In November 2011, the UAE government announced that the UAE Cabinet of Ministers had approved the draft of the new Companies Law. The new Companies Law has a number of aims, including improving the corporate governance of companies in the UAE.
In our Middle East exchange article on directors' duties in June 2010, we focused on the obligations on directors of UAE companies. One of the consequences of the global economic crisis was that shareholders of companies in financial difficulties started to look at the actions of the officers of those companies to test whether they had been properly managed with the skills they would have expected from those directors.
Will the standards which directors of UAE companies have to meet be clearer under the proposed legislation and will they be more accountable for their actions?
General statement of duties
Under the existing UAE Companies Law (Federal Law No. 8 of 1984), there are no express statements on directors' duties. This led some to conclude that there were no duties or standards which they were required to meet and few obligations for which they may be held liable under the civil law.
The draft new Companies Law rectifies this position for all types of company. Article 21 contains the basic standards and obligations that individuals acting as manager must meet as follows:
A person authorised to manage the company shall preserve its rights and work for the benefit of the company honestly and faithfully. Such person shall do all such acts in agreement with the objectives of the company and the powers granted to such person under an authorisation issued by the company in this respect.
There are a number of aspects to this provision:
A duty to preserve the rights of the company – in other words, there is a requirement on managers to protect and defend the company's rights. Although in most circumstances, this aligns with acting in the company's interests, on occasion a director may decide to waive rights in consideration of a different benefit or advantage. For example, a company may enter into a settlement agreement in relation to a dispute where it agrees to receive less than the claimed amount, against the benefit of avoiding costly and time consuming litigation. It will be interesting to see how the courts interpret this provision.
A duty to work for the company honestly and faithfully – the current law contains an implied duty of honesty in a manager's dealings with the company (under Article 111, which remains in the proposed legislation). The duty to work faithfully is presumably intended to require loyalty from directors, such as an obligation to avoid a conflict of interest and to not compete with the company. Certain duties to declare conflicts of interest and to not compete already exist in the Companies Law and these provisions are carried over to the proposed new law.
A duty not to act ultra vires – the manager must only act in accordance with the company's objectives as specified in the memorandum and within the powers granted to him. Again, there is an implied duty similar to this in the current Article 111 which remains in place in the draft law.
Although the concepts behind this new provision are not new to UAE law (they are generally found in most jurisdictions) it is helpful to have them clearly and positively expressed so that managers know what is expected of them. However, to whom these primary duties are owed - the company, or its shareholders, or both - has not been set out in the draft provision.
As we noted in June 2010, UAE law does not recognise a concept of ostensible or apparent authority (meaning that any obligations agreed to by a director apparently acting in that capacity are binding on that company) in relation to Limited Liability Companies (LLCs). If a manager is not properly authorised to enter into an agreement, a UAE LLC may disown the contract and the manager may have personal liability for it. This is one reason for the importance of specific powers of attorney to execute documents in the UAE.
The draft law changes this position for all types of company. It creates a new protection for third parties and managers from companies refusing to honour contractual obligations. Article 24 provides that a company may not claim that it has no contractual liability if the "acts of the manager are within the usual limits in respect of persons in the same position in companies which conduct the same type of activity as the company". The third party relying on this protection must be acting in good faith so that they lose the protection if they knew or could have known (based on their relationship with the company) that the manager was not properly authorised.
The ostensible authority only appears to be given to managers of the company , and not to any person to whom the manager may delegate his powers. This may have limited value for administrative reasons in large corporates, unless the view taken in practice is that it attaches to any person who is properly authorised regardless of whether they are an appointed director of the company. It will also be open to interpretation as to whether the individual is acting in the ordinary course for his role for that type of business. On this basis, it may take some time for businesses to accept the protection provided by this provision and specific powers of attorney may remain common practice for the time being.
New shareholder regulatory remedy for harmful acts for PJSCs
Under the current Companies Law, it is clear that a company may take action against the directors collectively for loss suffered by the shareholders as a whole. In addition, any individual shareholder may take action against the directors if the company does not do so, if the actions of the board result in that shareholder suffering a loss. These provisions remain in the draft new law. Article 111 of the current Companies Law also provides that the directors may be liable to the company, the shareholders and third parties for fraud, abuse of power, breach of the company's constitution and for mismanagement. These provisions apply to UAE LLCs as well as joint stock companies.
The UAE government has added another remedy for shareholders in Public Joint Stock Companies (PJSCs) under the draft law in Article 168. This Article gives a right of complaint to the Emirates Securities and Commodities Authority (ESCA) for one or more shareholders holding collectively more than 5% of the capital of the company if they consider that:
- the affairs of the company are being conducted or have been conducted to the detriment of all of the shareholders, or any of them; or
- the company intends to do, or omit to do, any act which may cause loss to a shareholder.
If ESCA agrees that the complaint is justified on the grounds set out in the Article, it may apply for a court order to annul the act, or to order specific performance to act in the case of an omission.
Unlike the other types of action, this is a regulatory process to take direct action by shareholders to protect their position, rather than a civil action for individual loss. However, it is not clear at whose cost the court proceedings are taken if requested by ESCA, given that UAE courts rarely grant significant costs awards.
Corporate governance of PJSCs is generally more extensive than other forms of company and the draft law recognises that ESCA may make additional regulations in this regard. Currently, there is more regulation for listed PJSCs, including a statement of directors' duties.
Indemnities for directors' liability – ruled out?
It has become commonplace in many jurisdictions for directors to seek financial protection from the companies on whose boards they serve from the costs of defending claims and the amount of damages which may be awarded against them. Under English company law, for example, a director is entitled to seek an indemnity from the company to compensate him, pound for pound, for third party damages claims, including from shareholders (but not for damages or the costs of defence against claims made by the company itself against the director, or fines imposed under the criminal law or from regulatory proceedings).
Article 23 of the draft new law contains an Article which states that any provision of the memorandum of association authorising the company to exempt any person from personal liability owed as a current or former officer is void. This is a new provision and, on the face of it, widely drafted. Whether an indemnity is construed as an exemption from liability (rather than a reimbursement) remains to be seen. If it is, this will be a cause of concern for directors of UAE LLCs who are based overseas and sit on a board of managers alongside one or more UAE managers. These foreign managers often have little day to day control over the management of the company, other than in relation to certain reserved matters. The fact that the company may not be able to protect that individual from third party civil claims and the cost of defending them may result in companies turning increasingly to director and officer liability insurance.