Capital Market Authority amends the definitions of ‘independent director’ and ‘related party’ in the Code of Corporate Governance for Public Listed Companies.
With effect from 24 October 2012, the Capital Market Authority of the Sultanate of Oman (CMA) has announced amendments to the definitions of ‘independent director’ and ‘related party’ in the Code of Corporate Governance for Public Listed Companies (Code).
Article 3 of the Code states that for an Omani public joint stock company (SAOG):
(a) the board must be comprised of a majority of non-executive directors; and
(b) a minimum of one-third of the members of the board must be independent directors.
Previously, article 1 of the Code stated that an independent director was an individual that had “not occupied any senior positions (such as the CEO, General Manager or similar posts) in the company for the previous two years … or had any relations with the company, its parent company or its affiliated or sister companies which could result in financial transactions”.
‘Financial transactions’ was defined as “those transactions which do not conform to the definition of small value transactions specified in the procurement manual… in addition, the following transactions are also exempted: (a) contracts and transactions entered into through open tendering; and (b) normal contracts and transactions in the ordinary course of business”.
It was therefore relatively easy for a prospective director to satisfy the criteria to be considered ‘independent’. However, on 24 October 2012 the CMA announced, in circular 14/2012, that the criteria would change. Under the new definition, a director is classed as independent if he “enjoys complete independence”. A non-exhaustive list of factors which mean a director will not be classed as independent is also set out in the circular, as follows:
- If he holds ten percent or more of the company’s shares or the shares of the parent company or subsidiary or fellow company.
- If representing a juristic person who holds ten percent or more of the company’s shares or the shares of the parent company or subsidiary or fellow company.
- If he is or was a senior executive, during the past two years, of the company or parent company or subsidiary or fellow company.
- If he is a first degree relative of any of the directors of the company or parent company or subsidiary or fellow company.
- If he is a first degree relative of any of the senior executives of the company or parent company or subsidiary or fellow company.
- If he is a director of the parent company or subsidiary or fellow company of the company to which he stands as candidate for its board.
- If he is or was an employee, during the past two years, of any of the associated parties of the company or parent company or subsidiary or fellow company including chartered accountants and major suppliers or if he holds or held a controlling share in any such parties during the past two years.”
This new definition raises a number of queries, such as who constitutes a ‘senior executive’, what constitutes a ‘fellow company’, and when listed companies are required to implement the change in order to ensure that their boards continue to meet the minimum composition requirements outlined above.
We understand from the CMA that further clarification will be issued in the near future to address issues such as these. The CMA has also verbally advised that it does not intend to apply the amendment retrospectively. Accordingly, public joint stock companies do not need to reconstitute or re-organise their boards of directors but should comply with the new definition with effect from the next board election (although this is not specified in the circular). We also understand, although again this is not set out in the circular, that the test to be applied for determining whether or not a company is an associate of another company is the definition set out in the International Financial Reporting Standards / International Accounting Standards issued by the International Accounting Standards Board. We expect this verbal guidance will be formalised when CMA issue their clarifications in the near future.
At the same time as announcing the changes to the definition of ‘independent director’, the CMA also changed the definition of ‘related party’ under the Code. This is important in the context of the general prohibition on transactions involving listed companies and their related parties and in construing the limited exceptions to the general prohibition set out in the Code.
Related parties will now include:
- Persons who are or within the previous 12 months have been members of the board of directors of the company, its parent company or affiliate / sister companies.
- The Chief Executive / General Manager or any employee reporting directly to the board of the company.
- Any person owning or controlling 10% or more of the voting rights in the company or the parent company or an affiliate company / sister company.
- Any person related to a natural person covered by points 1, 2 and 3 above, including their mother, father, daughters, sons, husband or wife. This also includes any businesses in which these persons own jointly or severally 25% of the voting rights.
- Any person related to a juristic person covered by points 1, 2 and 3 above including the parent company or an affiliate company / sister company, members of the boards of directors and employees, together with companies in which they own 25% of the voting rights. If the board of directors acts in accordance with the wishes of another business, that will also be caught.
As with the new definition of ‘independent director’, there are a number of queries arising from this latest revision to the meaning of ‘related party’, such as what constitutes an ‘affiliated’ or ‘sister’ company. For the moment, listed entities will need to wait for the clarifications to be issued by the CMA. What does seem clear, however, is that the CMA is committed to pressing ahead with reform of corporate governance in Oman as part of its stated aim of implementing international best practice.
As with all legislation in Oman, the Arabic text is the authentic version and any translation is unofficial.