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Corporate Governance
Phasellus Venenatis

Corporate Governance: Increasing regulation in the UAE

A new range of corporate governance rules come into effect in April 2010. The new regulations attempt to introduce internationally accepted corporate governance rules into the realm of commercial companies in the UAE. Tarik El-Bakri, of UAE law firm Hadef & Partners, explores these developments and provides useful tips for companies that are required to comply.

In brief:
The corporate governance code issued pursuant to the “Security and Commodities Authority’s Chairman’s Decision No. 32/R for 2007 on Corporate Governance Code” (the Code) has been recently superseded and amended by the “Ministry of Economy’s Decision No. 518 of 2009”.
The Security and Commodities Authority (SCA) Chairman’s Decision, as amended by the Ministerial Decision (the Decision), requires companies and institutions that have securities listed in any securities market in the UAE and members of their boards of directors to adopt corporate governance rules that aim to:
create an internal control system within their company; and
encourage such companies to adopt the principles of good corporate governance and establish an effective framework for the protection of shareholder rights, fair treatment of shareholders, strengthening transparency and openness with and within the company and for specifying the duties of the board of directors.
The original SCA Chairman’s Decision gave publicly listed companies three years from the date of publication of the Decision within which to comply with its requirements. The SCA Chairman’s Decision was published in the Official Gazette in April 2007 and so the deadline expires in April 2010. The new Ministerial Decision confirms 30 April 2010 as the final deadline for compliance with its provisions.
Attached to the Decision is a suggested table of events which the affected companies may follow, leading up to the 30 April 2010 deadline. According to the table, the affected companies should have completed the amendments to their Articles of Association by now and have elected boards of directors that meet the criteria set out in the Decision and should be preparing their first report on corporate governance for submission at their upcoming annual general assemblies in 2010.
The schedule is meant to provide companies with a road map on how to implement the Decision and is not a binding schedule. The SCA maintains that the bulk of registered companies have already completed the necessary transition.
It should be stressed that the Decision:
is mandatory only for companies that have listed securities in the UAE
does not apply to Private Joint Stock Companies
excludes companies and institutions that are wholly owned by the federal or local government
permits the SCA to grant a waiver to companies and institutions in which the government is a participant from some (but not all) of the corporate governance rules; and
attempts to introduce internationally accepted corporate governance rules into the realm of commercial companies in the UAE, with the objective of raising, in a gradual manner, the corporate governance standards to international levels. Therefore, while the Decision is mandatory only in relation to companies with listed securities, it serves as a benchmark for other non-publicly traded companies, especially Private Joint Stock Companies, to follow. It would come as no surprise if the Decision was further amended and applied to Private Joint Stock Companies in the future, as we have seen with the recent requirement by the Ministry of Economy that Private Joint Stock Companies transfer responsibility for their share registers to an outside, licensed, Registrar. A draft of the new UAE Companies Law indicates that all UAE companies will be required to adopt corporate governance rules, or risk being fined AED 50,000 in the event of non-compliance.
The corporate governance rules remain a work in progress. The SCA has always maintained that these rules will evolve with practice. It has also maintained it is open for comments and suggestions.
The following are some of the key requirements of the Code, as amended:
Board of directors
A majority of board members must be non-executive directors.
One third of the board members must be independent directors.
The remainder of the board may be executive members.
Chairman of the board

The chairman is required to play a leading role in ensuring the efficiency of the work of the board and the participation of its members in the decision-making process, ensuring efficient communication with shareholders, as well as promoting constructive relations between the executive and non-executive directors.

Members of the board
Existing management should give newly appointed directors a comprehensive induction tour of the company’s departments and divisions, and provide them with all necessary information for ensuring their correct understanding of the company’s activities and business.
The tasks of the non-executive directors include:
providing independent opinion on strategic matters
participating in the company’s audit committee; and
developing procedural rules for corporate governance and supervising and monitoring their implementation by the company.
Committees of the board
The board is required to form at least two permanent committees. These are:
(a)  audit committee; and
(b)  nomination and remuneration committee.
Internal control
Companies must establish an internal control system aimed at evaluating the methods and procedures for managing risk and implementing the Code, as well as compliance with relevant laws and regulations and reviewing financial information used in preparing the financial statements.
The board must submit an annual governance report to the shareholders regarding the company and its affiliated companies, disclosing the extent of compliance by the company with the internal control regulations.
The company must appoint a compliance officer to ensure compliance by the company and its employees with the relevant laws, regulations and procedures affecting the company.
Audit committee
The audit committee should be formed by not less than three non-executive firectors, the majority of whom must be independent directors and must include a financial and accounting expert.
The external auditor
The external auditor must be independent from the company as well as from the board.
The external auditor, during the period of his appointment, may not undertake any additional or consultancy work related to his appointment that may affect his judgment or independence, such as performing a valuation of the company while still the auditor or providing any human resource services to the company for positions of heads of departments and above.
The external auditor may, subject to certain conditions, assist the company in preparing feasibility studies, advices on restructuring and perform due diligence on companies targeted for purchase.
Shareholders’ rights
In addition to the basic rights of shareholders, the Articles of Association must also ensure:
the availability of all information that would enable the shareholders to fully and equally enjoy their rights without discrimination
that an overview of every candidate proposed to be appointed to the board is available to shareholders before voting
that the nomination for the board should be published in two daily newspapers
that votes are cast for the election of the board by cumulative voting.
The board must also develop a clear policy on dividend distribution and make this available to the shareholders at the general assembly meeting.
Rules of professional conduct
Companies are required to adopt rules of professional conduct which apply to their directors, managers, employees and internal auditors.
Companies must also implement a policy for serving the community environmentally and socially.
Governance report
This is a report that is signed by chairman of the board and submitted to the SCA on an annual basis or upon request.
Useful tips
The following is a useful list of action items to guide companies in implementing the Code:
Prepare a written corporate governance code for your company.
Determine the means of communicating with the shareholders, especially minority shareholders.
Prepare a community action plan (environmentally and socially).
Determine the requirements of the board in relation to non-executive directors and independent directors and whether this requires re-electing the board or increasing its members and the time frame for making the changes.
Identify the amendments required to the company’s Articles of Association.
Form an interim committee of the board, which may include experts who are non-members, to prepare the corporate governance code.
Establish an internal control system if one does not already exist or review the current system to identify any required changes or improvements.
Hadef & Partners advises public and private companies operating in the UAE on their strategic and operational corporate and commercial issues. Many of our lawyers are experienced in the application of corporate governance principles gained in jurisdictions such as the United Kingdom, United States, Australia, New Zealand, and across Europe.
For in-house lawyers, managers or directors involved in UAE listed companies, Hadef & Partners would be pleased to offer a more detailed overview of these changes and the implications. For a copy of our detailed publication, please contact Tarik El-Bakri.
Author: Tarik El Bakri

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

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