The Corporate Governance Code issued pursuant to Ministerial Resolution No. 518 of 2009 concerning Corporate Governance and Disciplinary Measures (as amended) (the Corporate Governance Code) came into effect on 1 May 2010. The Corporate Governance Code made it compulsory for public joint stock companies (PJSCs) to comply with certain corporate governance provisions. Unlike PJSCs, private joint stock companies (PrJSCs), which are regulated by the UAE Ministry of Economy, are not required to comply with any corporate governance provisions. However, PrJSCs may benefit from voluntarily complying with the Corporate Governance Code. Elsie Habib identifies and assesses these potential advantages.
- Adoption of corporate governance principles voluntarily by PrJSCs may result in several strategic and operational benefits.
- There is an indication that the UAE Ministry of Economy may soon require PrJSCs to comply with and implement the Corporate Governance principles as the Ministry of Economy requested PrJSCs to transfer responsibility of their share register to an external licensed registrar.
- It is expected that the new UAE Companies Law will require all companies have a corporate governance framework to protect shareholders and increase the transparency of its dealings.
Is voluntary adoption useful?
PrJSCs are regulated by the UAE Ministry of Economy and currently not required to adopt and comply with the Corporate Governance Code. However, it may be useful for PrJSCs to adopt voluntarily the Corporate Governance principles and hence amend their memorandum and articles of association accordingly. Such adoption and compliance could render benefits for the following reasons:
- The incorporation of the Corporate Governance principles within the memorandum and articles of association of a PrJSC and compliance with the same may result in comfort to the PrJSC’s investors and third parties dealing with the company (especially banks and financial institutions granting facilities and guarantees to the company).
- Adopting corporate governance principles could encourage strategic investors to invest in the company or expand the company’s operations, in the belief that the company is established on strong and healthy basis, and hence would have a positive impact on the business operations of the company.
- Adopting corporate governance will better prepare the company to convert into a PJSC because the company will be familiar and educated with the corporate governance principles and the mode of implementation of the same prior to becoming mandatory, once it converts into a public company.
- If the PrJSC is also a holding company and the latter is involved in the management of its subsidiaries, adopting the Corporate Governance principles and incorporating the principles within its memorandum and articles of association and implementing the same by the PrJSC, can help the PrJSC to better manage its subsidiaries and potentially strengthen and consolidate its position and standing as a holding company.
Expected legal developments
To our knowledge, the UAE Ministry of Economy is discussing the possibility of applying 80% of the Corporate Governance principles on PrJSCs, in the near future.
There is an indication that the UAE Ministry of Economy may soon require PrJSCs to comply with and implement the Corporate Governance principles as the Ministry of Economy recently requested PrJSCs to transfer responsibility of their share register to an external licensed registrar.
Furthermore, a draft of the new UAE Companies Law indicates that all UAE companies) will be required to adopt corporate governance principles, or risk being fined AED 50,000 in the event of non-compliance.
Although compliance with and implementation of the Corporate Governance Code is mandatory for PJSCs and not PrJSCs, the practice of compliance can reap benefits for a non-public company which chooses to adopt the Corporate Governance Code and such compliance will be an internal function of the company with no regulatory oversight.
A proactively complying PrJSC is not only preparing itself now for any anticipated future legal requirements to do so, but will almost certainly result in the company being identified as an adopter of best practice which can positively resonate with investors and other stakeholders.
All recommendations are provided without consideration of any specific reader's objectives, situation or particular needs. Those acting upon such recommendations do so entirely at their own risk.