Your Guide to the New UAE Corporate Governance Code

The Securities and Commodities Authority (SCA) of the United Arab Emirates (UAE) has recently implemented significant changes to the existing corporate governance rules. These changes, outlined in SCA's Board of Directors Decision no. (2/R.M) of 2024 (the "Amendment Decision"), serve to improve transparency, accountability, and overall best practices for listed companies in the UAE.

What's New?

The Amendment Decision brings several key changes to the corporate governance landscape in the UAE. Here's a breakdown of the most noteworthy updates:

1. Board Composition
   1. The Amendment Decision mandates several changes to the Board of Directors’ provisions in the Governance Code. For example, the Amendment Decision requires a majority of the Board members to be non-executive, with at least a third of the Board members to be independent (Article 9(5) of the Governance Code previously required the majority of the Board to consist of independent non-executive members).
   2. The Amendment Decision adds a new requirement for candidate directors to produce a criminal status certificate issued or authenticated by an official authority within the UAE, or outside the UAE if the candidate resides overseas, subject to the certificate having been duly authenticated in accordance with the procedures of the resident country. Failure to produce the certificate, amongst other things, shall deem an application for Board candidacy null and void.
   3. The Amendment Decision also grants a period of thirty (30) days for a company’s Board to appoint a director if a Board seat becomes vacant – alternatively, the Board is obliged to invite the general assembly to elect a member.

1. Definition of Related Parties
   1. Previously, the Governance Code defined “Related Parties” to include “the chairman, Board members, members of the senior executive management and the employees of the company, in addition to the companies to which any such persons contribute by at least 30% of its share capital, as well as the sister or affiliate companies or subsidiary companies.”
   2. The Amendment Decision extends the scope of this definition to include parent companies and major shareholders (those holding 5% or more of the share capital and/or the voting rights) in the company, amongst other additions.

1. Board Independence Criteria
   1. A key change involves the removal of the exemption that previously allowed a Board member who is an employee of the parent company or any of its subsidiary companies to be considered independent. This provision applied in cases where any of these entities is a Government Entity or a company owned by the Government to an extent of at least 75%, or any of their subsidiary companies.
   2. Companies that previously relied on this government-employee exemption are advised to review their board composition. Any necessary adjustments to achieve true board independence should ideally be implemented during the next board rotation cycle.

1. Supervisory Committee
   1. A new definition is introduced for the "Supervisory Committee." This committee, composed entirely of non-executive board members, functions in companies that have adopted the dual governance structure. The Supervisory Committee is responsible for overseeing the activities of the company's executive committee and management, ensuring they align with the strategic direction set by the Board.

1. Applicability to Free Zone Companies
   1. The Amendment Decision clarifies the applicability of the Corporate Governance Code. Previously, there was some ambiguity regarding free zone companies. Now, it's explicitly stated that free zone companies and financial free zone companies are exempt from adhering to the Governance Code. However, it's still recommended that listed UAE free zone companies follow the Code for best practices and to project a strong image to investors.

1. Board Secretary Qualifications
   1. Article 8(2) of the Governance Code provides that Board Secretaries must possess a minimum qualification of a degree in law, finance, accounting, administration or other equivalent, along with at least three years of practical experience. Additionally, it is stipulated that it is preferable if Board Secretaries have no less than three years’ worth of experience in corporate governance.
   2. The Amendment Decision relaxes the criteria for Board Secretary appointments. Now, the minimum requirement is a university degree, as well as experience and competence in Board secretarial tasks alongside their experience and competence in their role as a secretary. While the Board retains the authority to dismiss and appoint a Board Secretary, the Amendment Decision expands this by granting the Board the right to intervene in the Board Secretary’s work and/or impose penalties, provided that the SCA is notified of their decision.

1. Disclosure of the Integrated Report
   1. The Integrated Report is a comprehensive document that combines various company reports, including the company’s Board report, auditor report, annual financial data and notes thereto, governance reports, and the Sharia Control Committee’s report.
   2. The Amendment Decision sets a clearer timeline for disclosing this report. It must be made public within the first three months of the company's financial year or at least ten days before the annual general meeting, whichever comes first.

1. Restrictions on Additional Agenda Items for General Assembly Meetings
   1. A new restriction is introduced to prevent surprises during general assembly meetings. Shareholders can no longer propose additional agenda items aimed at amending the company's articles of association to increase the number of board members after the nomination period for board elections has begun.

1. Revised Reporting Requirements on Audit Committee Activities
   1. The Amendment Decision mandates the formation of an annual report by the audit committee, detailing its activities throughout the year. This report, endorsed by the committee chair, becomes part of the company's annual corporate governance report. The chair is also required to attend the annual general meeting to address any questions regarding the audit committee's activities.

1. Distribution of Responsibilities of Compliance Officer and Internal Audit Functions
   1. Previously, the roles of the compliance officer and the internal audit function could be combined within a single individual. The Amendment Decision prohibits this practice. Now, these functions must be distinct and independent. Additionally, neither the compliance officer nor the internal audit function can be merged with any other position within the company.

1. Restrictions Added to the Managing Director
   1. The Amendment Decision introduces a new restriction for the Managing Director. They are now prohibited from holding the position of chief executive officer (CEO) or general manager of any other company.

1. Control and Risk Management
   1. The original Governance Code mandated that the Board ensure appropriate risk management systems are in place. The Amendment Decision strengthens this requirement. Now, the Board has a more specific obligation to implement internal control and risk management frameworks that align with globally recognized best practices as set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
   2. The revised Article 14(7) also details specific steps the Board must take to fulfill its risk management responsibilities. This includes establishing a risk management framework, identifying potential risks, implementing mitigation strategies, and regularly monitoring and reviewing the effectiveness of these controls.

1. Enforceability of the Amendment Decision
   1. The Amendment Decision came into effect on January 16, 2024. This means companies have been required to comply with the new regulations since that date.

Frequently Asked Questions (FAQs) on the New Code

Q: Do the new regulations apply to my company?

The Code applies to listed companies. Free zone companies and financial free zone companies are generally exempt. However, following the Code is still recommended for best practices.

Q: How can I ensure my board composition meets the new independence criteria?

MBG Corporate Services can help you assess your current board composition and develop a plan to achieve compliance with the new independence requirements.

Q: What are the potential consequences of non-compliance?

The SCA may impose penalties for non-compliance with the Code.

Leverage the Opportunity: How Strong Corporate Governance Benefits Your Company

Adhering to the new Code goes beyond just meeting compliance requirements. Here are some potential benefits:

1. Enhanced Investor Confidence: Strong governance demonstrates transparency and attracts investors.
2. Improved Risk Management: Robust frameworks safeguard your company's financial health.
3. Stronger Decision-Making: Diverse and independent boards foster better long-term strategies.
4. Reputation and Brand Value: A commitment to good governance enhances your company's reputation.

MBG Corporate Services: Your Partner in Corporate Governance Compliance

MBG Corporate Services is a team of experienced professionals with a deep understanding of the UAE's corporate governance framework and the recent amendments. We offer a comprehensive suite of services to help your company navigate the new regulations and achieve lasting compliance:

1. Compliance Gap Analysis: We'll identify areas where your current practices need adjustment.
2. Tailored Compliance Plan: We'll develop a customized plan to address your specific needs.
3. Board & Committee Training: We provide training programs on the new Code and best practices.
4. Ongoing Support: We'll stay by your side to ensure continued compliance and address any future developments.