Best practices: Strengthening regulations for corporate governance

In recent years, the UAE has witnessed significant developments in corporate governance aimed at further advancing and promoting best practices across many industry sectors. Listed companies have seen the introduction of compulsory requirements in the UAE, while financial institutions have been provided with binding and non-binding guidelines.

LEGAL REGIME: Corporate governance in the UAE is currently supervised by different bodies in each of the following sectors: banking and financial institutions; private sector companies listed on the Abu Dhabi Securities Exchange (the ADX) and the Dubai Financial Market (the DFM); and companies and institutions that are wholly owned by government entities. This article is intended only to cover the rules applicable in the UAE to listed companies on the ADX and DFM; and to financial institutions regulated by the Central Bank of the UAE (the Central Bank). It does not cover the rules applicable in the Dubai International Financial Centre or companies listed on Nasdaq Dubai.

CORPORATE GOVERNANCE FOR LISTED ENTITIES: undefined Both the ADX and the DFM are licensed and regulated by the Securities and Commodities Authority (the SCA). In 2009, the SCA introduced a new corporate governance regulation (the Corporate Governance Code), which applies to all joint stock companies and institutions whose securities are listed on a “Market”.

Companies to whom the Corporate Governance Code applied were required to comply with it by the end of April 2010. The Corporate Governance Code does not apply to government-owned institutions (at both federal and emirate level), Central Bank regulated entities or foreign companies. Based on international best practices, the Corporate Governance Code sets high standards of corporate governance.

The SCA has issued a form of governance report for listed companies to follow and in its annual report to the SCA, any listed company must, among other things, identify areas in which it does not comply with any of the provisions or requirements of the Corporate Governance Code, including how that non-compliance will be remedied.

The SCA is empowered to impose penalties for breaches of the Corporate Governance Code, including fines and a delisting for serious breaches. Key highlights of the Corporate Governance Code: a) Directors: At least one third of directors must be independent directors, while the majority must be non-executive directors. The positions of Chairman and managing director must not be held by the same person; b) Board meeting: Meetings of the board of directors must be held at least once every two months; c) Committees: The board must form several committees, including an audit committee and a nomination and remuneration committee; d) Compliance officer: The board must appoint a compliance officer; e) Internal controls: In addition to the appointment of a compliance officer, the board must establish a strict internal compliance procedure to assess risk management, the implementation of the Corporate Governance Code, and to review financial information used in drafting financial statements; f) Yearly report: As briefly discussed above, the yearly report must include all information set out in the SCAapproved form. As well as details on compliance and breaches thereof, the report must contain a summary of the composition of the board of directors, including their levels of remuneration and those of senior managers.

ONGOING DISCLOSURE REQUIREMENTS: The Disclosure Rules set out ongoing disclosure requirements and reporting obligations for companies listed on the ADX and DFM. For example, the listed company must immediately notify the SCA and the management of the Market of any “significant developments affecting the prices” of its securities. This disclosure then allows the board of directors of either the ADX or DFM, at their discretion, to publish a statement concerning the information in whichever media they deem appropriate. This obligation on a listed company may be relaxed at the application of the company to either exchange. Circumstances in which such a disclosure may not be required are, for example, where there has been thirdparty transaction discussions (provided, of course, that there has not been any trading by its directors or managers on the basis of such information). These provisions are, of course, distinct from the express prohibition on insider dealing contained in the SCA Law.

Should a shareholder’s shareholding comprise (direct or indirectly) 5% or more of the company's total share capital, then the company is obliged to disclose this to the relevant exchange immediately. The company must comply with this obligation every time the shareholding increases by an additional 1% over the initial 5%.

Additionally, companies are required to disclose information such as data requested by the Market and the SCA, details of directors’ dealings in the company’s shares and changes to the management structure at executive and board level.

Again, breaches of these disclosure requirements can result in criminal and civil penalties.

DISCLOSURE OBLIGATIONS ON SHAREHOLDERS: A shareholder’s disclosure obligation differs depending on the percentage shareholding. For example, and in addition to the obligations already mentioned above: a) Any natural person who owns a percentage equivalent to, or in excess of, 10% of the securities of a “Parent”, “Subsidiary”, “Affiliate” or “Allied Company” (each as defined in the Disclosure Rules) of a listed company must immediately notify the Market; b) Any natural person owning 10% or more of a listed company’s securities, and wishing to purchase 20% or more, must notify the Market before placing the purchase order for execution. The director-general of the Market then has a discretionary power to prohibit the acquisition if, in his/her opinion, the acquisition would prejudice the interests of the national economy; and c) The permission of the UAE Central Bank must be obtained before a UAE-licensed bank or financial institution enters into any transaction which would result in it acquiring 5% or more of the securities of any company listed on the ADX or DFM. CORPORATE GOVERNANCE FOR UAE CENTRALBANK-REGULATED INSTITUTIONS: As previously mentioned, the SCA Corporate Governance Code does not apply to Central-Bank-regulated institutions.

The Central Bank has issued binding and non-binding guidance in relation to corporate governance within regulated institutions. Binding guidance comes in the form of circular 23/00, for corporate governance structures in UAE banks (the Central Bank Rules). Additional non-binding guidance was issued in its Corporate Governance Guidelines for Bank Directors (the Central Bank Guidelines).

The non-binding guidelines apply only to bank directors. Both the Central Bank Guidelines and the Central Bank Rules are similar in approach and consistent themes are found within each set of regulations.

THE CENTRAL BANK RULES: The Central Bank Rules include the following provisions: a) A requirement for an independent chairman; b) A separation of the functions of the board of directors and those of the general management. The board has discretion to appoint an executive committee with delineated specific powers; c) A requirement for an independent CEO appointed by the board and reporting to the board and the chairman; d) A requirement to produce a Corporate Standards Manual which sets out a clear list of authorities, responsibilities and expected behavioural standards; e) A requirement that senior personnel be appointed after first being vetted and approved by the Central Bank (senior personnel are expected to have at least five years’ relevant experience); f) A recommendation that the internal audit department monitor any conflicts of interest, as well as significant losses and wrongdoing (including cases of embezzlement). The department must report to the chairman, copying in the board, CEO and the Central Bank; and g) A recommendation that a credit committee be formed of not less than five members, with authority for loans in excess of the value of 1.5% of the capital and reserves of the bank, settlements and adequate provisioning for bad debts. The Central Bank rules contain a special appendix which provides further guidance as to the matters that should be submitted to boards for their consideration. These matters include: a) Amendments to the organisation chart and the establishment of subsidiaries in which the bank will hold more than 5% of the issued capital; b) Recruitment, termination and remuneration of senior staff (if aggregate bonuses are to exceed 5% of net profit, this is to be put to the general assembly for approval); and c) Major loans, settlements and provisions for bad debts (over a set threshold).

CENTRAL BANK GUIDELINES FOR BANK DIRECTORS: undefined These guidelines introduce the basic principles of corporate governance, describe the expected role of the board, and provide guidance on board selection, qualifications of independent directors, performance monitoring, and corporate governance structures.

In addition, the Central Bank Guidelines provide an information pack for all directors of regulated financial institutions in the UAE, which contains annexures covering model corporate governance guidelines, indicative criteria for independent directors and a model code of ethics.

COMPANIES LAW: The much-anticipated new Companies Law was approved by the UAE Cabinet in early December 2012. It is anticipated that this piece of legislation will further strengthen the corporate governance landscape in this fast-paced economy.