Corporate governance in onshore UAE companies

Investing in developing consumer markets and less developed economies comes with its own particular risk. A significant consideration is the parlous state of corporate governance that is often the norm in companies that otherwise would represent prime investment opportunities.

A company that is well run, with its officers working within a well considered and appropriate set of rules, with appropriate shareholder engagement and a regulatory environment that provides sufficient oversight, can considerably lessen the risks to profitability arising through bad management, or actions that might amount to fraud or criminality.

However, if such processes and procedures are not in place, if the officers of a company do not act impartially or with the interests of the company in mind, or if the regulatory framework in which the company operates does not provide a solid basis for good governance, then the result could be a company that operates outside the boundaries of what is legal, and in a way that is not in the best interests of stakeholders.

The United Arab Emirates (UAE) has progressively put in place a system of corporate governance that seeks to impose standards that are recognizable from an international perspective.

PUBLIC COMPANIES

The primary sources of corporate governance in the UAE derive from Federal Law No. 2 (2015) concerning Commercial Companies (CCL) and Federal Law No. 51 (2004) concerning the Emirates Securities and Commodities Authority (SCA), as well as a number of other regulations promulgated by the SCA, and the listing rules of the Dubai Financial Market and the Abu Dhabi Securities Market.

In order to adopt a progressive corporate culture, additional regulations are issued from time to time; one relatively recent addition was decree No. 518 (2009) on rules and regulations of corporate governance and institutional code of conduct.

The decree applies to companies with securities listed on a securities market, and provides rules concerning a number of elements of good corporate governance related to the board of directors. These include rules addressing: (a) the composition of the board of directors, to ensure an independent voice on the board and that sufficient technical skills and experience are available; (b) procedures for conflicts of interest, which should be resolved in favour of the company and its shareholders; (c) internal and external audit procedures; (d) the remit and scope of authority of the chairman and chief executive officer (who must not be the same person); and (e) the role of board committees to deal with audit, and
remuneration and nomination.

As well as providing a framework for the board’s proper conduct of its governance function, the decree also provides for fundamental shareholder rights to be enshrined in the corporate documents of the company. These include: (a) regular provision of information to shareholders of information on the ongoing plans of the company, and the opportunity to vote on the same; (b) knowledge of all rules governing shareholder meetings; (c) opportunities for effective contributions in the general assembly; and (d) opportunities to question board members and the company’s auditor.

These rules are important as they ensure that, whilst the decree vests power in the hands of the directors, checks and balances in favour of the shareholders (whose interests are of course aligned with the correct management of the company) are preserved.

PRIVATE COMPANIES

The decree provides mandatory rules for public companies only. Private joint stock companies and limited liability companies may, however, cherry-pick these provisions in the process of formulating rules for the efficient management of their businesses, especially if any plans include the possibility of a future listing.

However, underpinning any discussion concerning the framework in which the governance of private companies is considered is the subject of directors’ duties to the company, and therefore its shareholders.

As is commonly the case in other jurisdictions, the directors of private companies in the UAE are the subject of what would internationally be described as fiduciary duties. However, rather than refer to a general concept of fiduciary duty, the duties and liabilities imposed on directors of LLCs are referred to in several sources.

The main source is the CCL. In addition, the Civil Code, the UAE Commercial Transaction Law, and the UAE Penal Code also contain provisions that form the basis of directors’ duties. These laws define such duties by a combination of rules stating what directors should do, as well as what they may be personally liable for (and hence what they should not do), rather than simply relying on a general concept of fiduciary duties being owned by a director to the company.

These obligations cover liability of directors in the case of: (a) fraud, power abuse, violations of the CCL or the company’s memorandum of association or for mismanagement; (b) the company incurring any losses by reason of he directors’ authority being exceeded; (c) participating in any business that may be in competition with the company itself, on the directors’ account or on account of third parties, without receiving consent from shareholders; (d) failure to disclose any conflicts of interest in relation to any transaction; or (e) the use of confidential information of the company for the directors’ benefit or the benefit of others.

There are also several articles in the Commercial Transactions Law, being the relevant UAE legislation dealing with insolvency proceedings that must be considered by directors in the context of civil and criminal liability that may arise as a result of a company being declared bankrupt.

The above provisions of these laws together form the basis of a sound legal requirement for good governance by a company’s officers. They form the bedrock of shareholder protection and enable shareholders to be confident that the appropriate legal framework exists to enable private companies to apply generally accepted international standards of business.

Richard Catling is a senior associate at Al Tamimi & Company