There have been few recent legal topics discussed with as much fervour in the UAE as corporate governance. With many large companies struggling in the region as a result of the global financial crisis, people are asking if there is a better way to do business.

The federal government of the UAE clearly thinks there is, and in 2007 introduced new rules applicable to companies listed on the ADX and the DFM identifying strict corporate governance requirements that must be complied with.

In response to further public comment, Ministerial Resolution No (518) of 2009 Concerning Governance Rules and Corporate Discipline Standards (Rules) has been introduced, effective from 30 April 2010, updating the existing rules.

Who do the Rules apply to?

All companies listed on the ADX and the DFM, including partially owned government companies.

When do the Rules come into effect?

Companies have been given until 30 April 2010 to comply.

What do the Rules include?

  • requirements regarding the composition of the board of directors, with mandatory requirements for the inclusion of independent and non-executive directors. At least one third of the board of directors must be comprised of independent directors, with the majority non-executive;
  • mandatory formation of audit committees and nomination and remuneration committees. All committees must have at least 3 non-executive directors of whom at least 2 must be independent;
  • requirements regarding the manner in which external auditors must be appointed. Auditors will not be permitted to take on consultative, technical or administrative work that may affect their decisions and independence;
  • the requirement for the board of directors to make complete and accurate disclosures to investors;
  • the requirement to develop a Corporate Social Responsibility (CSR) policy.

Compliance and Implementation-what should you do?

In order to comply with the Rules, companies should give due consideration to a wide range of factors including the following:

  • the content of their Memorandum and Articles of Association in order to reflect the requirements of the Rules;
  • the composition and expertise of their board of directors;
  • initial induction and ongoing education of the board of directors in order to support the requirement for relevant expertise;
  • creating an internal control department, charged with implementation and annual review of internal control and risk management procedures;
  • the requirement to develop a code of conduct, CSR policies, risk management systems, employee "whistleblower" rules designed to enable employees to secretly report violations, policies regarding the appointment, removal and remuneration of external auditors, and share trading policies applicable to the board of directors and employees.

Companies will be required to appoint a compliance officer to monitor implementation and ongoing compliance.

The Chairman will be required to sign a report and forward it to ESCA annually (or as otherwise required) which is to include:

  • an overview of the corporate governance system implemented;
  • details of violations and the remedies applied;
  • an overview of the composition of the board of directors and remuneration and the remuneration of the general manager, CEO and executive directors.

The report will also be sent to shareholders prior to the annual general meeting.

Penalties for non-compliance

Penalties include possible suspension or delisting of a listed company.

What are the benefits?

The Rules encourage transparency, disclosure, accountability and the general protection of stakeholder rights, thereby promoting investment and supporting future growth in the UAE. When properly structured and competently implemented, a good corporate governance framework can provide considerable value to both corporations and capital markets in general. Benefits include:

  • aligning stakeholder and employee interests;
  • providing a structure with which sophisticated investors are comfortable, thereby encouraging external investment and access to international debt and equity markets; and
  • promoting transparency, minimizing uncertainty and conflicts of interest, thereby encouraging confidence, reducing company specific risk and optimizing value and share price.

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.