This article addresses how a proposed new UAE commercial companies law will adopt stricter corporate governance requirements for businesses operating in the UAE and how this might impact upon the perception and uptake of management liability insurance in the region.
Proposed changes to the existing UAE Companies law
The existing federal legislation governing the conduct and performance of companies, the Commercial Companies Law 1984 (the Current Companies Law), contains very little specific guidance on corporate governance. Indeed, legal provisions dealing with directors’ duties and performance presently exist in piecemeal legislation such as criminal repercussions following certain activities pursuant to the UAE Penal Code and civil remedies for falling foul of provisions contained within the UAE Civil Code and the UAE Commercial Code.
The new commercial companies law (the New Companies Law) was approved by the Federal National Council (FNC) in late May 2013 and seeks to bring the issue of corporate governance up to international standards and to offer a more transparent means of undertaking business in the region.
Whilst it is not clear precisely when the draft law will be issued, the general consensus is that it will be sometime later this year. It would therefore be prudent for businesses, and specifically those individuals/groups of individuals that manage them (and their insurers), to be fully aware of the anticipated effect of the New Companies Law.
The New Companies Law contains express provisions regarding corporate governance and sets out in succinct, plain language, the duties of those who manage the affairs of a company.
Article 5 of the New Companies Law states that, as a general rule, the Board of Directors of a company or, as applicable, its managers “shall be responsible for the application of the rules and criteria of Governance.”
Article 6 continues this theme, stating that “resolutions regulating Governance in Article 5 include penalties to be imposed on the company and their Chairmen, Directors, managers and auditors in the event of contravention provided that such shall not exceed AED 10 million [approximately US$2.75 million].”
At Article 21 of the New Companies Law, the general, internationally understood and respected duties of those that manage companies are described. Article 21 requires that “Persons authorised to manage a company shall preserve its rights and work for the benefit of the company honestly and faithfully and in agreement with the objectives of the company and the powers granted to them under an authorization issued by the company.”
The expression “powers granted to [the directors] under an authorization issued by the company”, takes the present position (pursuant to article 111 of the Current Companies Law), which limits powers to those derived under a public joint stock company’s regulations (effectively the company’s Memorandum of Association), to a much broader level. This means that powers derived from all documents conferring powers upon the directors, including the company’s Articles of Association and powers of attorney also appear to be covered by the provisions of the New Companies Law.
In addition to the requirements of Article 21, under Article 22, a company shall be bound by “any act or thing by the person authorized to manage the company upon conducting the affairs of management in a usual manner.”
The company shall also be bound by “any act by any of its employees or agents authorized to act on behalf of the company, [where] a third party relies thereon in its transaction with the company.”
It is therefore clear that pursuant to the terms of the New Companies Law, the scope of duties owed by those that manage a company in the UAE will be significantly expanded from those that are presently expected under the terms of the Current Companies Law.
Under Article 23 of the New Companies Law, there is no ability to contract out of the duties/obligations mentioned in Articles 21 and 22, with any attempt to do so being deemed to be void. Depending upon how this Article will be construed, this provision could have a significant hindrance on indemnities offered by a company to the directors/persons authorised to manage it, which indemnity is currently available to directors of public joint stock companies under Article 110 of the Current Companies Law. Only time will tell how this provision of the New Companies Law will be interpreted and how the expression ‘indemnification’ will be construed.
What is apparent is that pursuant to Article 23, the generally recognised position of allowing a company to offer an indemnity to its directors and officers for any wrongdoing does not appear to be available under the New Companies Law. This means that greater reliance will need to be placed on insurance products protecting the interests of company directors/officers. The provision of management liability insurance has significant potential for the region and the availability of dedicated insurance protection to those exercising management functions may be the difference between decisions being made whether or not to operate in the region both on a corporate level and an individual level. Management liability insurance helps to mitigate against the personal liability of those individuals in a company who exercise management functions. One consequence of the financial crisis is that the region has become more litigious with claimants now looking at a range of possible defendants to satisfy their claims. If the region is to continue to attract and retain the talent required to make the jurisdiction a prosperous business hub, it is important that management liability cover is made properly available.
The impact on insurance
It is not compulsory for companies (private or public) in the UAE to obtain and maintain management liability insurance. This appears to be the case in most other jurisdictions in the MENA region. However, given the steps being taken by the international community to better police the operations and affairs of the corporate world, it would be prudent for a business to ensure that they have in place management liability insurance cover.
Some management liability policies available in the MENA region contain provisions that require a company to indemnify director(s) before a policy will provide the indemnity. However, indemnity provisions are often not contained within a director’s service contract or even the company’s governing documents, an issue further compounded when one factors into the equation that within a number of jurisdictions in the GCC, companies are expressly precluded from indemnifying management, which appears to be how the position will be in the UAE once the New Companies Law has been signed into law.
Corporate governance remains a buzz-phrase in the business world and the UAE is making attempts to upgrade its corporate legislation to a level more in line with a modern international business environment. The precise date that the New Companies Law will come into force in the UAE is currently unknown although is likely to be this year. Without the New Companies Law, the region would be at a disadvantage as it is clear that the view internationally is that the corporate world requires a better system of corporate governance to curtail the potential for events which led to the on-going global financial crisis.
It appears that the GCC region is seeing a marked increase in regulatory investigations and action being taken against companies/their managers with respect to business decisions and performance of companies. Management policies, and in particular management liability policies, can assist greatly, particularly with the associated legal costs involved in responding to action taken by the authorities which can sometimes even outweigh the penalties/fines actually imposed on conclusion of regulatory action/investigation.
Once the New Companies Law is signed into law, the repercussions for management liability insurers will not be insignificant, with exposure of businesses (and those that run them) to regulatory penalties and indeed claims in tort likely to increase sharply.