Corporate Governance in the United Arab Emirates (UAE)

Corporate governance in the United Arab Emirates (UAE) is primarily focused on listed companies. All public joint stock companies (public JSCs) listed in onshore UAE markets are governed by Resolution No. 3/RM of 2020 and its amendments (Corporate Governance Rules), which repealed and replaced Decree No. 7/RM of 2016 (the first iteration of corporate governance rules introduced by the UAE).

The following corporate governance rules (Private JSC Governance Rules) have also been issued in relation to private JSCs in the UAE:

• Ministerial Resolution No. 228 of 2015 on governance controls and corporate discipline standards.
• Ministerial Resolution No. 539 of 2017 on controls of the private JSCs implementing the provisions of the commercial companies law.

On 2 January 2022, Federal Decree Law No. 32 of 2021 on Commercial Companies (Commercial Companies Law) came into force and repealed the old commercial companies law (Federal Law No. 2 of 2015, as amended). The new Commercial Companies Law regulates the different forms of companies in the UAE.

Corporate governance regulations will be issued by the Ministry of Economy and will apply to different onshore companies (including limited liability companies but excluding public JSCs, which will remain under the supervision of the Emirates Securities and Commodities Authority (ESCA)) (Article 6, Commercial Companies Law).

Cabinet Decision No. 77 of 2022 concerning limited liability companies includes certain provisions relating to governance and management (regarding board member election and termination, and related party transactions). However, no ministerial resolution has been issued to set out a detailed corporate governance framework applicable to limited liability companies.

Ministerial Resolution No. 2 of 2018 (CSR Regulation), established a new corporate social responsibility regime (CSR) for the UAE.

The most common forms of "onshore" corporate entities in the UAE (excluding Free Zone companies) are:

• Limited liability companies (LLCs).
• Public joint stock companies (public JSCs).
• Private joint stock companies (private JSCs).
• Civil companies.

The Corporate Governance Rules and the Commercial Companies Law are the main laws that apply in relation to corporate governance in the UAE. The Private JSC Governance Rules set out the requirement for a "general framework regulating governance" for private JSCs in the UAE.

Circular 2019/83 sets out the corporate governance regulations applicable to banks.

The authorities that enforce corporate governance compliance are the:

• ESCA, which supervises public JSCs.
• Central Bank of the UAE for banks and other financial institutions.
• Department of Economic Development of the relevant Emirate for other types of companies.

Organisations responsible for promoting good corporate governance in both public and private UAE companies include the Hawkamah Institute for Corporate Governance, the Abu Dhabi Centre for Corporate Governance and the GCC Board of Directors Institute.

The Corporate Governance Rules:

• Cover board composition, committees, remuneration of directors and audits.
• Apply to all listed public JSCs.
• Do not apply to listed foreign companies.

Certain rules do not apply to financial institutions that are subject to the supervision of the Central Bank. Banks in the UAE are subject to their own corporate governance rules (Circular 2019/83).

Compliance with the Corporate Governance Rules is mandatory and public companies cannot adopt a "comply or explain" approach. The ESCA has the power to issue penalties for breach of the rules, which include:

• A written warning to the defaulting company, its board members, directors and/or auditors.
• A monetary fine up to a maximum limit stipulated in the Commercial Companies Law.
• Referring the breach to public prosecution if it warrants possible criminal action.

The Private JSC Governance Rules apply only to private JSCs. The corporate governance requirements for private JSCs are less strict than those for public JSCs and, since private JSCs are not listed entities, they are not bound by the same disclosure requirements as public JSCs.

The Corporate Governance Rules require listed public JSCs to have a policy relating to the local community and environment.

A public JSC's general assembly must also, based on the board's recommendation, set a policy to ensure a balance between the objectives of the company and those of the community to promote local socio-economic conditions. The company's board must also develop programmes and determine ways of proposing socio-economic initiatives by the company.

The CSR Regulation (see Question 1) has also established a new CSR regime for the UAE.

The key features of the CSR Regulation are:

• Establishment of a federal CSR fund (CSR Fund) which will co-ordinate and supervise CSR initiatives and contributions made by companies to such initiatives.
• Establishment by the CSR Fund of an online platform which will list among other things:
  • CSR projects and programmes promoted by the CSR Fund; and
  • the companies that are making contributions to such initiatives.
• Mandatory listing on the CSR platform of:
  • all UAE "onshore" commercial companies (including banks, financial institutions and branches of foreign companies);
  • companies partially or wholly owned by the federal or local governments.
• An annual contribution to the CSR Fund, currently AED1,500 (additional costs and obligations will apply for companies seeking to be awarded a higher CSR certification).
• CSR reporting requirements.

While the law states that social responsibility is based on voluntary principles and that CSR contributions will remain voluntary, filing a CSR return and listing on the above platform is mandatory for all businesses in the UAE falling within the scope of the CSR law.

Continue reading (Board composition, remuneration, liabilities, disclosures, shareholder rights and more)

Source:

Thomson Reuters Practical Law: https://uk.practicallaw.thomsonreuters.com/0-608-9147?