In the current economic climate, companies, their shareholders and other stakeholders will often take a hard look at the role of management in relation to any questionable transaction or other commercial problems. It is, therefore, important for the business community generally, not least the directors themselves, to understand the responsibilities of a director.
Generally, in the UAE there is a perception that there are few duties placed on a company director. In many countries (such as under English and Australian company law), recent legal trends have resulted in positive duties being spelt out in plain language so that directors may better understand the standard of conduct that is expected of them.
UAE law does not contain a comparable set of positive duties. However, it is important to be aware that UAE law does contain provisions which may expose directors and managers of UAE incorporated companies to personal liabilities. We look below at some of those provisions and their potential consequences.
Where are the duties set out?
The duties and liabilities of directors and managers in relation to UAE companies (joint stock companies (JSCs) and limited liability companies (LLCs)) are contained in a suite of documents and legislation, including in particular:
- the company's constitutional documents (the memorandum and articles of association);
- the UAE Companies Law; and
- Ministerial Resolution No. 518 of 2009 of the Minister of Economy and Chairman of the Board of the Emirates Securities and Commodities Authority (ESCA) concerning governance rules and corporate discipline standards, which has been recently enacted and applies to UAE incorporated public JSCs which are listed on either the Dubai Financial Market (DFM) or the Abu Dhabi Securities Exchange (ADX).
Further obligations are contained in other legislation, such as the Penal Code and the Commercial Transactions Law, as well as relevant banking and financial markets legislation.
What are the duties and potential obligations owed by a director?
One of the key provisions in the UAE Companies Law which creates potential liabilities for a director of a JSC is Article 111 which states:
"the chairman and members of the board of directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, abuse of power, violation of the law or the company's articles, in addition to mismanagement. Any provision to the contrary is void".
Similar duties and responsibilities apply to managers of LLCs.
From Article 111, it is possible to infer some of the duties which fall upon a director. These duties are:
- a duty to act honestly (this is a duty which is recognised in most jurisdictions);
- a duty to act in accordance with the law and within the scope of the powers set out in the company's constitutional documents (as above, not unusual in most legal systems);
- a duty not to abuse the powers of a director, which probably includes a duty not to make a secret profit from one's position as a director (again, commonly seen in other jurisdictions).
It may also be possible to infer the following two other duties:
- a duty to exercise a degree of care and judgment in the performance of a director's role (see the scope of mismanagement below); and
- a duty to act in the best interests of the company and the shareholders.
Scope of mismanagement
The degree to which a company (in its own name or on behalf of all shareholders) or its shareholders individually can pursue a director or a manager for mismanagement under Article 111 has not been the subject of extensive case law or commentary in the UAE. From past Court of Cassation cases, it would appear that a shareholder who suffers a loss by a director or manager neglecting to perform tasks which he is required to do under the Companies Law or the company's constitution may give rise to a claim against him. A failure to make a distribution of profits may give rise to a valid claim, for example. This is as much a failure to comply with the company's articles of association (which is a separate head of liability under Article 111) as it is a matter of mismanagement.
It is not clear whether a claim may be brought where the neglect of duties is more general in nature – for example, the director did not meet the standard of management which may reasonably be expected of someone with his level of education and experience, performing that role in that company, or a transaction approved by the board was not reasonable and the shareholders suffered loss as a result. Given that the wording in Article 111 is drafted widely, the potential for such a claim cannot be ruled out.
Positive duties to avoid a conflict of interest
The UAE Companies Law contains, by way of positive duties to act, a requirement to avoid conflicts of interest by directors. Article 109 states that a director must notify the board of directors of any personal interest in a transaction presented to the board for approval if that interest conflicts with the company's interests. In such circumstances, a director is not entitled to vote on the board resolutions relating to that transaction. Note that this means that the interest must be disclosed before the company enters into the transaction. Furthermore, Article 108 states that a director is not entitled to compete with the business of the company or carry out activities on his own account which are the same as any of the businesses carried on by the company, unless prior approval is obtained from the shareholders in general meeting and that approval is refreshed annually. In the same vein, no person may be a director of more than five UAE JSCs or chairman of more than one UAE JSC.
To whom are the duties and potential obligations owed?
The company and the shareholders
Article 111 of the Companies Law makes clear that personal obligations may be owed by directors to the company and to the shareholders. The right of a company to take an action against the directors is founded in Article 113 which provides that the action may be taken by the company on behalf of all the shareholders. A shareholder resolution is required to specify who is responsible for the proceedings. If a shareholder suffers loss which is particular to it, the shareholder is entitled under Article 114 to take action on its own account, if the company does not do so on his behalf after being notified.
The scope of Article 111 is wide and potentially gives rise to a claim by a third party for the conduct described in that section. It is not clear whether there are any limits on a third party's ability to make a personal claim against a director for loss suffered as a result of his actions, rather than against the company. It is worth noting that Ministerial Resolution 518 of 2009 does not require a director to take into account the interests of third parties when exercising his/her powers and duties (see below).
One circumstance in which a director may assume personal liability to a third party is where a contract is executed by the director without proper authorisation by the company to so. In many jurisdictions, there is a concept of ostensible (or apparent) authority. Simply stated, this concept means that any obligations agreed to by a director of a company apparently acting in that capacity are binding on that company as against innocent third parties. Therefore, if a director was not properly authorised by the company to sign a contract on behalf of the company, the contract is still enforceable by the other contracting parties against the company. Instead, the company may have a claim against the director for breach of duty.
Faced with the same situation, the case law from the Court of Cassation is clear that a UAE LLC is entitled to claim that the contract did not validly come into effect and the third party would instead have a personal claim against the manager who acted ultra vires. It is partly for this reason that, although the memorandum and articles of a company may state that the manager has full capacity and authority to manage the company and to bind it, third parties will usually ask for a specific power of attorney before entering into a transaction with a UAE company. From the perspective of a third party, a claim against an individual manager, as opposed to the corporate entity, may well be a less valuable claim. A specific power of attorney also assists the manager to demonstrate that he was acting in accordance with his corporate authorisations to avoid personal liability of the Companies Law.
In relation to JSCs, Article 110 of the Companies Law provides that the company shall be liable to pay compensation for loss caused by the unlawful actions of its directors in the course of managing the company. Therefore, potentially, third parties have recourse to the company for ultra vires acts of the directors. The chairman of the board of a JSC also has the power to bind the company (as representative of the board of directors).
The UAE Companies Law works on the basis that all directors of the company are jointly liable for the actions of the company in the event of a default arising from a board decision. The joint liability extends to directors who were absent from the meeting, unless the director was not aware of the resolution, or if the director was unable to vote against the resolution (even if he knew about it). The only exception to this rule is for directors who were in attendance and who voted against the resolution (Article 112), and whose objection is stated in the minutes of the meeting, who do not bear joint liability for the act. In practice, it may be possible for some of the responsibilities of the board to be delegated to smaller committees of directors or individuals.
Additional regulation for public JSCs listed on a UAE exchange
Ministerial Resolution 518 of 2009 sets additional regulations for directors of companies listed on the DFM or ADX. These include a requirement that directors, when exercising their powers and duties, "act honestly and loyally, taking into consideration the interests of the company and its shareholders, make the utmost effort and adhere to applicable laws, regulations and resolutions as well as the articles of association and internal regulations of the company" (Article 5(3)).
This requirement therefore includes the duties of honesty and loyalty and to comply with applicable laws, regulations and the company's constitution. These are some of the duties that can be implied from Article 111. However, it is clearer from these regulations that directors of a listed JSC must act in the best interests of the company and its shareholders.
Overlap with criminal law
The criminal law also plays an important part in the regulation of company affairs.
Directors need to be aware that there is at least the possibility that an investor or third party who loses money as a result of the directors' actions may report the matter to the police and public prosecutor, in addition to looking for civil redress. This is not just the case where the acts concerned may amount to fraud or misuse of powers; in fact, any breach of the Companies Law is a criminal offence for which the director is, at a minimum, liable to a fine, under Article 323. In addition, certain offences described under the Companies Law and other legislation (including the Penal Code) may result in imprisonment for a director.
Remedies against directors for a breach of their duties and protection from claims
The primary civil remedy against directors for a breach of their duties and responsibilities is damages. It is generally difficult to get an injunction order from a UAE court and therefore, this is not usually an option under UAE law to restrain a director from acting in a certain way.
There are a number of ways in which directors may seek to protect themselves from claims against them:
- by the company granting them an indemnity in relation to the amount of any damages award and costs incurred in defending claims;
- by a directors' and officers' insurance policy to cover them against such damages awards and costs; and
- ratification of specific acts which may be a breach of the directors' duties by the company's shareholders.
Indemnification and insurance policies have not become commonplace in the UAE as they have in other countries, against a background of limited claims being made against directors. In each of the three possible methods of protection, there are specific provisions of the Companies Law which need to be taken into account when considering them.