Legal guide for company directors and CEOs in Oman

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

A large number of sectors have been heavily impacted by the COVID-19 crisis. The principal issues facing directors and business leaders in Oman currently relate to labour and the workforce, such as what employers are entitled to do in terms of salary reductions, unpaid/paid leave and termination/redundancy. 

Following government guidance on the above, directors and business leaders are now turning their attention towards survival, longevity and cash flow.

2. What government relief measures have been made available to directors?

The government announced that it would be possible to decrease the salaries of employees if the company could prove that it had been directly impacted by the crisis. The government issued a follow-up clarification announcement that businesses must prove that they have been directly affected by COVID-19 and are not generally unprofitable (i.e. there has to be a causal link). Previously it was very difficult to reduce the salary of any employee without their consent without risking a claim. Prior to the announcement, unilateral termination was also considered as unfair dismissal if the company could not justify its actions.

Small- and medium-sized enterprises which have been affected by the crisis have been given the ability to defer loan payments and freeze any interest for the next 6 months.
The Taxation Authority has removed penalties for late filing during the crisis. The Ministry of Commerce and Industry has also removed penalties for failing to renew a company’s commercial registration.

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

In summary, there is no fundamental difference to the main legal/substantive duties placed on directors as a result of the COVID-19 crisis. However, as part of their overall duties, directors have additional considerations to factor into their decision-making processes with regards to managing their workforce and preserving the business. 

Directors duties and responsibilities

1. What form does the board of directors take?

In Oman this depends on the type of entity being considered. For limited liability companies (LLCs) there is no board of directors, only managers who are appointed on behalf of their shareholders. The Omani LLC is comparatively simple to form and is subject to relatively straightforward annual statutory filing requirements. It is therefore typically the model of choice for most businesses in Oman.

Notwithstanding this distinction, even some LLCs decide to create a quasi- or contractual (as provided for in a shareholders’ agreement) board.

For closed joint stock companies – both private (“SAOCs”) and public (“SAOGs”) – boards of directors are mandatory. What follows is a summary of the regulatory requirements concerning closed joint stock companies only. The key item of legislation is the Commercial Companies Law (Royal Decree No.18 of 2019) (the “CCL”). 

2. What is the role of non-executive or supervisory directors?

In accordance with Oman’s Code of Corporate Governance for Public Listed Companies issued in 2015 by the Oman Capital Market Authority (the “Code”), which applies to SAOGs but is often relied upon by SAOCs as well, all directors should now be non-executive. The Code prescribes the role and necessary skills and competencies of members in detail.  

3. Who can be appointed as a director? 

Principally any natural person is eligible to become a director in an Omani company. However, according to the CCL, the conditions, rules and procedures of the election of a board of directors was to be specified in subsequent regulations issued pursuant to the CCL. To date, the implementing regulations have not been issued, despite an anticipated release date of April 2019.   

Pursuant to the previous Commercial Companies Law (1974), a person who had been convicted of a criminal offence (save where that person had been “rehabilitated”), was not eligible to act as a director. This exception has not been mentioned in the new CCL. However, it remains to be seen if it will be in subsequent regulations.  

4. How is a director appointed?

Directors are appointed by ordinary general meeting except for the first directors of the company following formation where they are appointed by the Constituent General Assembly (the “Assembly”). Members of a board are elected either from among the shareholders or from elsewhere by direct secret ballot. 

If the office of a director becomes vacant during the period between two ordinary general board meetings, save where the articles of the company provide otherwise, the board may appoint a temporary director to assume the outgoing director’s office until the next ordinary general meeting is held.

If at any time more than half the directors on the board are temporary directors, the directors are required to call an ordinary general meeting in order to elect directors to replace the outgoing directors. Any such director so elected will serve for the remaining period in office of their predecessor.

5. How is a director removed from office?

A director may be removed without any reason or justification by the ordinary general meeting, even though the company’s articles provide otherwise. Moreover, any directors who, without any acceptable reason, do not attend three consecutive meetings of a board of directors, shall be deemed resigned by law. In addition, re-electing board members who have been removed is not allowed in order to fill vacancies or for the first new board of directors. 

6. What authority does a director have to represent the company?

The company’s board has full authority to perform all the acts required for the management of the company, except as limited by law or by its articles of association.

However, the company’s board of directors can perform the following acts where expressly authorised to do so in the companys articles, or through a resolution of the general meeting:

  • making a donation, except for donations required by the business if of a small and customary amount
  • selling all or a substantial part of the company’s assets
  • pledging or mortgaging the company’s assets, except to secure the company’s debts incurred in the ordinary course of the company’s business, and
  • guaranteeing debts of third parties, except where the guarantee is made in the ordinary course of the company’s business for the purposes of achieving the company’s objectives.

The board of directors may, with the majority consent of its members and within the limits assigned to it, delegate some of its powers to its chairman or to committees formed from among its members.

A joint stock company is bound by the acts of its board of directors, its chairman, managing directors and other executives, where they act in the company’s name and within the scope of their powers. Any third party in good faith has by law the right to assume that any act of the board of directors, chairman or managing director of a company in pursuance of its business is within the scope of power delegated to such person, and the company is bound thereby, save where the limitation of any such person’s authority is registered with the Commercial Registry in Oman.

The detailed duties of a member of a board of directors are set out more fully in Ministerial Decree 137/2002, and will include, for example, the approval of the company’s commercial and financial policies and the company’s estimated budget; adopting the company’s disclosure procedures; supervising the performance of the company’s executive management; providing timely information to the company’s shareholders; appointment of the company’s chief executive or general manager and secretary to the board; and approval of the company’s financial statements.

7. How does the board operate in practice?

The management of a joint stock company is entrusted to the company’s board of directors, the number of members of which will be given in the company’s articles of association which will provide that it is formed of an odd number. 

The number of members of board of directors for a closed joint stock company must not be less than three and for a public joint stock company must not be less than five; in both cases the number shall not exceed eleven. 

The term of office of a member of a board of directors must be 3 years from the date of the Assembly in which the board is elected. 

The board of directors will have a chairman, a deputy chairman and a secretary who are elected by the members. Only the secretary may not be from among members of the board. The chairman is the company’s representative before third parties and courts and shall implement the board’s decisions. Moreover, from among the members of its board of directors, each company shall form an audit committee for the company. 

The board of directors shall take all the necessary actions which lead to the achievement of the company’s goals including adopting commercial and financial policies, developing and exercising required plans, taking the disclosure procedure of the company, supervising the executive management and adopting financial statements relating to the company’s activity. 

The minimum number of board meetings is four per year, with no more than 120 days between two any meetings. The meetings do not require the presence of the members and can be held via conference call without any limitation in the numbers of such meetings. 

8. What contractual relationship does the director have with the company?

The members of the board of directors are entitled to remuneration and attendance fees which shall be determined by the general assembly of the company in accordance with regulations.  

9. What rules apply in respect of conflicts of interest?

The CCL provided that a member of a board of directors or any other party related to a company is prohibited from holding any direct or indirect interest in any transaction or contract which the company is a party to. By way of exception to this, a company may carry out certain transactions and contracts with such persons where this is done in accordance with the regulations and provisions of the competent authority. Related parties, the controls of disclosure of dealing and the rules of transaction disclosure would be specified in the regulations. 
The Code has added further details: a director should always maintain transparency, avoid personal and professional conflicts of interest, and disclose all direct or indirect contractual interests with the relevant company, with a view to avoiding any situation where a director takes improper advantage of his/her position. 

The Code also states that a director should not make improper use of information acquired by him/her in the performance of his/her duties and should make sure that the company’s non-public information is not provided to anyone who may influence the subscription or buy and sell shares. Moreover, he/she should comply with all regulations relating to the buying and selling of the company’s shares. The Code also prohibits a director from taking dishonest advantage of the office in his/her favour or in favour of any related person to him/her. 

Further, a director is responsible for complete disclosure of any actual or potential conflict of interest to the board of directors and, if a conflict arises, should consider avoiding voting and preferably exiting from the meeting at the time that the board is debating the matter concerning the conflict of interest. He/she shall also submit to the chairperson or secretary any documents that he/she may receive regarding a matter with potential conflict of interest. 

Under the Code a director should seriously consider resignation from his/her position if the conflict of interest continues. A company’s board of directors should in all cases consider any other means that make the director’s expertise available while reducing the effect of conflicts of interest.    

10. What other general duties does a director have?

Other than the duties mentioned above, the Code sets out some principles for directors. In particular, the third principle states the authorities and competencies of a board of directors as follows:

  • identifying a strategic vision for the company
  • adopting the best business and financial policies to achieve the business objectives of the company
  • setting out strategic executive plans
  • adopting internal regulations and bylaws
  • monitoring the work of the management
  • reviewing related parties’ transactions
  • forming specialised committees
  • appointing key executive officers
  • evaluating committees, and
  • approving the financial statements.  

11. To whom does the director owe duties?

Directors owe a duty towards the company. A director should at all times ensure that the benefit of any action taken is for the sole benefit of the company. The director should never jeopardize the interests of the shareholders in the company.

12. How do the director’s duties change if the company is in financial difficulties?

During a financial crisis facing a company, directors’ duties would not change.  However in the case of public joint stock companies, the capital market authority can meet with the directors to see if they can help the company overcome the financial difficulty, and if the capital market authority sees that the directors are incapable of saving the company from its difficulties, they can issue a decision to remove the board and appoint a temporary board in its place.

13. What potential liabilities can a director incur?

Directors can incur different liabilities which are set out in the CCL as follows: 

  • joint liability if the first board of the company fails to register the company within 15 days of convening the constitutive general meeting
  • joint liability of the directors and the auditor for any damage resulting from their failure to take the necessary actions for preserving the company’s share capital
  • liability for failure to amend any discrepancy in the procedures for the establishment of a joint stock company within 1 month of being notified of that discrepancy
  • liability to the company, its shareholders and third parties for any damage caused by a director’s breach of law; and/or any act of a director which is ultra vires; and/or for fraud; and/or for negligence in the performance of his/her duties
  • liability for intentionally using or including false information in any company document, or omitting any essential fact which conceals the company’s true financial condition, and
  • if more than one director is liable for a breach of the CCL, the competent court may decide to hold each director liable for all or part of the damages thereunder.

Punishment with imprisonment for a period of 1 to 3 years and/or a fine from OMR 10,000-50,000 shall be imposed on:

  • any director who intentionally issues an invitation for subscription for shares, bonds or other securities of the company in violation of provisions of the law, and any person who knowingly offers such shares, bonds or other securities for subscription
  • any director entrusted with the management of the company who intentionally records incorrect data or information in the company’s budget, profit and loss account or a report prepared for the ordinary or extraordinary general meeting, or who intentionally conceals a material fact in any of the aforementioned which is likely to conceal the actual financial position of the company from shareholders, creditors or third parties, and
  • any director who intentionally uses the property of the company for their personal benefit or for the benefit of a company or another establishment in which they have an interest.

Punishment with imprisonment for a period of 6 months to 3 years and/or a fine from OMR 3,000-20,000 shall be imposed on:

  • any director who prevents or hinders the auditors from performing their duties, and
  • any member of the first board of directors of the company who intentionally fails to register the company with the registrar. 

Punishment with a fine from OMR 5,000-10,000 shall be imposed on any member of a company’s board of directors who fails to convene an ordinary or extraordinary general meeting whenever the law requires.

14. How can a director limit his/her liability?

Some companies can purchase an insurance policy for their directors to try to limit their liability. 

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Ben Ewing