INSITE-UAE-Feb2024

SCA UPDATES CORPORATE GOVERNANCE CODE FOR UAE LISTED COMPANIES

Summary: The Securities and Commodities Authority (SCA) of the United Arab Emirates (UAE) has recently updated its corporate governance rules outlined in the Governance Code. The changes are detailed in the Amendment Decision published on January 15, 2024, with effect from January 16, 2024.

In Detail:

Amendment to Board Composition

The Amendment Decision introduces changes to the Board of Directors' regulations in the Governance Code. For instance, it now requires a majority of non-executive members on the board, with at least one-third being independent. Previously, Article 9(5) of the Governance Code mandated that the majority of the board consist of independent non-executive members.

Additionally, the Amendment Decision mandates that candidate directors must provide a criminal status certificate issued by an official authority in the UAE or overseas if residing abroad. Failure to provide this certificate renders a candidacy application invalid.

Furthermore, the Amendment Decision allows a company's board thirty (30) days to appoint a director if a board seat becomes vacant. Otherwise, the board must call for a general assembly to elect a new member.     

Related Parties

Previously, the Governance Code defined "Related Parties" as including the company's chairman, board members, senior executives, and employees, along with companies in which they have a significant shareholding. The Amendment Decision expands this definition to include parent companies and major shareholders holding 5% or more of the company's share capital or voting rights, among other changes.

Amendment to independence Criteria

The Amendment Decision has eliminated paragraph "Second" of Article 19, which previously allowed a Board member who is an employee of the parent company or its subsidiaries to be considered independent. This provision applied when these entities are Government Entities or companies owned by the Government to a significant extent. Companies relying on the previous Government exemption should review their Board composition to see if it's affected by this change.

Supervisory Committee

The Amendment Decision now defines a "Supervisory Committee" as part of the dual structure governance option. This committee, made up of non-executive board members, oversees the activities of the company's executive committee and management.

Applicability to Free Zone Companies

The Amendment Decision now exempts free zone companies and financial free zone companies from the Governance Code. Previously, only foreign companies listed on the market or all public joint stock companies listed on the market were exempt. This change clarifies that free zone companies don't have to follow the Governance Code. However, listed UAE free zone companies typically still follow it voluntarily, even though it's not mandatory.

Board Secretaries Qualification

Article 8(2) of the Governance Code sets requirements for Board Secretaries, stating they need a degree in law, finance, accounting, administration, or similar, plus three years of practical experience. It's also preferred for them to have three years of corporate governance experience.

The Amendment Decision eases the rules for Board Secretary appointments. Now, they only need a university degree and competence in secretarial tasks, along with relevant experience. The Board can hire or fire Board Secretaries and intervene in their work or penalize them, but they must inform the SCA of their decisions.

Disclosure of the Integrated Report

Article 76 of the Governance Code requires companies to disclose an "Integrated Report" containing various reports like the Board report, auditor report, financial data, governance reports, and Sharia Control Committee's report.

The Amendment Decision sets a timeline for disclosing the Integrated Report. It must be done either within the first three months of the company's financial year or at least ten days before the annual general meeting, whichever comes first in that year.

Limitation on Adding More Agenda Items to General Assembly Meeting Invitations

The Amendment Decision introduces a new rule in Article 9(7) of the Governance Code. It says no new agenda item can be added at the general assembly to change a company's articles of association and increase the number of Board members once the nomination period for Board elections has begun.

Revised Reporting Requirements on Activities of the Audit Committee

The Amendment Decision now requires the audit committee to create an annual report on its activities. This report, approved by the committee chairman, must be included as a separate section in the company's annual corporate governance report, following the Governance Code guidelines. The chairman of the audit committee must attend the annual general assembly meeting to answer questions about the committee's activities.

Distribution of Responsibilities of Compliance Officer and Internal Audit Functions

Before, Article 69(5) of the Governance Code permitted the merging of the roles of compliance officer and internal auditor. Now, the Amendment Decision forbids combining these roles or merging them with any other position in the company.

Restrictions Added to the Managing Director

Also, Article 7(c) of the Governance Code allows a company's Board to appoint a managing director. The Amendment Decision now adds a rule preventing a managing director from serving as the chief executive officer or general manager of any other company.

Control and Risk Management

 Previously, Article 14(7) of the Governance Code required companies' Boards to use suitable systems to manage risks, identify potential risks, and deal with them transparently. The Amendment Decision makes this requirement more specific, mandating that Boards adopt internal control and risk management frameworks aligned with global standards set by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). The revised Article 14(7) outlines steps for Boards to fulfill these duties.

Enforceability of the Amendment Decision

The Amendment Decision took effect on January 16, 2024, the day after its publication. The amended Governance Code needs to be complied with and if any changes in the Board independence are to be made, they should ideally be made during the next Board rotation. It's advisable to consult with the SCA on a case-by-case basis, and assistance will be available for this process.