson, under the CG Resolution, to ensure that the board elects a vice chairperson.

 

The Commercial Companies Law

As per Article 162 of Federal Law No. 2 of 2015 on Commercial Companies Law (as amended) (CCL), board members are liable to the company, its shareholders and third parties for fraud, abuse of power and mismanagement and any violation of the law and the company’s Articles of Association.

It is noteworthy that the violation of the law is not limited to violation of the provisions of the CCL, but also extends to the violation of any regulations implementing or complementing the provisions of the CCL such as the CG Resolution.

Accordingly, it is likely that the expansion on, and clarifications of, the duties of the board, individual board members and the chairperson as reflected in the CG Resolution makes it now easier for any concerned party to establish the liability of either the board of directors as a whole, the chairperson, or any board member under Article 162 of the CCL. Establishing that the duties stipulated under the CG Resolution are not fulfilled could be in itself sufficient to prove the error on the part of the board member, the chairperson, or the totality of the board depending on the nature of the duty that has been breached.

Should you require any further information about the CG Resolution, please contact the author of this article, Yasser Omar, Partner and Head of Corporate and Commercial, Abu Dhabi.

 
 

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.