United Arab Emirates: The UAE Commercial Companies Law In Focus: Corporate Governance

Last Updated: 26 April 2016
Article by Clyde & Co LLP

One of the main objectives of the CCL is to enhance the UAE's corporate governance regime. This is highlighted in Article 2, where the organisation of governance rules is emphasised as an important part of the development of the UAE's business environment.

Directors' duties

Directors' duties and liabilities are integral to any corporate governance regime by upholding minimum standards and providing rights of redress for management failures. The CCL has introduced some significant changes in this area, for example:

  • A positive statement of duties: any person authorised to manage the company must protect its rights and exercise the diligence of a prudent person and must act in accordance with the objects of the company and the powers granted to him.
  • Provisions specifically in relation to LLCs: addressing conflicts of interest and the liability of LLC directors.
  • A restriction on companies exempting officers (current and former) from liability: any provision of the company's memorandum of association authorising such an exemption of liability is void.
  • Loans to directors: the Old CCL prohibited JSCs from making or guaranteeing loans to their directors, but the CCL has widened this prohibition significantly. It now extends to a director's family members (spouse, children and any other relative to the second degree) and there is a new prohibition on loans to companies in which the director and/or such family members hold over 20% of the share capital. The Old CCL also included an express exemption for banks and credit companies which does not appear in the CCL; however, this exemption has been reapplied by virtue of a Central Bank circular. Breach of the prohibition is a criminal offence.

Corporate governance rules for joint stock companies

Article 6 of the CCL provides for the Minister of Economy to issue corporate governance regulations for private JSCs (PrJSCs) (other than banks and finance companies) where the number of shareholders exceeds 75. For public JSCs (PJSCs), the Securities and Commodities Authority (SCA) continues to be responsible for such regulations.

The SCA has not as yet issued any new regulations for PJSCs pursuant to the CCL. The most recent SCA regulation in this regard - requiring PJSC boards to nominate at least one female for appointment to the board (Ministerial Resolution No. 225 of 2015) - referenced the Old CCL.

In relation to governance of PrJSCs, Ministerial Resolution No. 228 of 2015 came into force on 1 May 2015. Companies have 12 months within which to comply. The Resolution includes provisions requiring at least one independent director, the appointment of directors by cumulative secret ballot, the chairman to be a non-executive, the appointment of nomination and remuneration and audit committees and the implementation of internal systems and controls to manage risk. Although the Resolution does not expressly state that it only extends to PrJSCs with more than 75 shareholders, given that its legislative authority stems from Article 6, this is presumably the case.

Unfair prejudice

Shareholder(s) of a JSC holding at least 5% of the share capital may lodge a complaint with the SCA that the affairs of the company are being conducted in a manner which is prejudicial to the interests of all or any of the shareholders, or that the company intends to do, or omit to do, an act which may cause loss to a shareholder.

The cause of such an action could include, for example, proposals voted into force by a majority shareholder against the interests of the minority. The SCA will consider any such complaint and take court action on the shareholders' behalf if it believes that it is well founded. If the SCA takes no action, the shareholder may nevertheless initiate court proceedings on its own behalf.

Related Party Transactions

A JSC is now restricted from entering into transactions with its related parties. Where the value of the transaction is equal to or less than 5% of the company's share capital, board approval is required; where this is exceeded, shareholder consent is required. In addition, the value of such transactions must be independently assessed by an SCA - approved assessor. The term "related parties" is defined widely as the chairman, the directors and senior executive management (and any companies in which such persons hold at least 30% of the share capital, and the subsidiaries, associated companies and sister companies of those companies). In a Circular to PJSCs in February, the SCA widened the definition even further to include significant shareholders and those with effective control over the company.

Powers of the Board

The Old CCL provided that the board of directors of a JSC could not enter into loans for a term of more than 3 years, sell the company's real property or business premises or create mortgages over such property write-off debt due to the company or submit the company to arbitration unless the power to do so was set out in the articles of association or such matter constituted one of the objects of the company; otherwise, specific shareholder approval was required. The new CCL maintains this restriction but also extends it to cover mortgages/ pledges of movable property.

Financial assistance

One of the most talked about provisions of the new CCL is Article 222, which prohibits a JSC or any of its subsidiaries from providing financial assistance to any shareholder to enable the shareholder to hold any shares, bonds or sukuk issued by the company. Financial assistance includes providing loans, gifts or donations, security and guarantees.

A prohibition on financial assistance is designed to protect creditors and shareholders from a depletion in, or misuse of, the company's assets and may therefore be viewed as a tool to support good corporate governance.

Unlike other jurisdictions, there are no specific exemptions to the CCL prohibition and there is no process which can be followed to permit ("whitewash") the assistance.

The extra-territorial reach of Article 222 is unclear. We think it is unlikely to extend to a UAE company providing financial assistance in respect of the acquisition of a foreign parent company. It is not clear, however, whether a UAE company which permits a foreign subsidiary to provide such assistance would be caught.

There is market discussion as to whether the prohibition extends to acquisitions of interests in LLCs in light of Article 104 of the CCL (see commentary).

The UAE Commercial Companies Law In Focus: Corporate Governance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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