Companies and institutions whose securities are listed on the
"on-shore" financial market in the UAE
("Company", jointly "Companies") are regulated
by the Securities and Commodities Authority ("SCA"). The
Board of Directors of the SCA recently issued a "Circular
Concerning Certain Matters Relating to Corporate Governance"
("Circular") which introduces mandatory requirements for
companies listed on UAE financial markets.
This article analyses and comments on the Circular.
Who needs to know about the circular?
Companies listed on the Dubai Financial Market and the Abu Dhabi Securities Exchange, their directors and managers, auditors and advisors need to know about these new requirements mandated by the Circular.
Binding nature of the circular
To begin with, the Circular has legal force, and as such can be
enforced by the SCA acting in exercise of its powers to regulate
capital markets in the UAE.
The Circular is ancillary to Ministerial Resolution No 518 of 2009 Concerning
Corporate Governance Rules and Corporate Governance Standards issued by the Board of Directors of the SCA on 29th October 2009 ("2009 Resolution"), and for that reason our view is that it is binding on the Companies.
Consequently, the SCA, acting in exercise of its wide authority when it comes to capital markets in the UAE, can and will enforce the requirements of the Circular.
Mandatory annual corporate governance report
The 2009 Resolution imposes an obligation on the Board of Directors of a Company ("Board") to prepare a corporate governance report on an annual basis to ensure efficiency of the internal control system in the Company and its subsidiaries ("Report").
In accordance with the 2009 Resolution, the Company is required to arrange that the Report be signed by the chairman of the Board and filed with the SCA on annual basis or upon its request during the accounting period covered in the Report or for a subsequent period up to the publication date of the Report, which shall cover all information and details in the form specified in the Circular that requires the following inclusions:
- Requirements and principles of implementation of corporate governance system and approach to their application, adopted by the Company;
- Details of any violations committed by the Company during the financial year, reflecting their causes as well as the method of remedy and avoidance of future occurrence; and
- Method of formation of the Board in terms of member classes, terms of membership, means of remuneration fixation as well as the remuneration of the general manager, executive director or chief executive officer of the Company appointed by the Board, accordingly.
The Circular stipulates that the Report should be signed by the chairman of the Board and provided to the Company's shareholders sufficiently in advance of the general assembly meeting.
What is more, the Circular provides that the Report does not require the SCA's pre-approval, so long as the Company follows the prescribed form.
Despite the reference to the form in the 2009 Resolution, the 2009 Resolution did not incorporate it, and this matter has now been clarified through the issue of the Circular which provides the form as an attachment.
Content of memorandum and articles of
In accordance with the 2009 Resolution, the Companies were required to "adjust" their position to meet requirements set out there under "Board" before the end of April 2010.
The Circular clarifies that the requirement of "adjustment" of the Company's position does not automatically require all the Companies to amend their Memorandum and Articles of Association ("MoA"). It states, in particular, that the Companies can implement the applicable procedures and rules of corporate governance without the need to amend their MoA. Consequently, the Companies are not under a duty to hold an extraordinary general assembly meeting solely for the purpose of amending the MoA to make it reflect the corporate governance requirements arising out of the 2009 Resolution and/or the Circular.
The Companies which had already amended their MoA as per the rules of corporate governance (e.g. by incorporating a general provision in their MoA that indicates enforcing Decision No R/32 of 2007 on Corporate Governance Codes for Joint Stock Companies and Institutional Discipline Criteria issued by the Board of Directors of the SCA on 9th April 2007), are not required to make any further amendments to their MoA but must nevertheless comply with the provisions of the 2009 Resolution as soon as it comes into force.
Mandatory process for Board appointments
Thirdly, the Circular sets a date for the implementation of mandatory procedures concerning the process for appointing Board members.
The 2009 Resolution provides that a Company shall open nomination to membership of the Board by announcement in two daily newspapers (one published in Arabic), and that the nomination should be open for at least one month from the date of announcement.
The 2009 Resolution further requires that each shareholder meeting nomination conditions pursuant to Federal Law No. (4) of 2000 Concerning the Emirates Securities and Commodities Authority and Market and the amendments thereto and the MoA may stand for election to the membership of the Board by virtue of a request made together with his/her biography and the capacity in which he/she is willing to stand for election.
Additional publication requirement under the 2009 Resolution is that the Company shall, at least two weeks prior to the general assembly meeting, publish (in the two newspapers referred to above) the names and particulars of nominees to the membership of the Board.
The Circular sets a date for the mandatory implementation as 1st May 2010. If the general assembly meetings of the Companies that are to elect its Board members are held before that date, the process under the 2009 Resolution is not required to be followed. However, the full requirements under the 2009 Resolution apply to all Board appointments processed at general assembly meetings held after 1st May 2010.
The audit committee
Last but not least, the Circular clarifies that the "expert" in financial and accounting affairs, referred to under the 2009 Resolution, who is a member of the audit committee of the Board, may be an employee who exercises any function in another company and may be a member of the Board of another company, and may also be a member of more than one audit committee for more than one company, provided that the number does not exceed (5) companies pursuant to Article (98) of Federal Law No (8) of 1984 Concerning Commercial Companies which provides that "No one may be a director, whether in his personal capacity or as a representative of a corporate entity, in more than five public companies having their main offices in the State. He cannot be a chairman or a vice chairman of more than two companies having their main offices in the State."
Government representatives on Boards deemed independent
The Circular provides that the Government of the UAE shall always be
deemed "independent" in relation to any Companies in which it owns shares, irrespective of the percentage of its ownership in the share capital of the Company concerned.
The Circular also states that the Government is required to always act in the Company's best interest and not in a private interest at the expense of the minority of the shareholders, as the Government's responsibility is to protect the interests of the minority shareholders and not to infringe their rights.
The 2009 Resolution defines an "Independent Board Member" as a member who has not been a member of the executive management of a Company during the last two years and has no spouse of immediate family member who has served in executive management for the same period or has a relationship that creates financial deals with the Company or any parent company, sister company or allied company during the last two years if the total amount of these transactions exceeds 5% of the paid-up capital of the Company, an amount of AED5 million whichever is less.
It further stipulates that, in particular, a Board member does not meet the independence condition if:
- The Board member is an employee of any party related to the Company during the last two years which is directly related to a Company that performs consulting business or consulting services to the Company or any related entities thereto; or is directly related to not-for-profit organisation which receives material financing from the Company or any related entity;
- The Board member is a first degree relative of an employee of any external or former auditor of the Company or any related entity;
- The Board member enters into personal service contracts with the Company, any entity related to the Company or the employees of the executive management of the Company; and/or
- The Board member's own minor children own shares in the capital of the Company amounting collectively to ten percent (10%) or more of the issued capital.
The Government employees can be elected as
"independent" directors of the Companies provided that
the Government does not own more than ten percent (10%) of the
share capital of the Company and that other conditions of
independence are satisfied. Therefore, it follows that
notwithstanding the broad principle that the Government is always
deemed independent restrictions on the ability of the Government
employees to be treated as "independent" will arise if
the Government shareholding exceeds 10% of the Company.
In addition, the Circular confirms that the Companies are required to comply with certain other requirements in order to obtain the SCA's approval on the application of the rules of corporate governance issued by the SCA, in particular those under the 2009 Resolution and the Circular and refers the Companies to the following link for further information: Click Here
Outcome and conclusions
The Circular provides some additional information and
clarification to the Companies as far as their obligations arising
out of and/or in connection to the 2009 Resolution are
In particular, the Circular addresses the independent status of Government-owned Companies in certain circumstances, sets out details of the annual corporate governance form and clarifies the SCA's position in respect of the MoA and amendments thereto in order to reflect relevant provisions of the 2009 Resolution and/or the Circular, if any.
Among other issues, it further touches upon the Board membership nomination mechanism and defines an "expert" that the Companies need to appoint as a member of the audit committee of the Board (the formation of which is mandatory).
In conclusion, we view the Circular as yet another step towards implementation of best corporate governance practices and the instrument that will contribute to the increase in understanding and a more accurate implementation of corporate governance principles by Companies.
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.