Contributed By Matouk Bassiouny
In the UAE, the principal forms are: public joint stock companies, joint stock companies, limited liability companies, professional licences and free zone entities.
Corporate governance requirements in the UAE primarily emanate from the following regulations:
Listed companies that are not regulated by specific financial regulators and or other regulators (such as the Central Bank, DIFC and ADGM) are governed by the Securities & Commodities Authority’s Decision No 3 (Chairman) of 2020 concerning the Joint Stock Companies Governance Guide. These regulations are mandatory to listed companies in the UAE.
Said regulations are mandatory in nature to listed companies as they preview certain sanctions for breaches to the regulations that can also have a criminal aspect, since the SCA (Securities and Commodities Authority), the regulator, has the authority to refer breaches to the public prosecutor. Applicable sanctions are as per the following:
There are no other key corporate rules and requirements in the UAE.
Environmental and social corporate responsibility are governed by the SCA’s Chairman Decision No 3 related to corporate governance, as well as the UAE Cabinet Resolution No 2/2018. The key issues and requirements for companies are as follows.
It is worth noting that the above is to be also included within the audit programmes of each listed company, and it is the internal audit’s responsibility to ensure that these requirements are being adhered to.
The General Assembly, the board and its committees, the company secretary and the chairman of the board have ultimate responsibility for the governance and management of a company.
The General Assembly is responsible for setting the corporate governance framework and electing the board.
The board is responsible for drafting and approving the corporate governance policies and for the formation of the board's sub-committees (ie, audit, nomination and remuneration, and risk).
The sub-committees are required to have their charters approved by the board and are required to act upon these charters.
The General Assembly should have on its agenda at the end of each term (or upon the constitution of the company) an item pertaining to the election of the board of directors, as per the articles of association of the company. Thereafter the General Assembly members (shareholders) will vote on the election of the board. The vote is secret and cumulative. If a government entity is a holder of 5% or more of the shares of a company, it may appoint its board representatives (pro rata).
The majority of the board members and the chairman must be UAE nationals.
The board, upon constitution/election, shall approve and adopt the corporate governance policies and appoint the sub-committees; such decisions are taken by a majority.
A board of directors shall be composed of a minimum of three members and a maximum of 11 members, provided the number of members is always an odd number.
The board may be composed of executive, non-executive, independent and non-independent members, provided that the majority of board members shall be non-executive independent board members. A recent amendment to the Corporate Governance Framework in the UAE made it mandatory by 2022 for all listed companies to have 20% female representation on the board.
The roles of boards of directors are as follows.
It is recommended that a board of directors, in addition to the above criteria, be composed of a homogenous member with enough experience (ie, subject matter experts with business acumen) to lead listed companies along a successful path.
Appointment of directors is done via election by the General Assembly; the vote is secret and cumulative. If a government entity is a holder of 5% or more of the shares of a company, it may appoint its board representatives (pro rata).
The majority of the board members and the chairman must be UAE nationals.
The General Assembly may dismiss the board chairman or any board member or all the board members. In this case, the General Assembly shall authorise those it deems appropriate to chair the meeting of the General Assembly and take the procedures for opening the nomination and invite the General Assembly to elect new board members instead of those who have been dismissed.
It is not permissible to re-nominate those who have been dismissed for membership of the board before the lapse of three years from the date of issuance of the decision of dismissal.
In the event of a judicial judgment proving that the chairman or any of the board members or any of its executive management have concluded deals or transactions involving conflicts of interest, they shall be dismissed from their position and shall not be nominated for the chairmanship or membership of the board or to perform any duties in the executive management in any joint stock company until the lapse of three years at least after the date of his dismissal, and Article 145 of the Companies Law on occupying the new position on the board shall apply.
If all the board members are dismissed, SCA or its delegate shall conduct the management of the company until the first general assembly is held.
In the event of issuing a judgment of imprisonment and/or fine due to a complaint of a shareholder against the chairman or any member of the board or the executive committee, including dismissal or removal from office, the member shall not remain in office or run for board membership of this company or any other company until expiry of three years from the date of the judgment.
For a board member to be qualified as independent, the member should have no relationship with the company, any of its senior executive management persons or its auditor, parent company, subsidiaries, sister company, or affiliate company in a manner that may lead to financial or moral benefit that may affect its decisions.
Board members shall act at all times in the interest of the company, regardless of the interests of any other parties. Board members shall perform their duties and conduct the affairs of the company in a manner that supports the confidence of the general public in the company. They shall also refrain from actions that lead or may lead to a conflict of interest with the company. In the event of a conflict of interest, the board members shall disclose the same immediately to the chairman and remove themselves from any position of decision-making authority in respect of any such conflict of interest involving the company.
A board member shall, upon assuming the office, disclose to the company all interests and relationships that may, or may be deemed to, affect their ability to perform their duties as a board member. Any such declared interests shall be recorded by the board secretary.
In particular, board members shall disclose partnerships, related employment or the main interests of relatives that may create a conflict or potential conflict in interests. Each board member shall notify the company of any changes in their interests and shall complete a form prepared by the company for this purpose on a quarterly basis and as may be necessary to determine specifically their interests.
The board secretary shall request the board members to review the form on a quarterly basis to verify its accuracy and completeness.
At the beginning of each board meeting, each board member shall declare their interests, if any, to avoid any possible conflict of interests.
If a board member or a person representing a body in the board has a joint interest or a conflict of interest with the company in a deal or transaction submitted to the board for a resolution, they must inform the board and record the same in the minutes. Furthermore, they shall not participate in the voting on the decision relating to the deal or transaction.
If a board member fails to inform the board, the company or any of its shareholders may resort to the competent court to invalidate the contract or order the member who acted in contravention of these provisions to return to the company any profit or benefit obtained as a result of entering into this contract.
If it is not entirely clear that there is a conflict of interest, the board member who is the subject of the potential conflict shall disclose these circumstances to the chairman or its designee, who decides whether or not there is a conflict of interest.
The company shall maintain a special register for conflicts of interests in which the cases are recorded in details together with the measures taken in this regard.
A board secretary shall record the interest conflict in the related board minutes. In this case, the remaining board members presenting shall consider whether it is appropriate for the board member involving in the conflict issue to participate in discussing that agenda item or not before the board after reviewing whether the conflict may affect the objectivity of the member and/or their ability to properly perform their tasks/duties towards the company. If they decide that it is not appropriate for the member to participate, they may ask the board member to leave the meeting room during these discussions. The board member is not entitled to use their personal influence in issue, whether in or outside the meeting. The board member shall not vote on the decision.
The legal duties of board members are to have a fiduciary responsibility towards the company and to act within the best interest of the company (for further details, please refer to 4.2 Roles of Board Members).
The directors owe their duties to the company, and its shareholders must take into account the interests of the company exclusively.
Shareholders can enforce any breaches of the directors' duties; internal audit can also investigate any breach by any board member and has the duty to report the same to the board and/or the chairman of the board.
The SCA has also the authority to investigate any breach of the corporate governance rules by any director and to impose adequate sanctions accordingly.
Members of the board of directors shall be liable towards the company, shareholders and third parties for fraudulent acts and misuse of power, as well as for any violation of the law or the company's articles of association, mismanagement, and any provision made to the contrary hereof shall be null and void.
Liability stated above shall apply to all board members, if such error arises from a decision taken by unanimous agreement.
However, if the decision in question was issued by majority vote, members who objected to the same shall not be held liable, so long that their objections have been established in minutes of the meeting. A member's absence from the session in which the decision in question was issued shall not relieve them from liability, unless proven unaware of such decision or unable to object to the same.
The board can recommend a remuneration policy applicable for its members to be approved by the General Assembly.
In general, the remuneration of the board chairman and members shall consist of a percentage of the net profit, provided that it may not exceed 10% of the net profits for such fiscal year after deducting all consumption and reserves.
The company may also pay expenses, fees, additional bonus or a monthly salary to any board member, consistent with the polices suggested by the nomination and remuneration committee, reviewed by the board and approved by the general assembly.
If such member serves in any committee, makes special efforts or performs additional work to serve the company in excess of their regular duties as a member of the company board, attendance allowance may not be paid to the chairman or a board member for attending board meetings.
Fines that may have been imposed on the company by the Authority or the relevant competent authority due to violations by the board of the law or the articles of association during the previous fiscal year shall be deducted from the remuneration.
The General Assembly may decide not to deduct such fines, or some of them, if it deems that such fines were not the result of default or error of the board.
The company shall submit a governance report signed by the chairman in accordance with the form prepared by the Authority and available on the Authority's website.
The annual report shall include a corporate governance report which features the following, at least:
The board shall make this report available to all company shareholders before submitting an application to the Authority to approve holding of the Annual General Meeting.
The Corporate Governance Framework in the UAE sets the rules for the company accountability towards all shareholders and stakeholders, and directs the board to develop strategy, perform supervision and guide and control the administration.
The company shall oblige itself to protect shareholders' rights, ensure fair treatment for all shareholders, including minority shareholders, and give all shareholders enough compensation for any damage caused by the board to shareholders' rights.
The company shall ensure that accurate and timely disclosures are made on all material matters related to the company, including its financial affairs, performance, ownership of its shares and governance in an accessible manner by all concerned parties.
The company shall recognise the rights of other stakeholders in accordance with laws and regulations, and encourage co-operation between the company and stakeholders in establishing a sustainable and solvent company.
The company shall ensure it applies the investor relationships policy to support regular, effective and fair communication with shareholders.
In general the shareholders of a company have no control or interference in management of a company. The General Assembly of shareholders play the following part in annual meetings:
Shareholder meetings are required at least once a year to conduct business as per 5.2 Role of Shareholders in Company Management. However a general assembly may be called to conduct business that requires special resolutions, namely when it comes to a decision to merge, dissolute, increase or decrease the capital, amendment of the articles of association.
A shareholder in the company may file a lawsuit against the company, its board chairman, any board member, or its executive management for breach of the company’s bylaws and/or the Corporate Governance Rules, as well as for fraud or mismanagement. If a case is filed before a competent court, the shareholder shall have the right to obligate the defendant (s) to do the following:
The company has obligation to disclose withholding of 5% or more of shares by a given shareholder, in addition to disclosure related to the Ultimate Beneficial Ownership.
Listed companies are under the obligation to announce their quarterly, semi-annual and annual financial performance, in addition to disclosing any information that is or might be price-sensitive information.
Please refer to 4.11 Disclosure of Payments to Directors/Officers.
Each emirate in the UAE has its own Department of Economy where companies incorporated on that respective Emirate have to file the incorporation. This information is available for the public. Further, each listed company is under the obligation to have its articles of association filed and registered with SCA.
The company shall assign the function of auditing its annual accounts to an independent external auditor having the necessary experience and qualifications to prepare an objective and independent report to the board and shareholders, indicating whether the financial statements of the company clearly and impartially reflect the financial position and performance of the company in key areas.
The board shall nominate one or more auditor(s) upon the recommendation of the audit committee. The auditor shall be appointed and their remuneration shall be fixed under a resolution of the general assembly of the company. Such auditor shall be recorded in the Authority's register of professional auditors. The auditor shall be selected based on criteria of efficiency, reputation and experience.
None of the employees of the auditing office may be appointed at the company senior executive management before the lapse of two years at least as of the date of such employee leaving the auditing of the company accounts.
Management of risk and internal control is normally within the scope of the audit and risk committee, that is either a combined committee or segregated committees. In any case, whether combined or segregated, the directors' audit and control management shall be performed via the committee and will be directed towards the following tasks and duties.
As per risk management, the directors will undertake the following.
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