1. What form does the board of directors take?
LLCs
LLCs must appoint a general manager to manage its day-to-day affairs. However, there is no obligation to appoint a Board of Directors - LLCs are permitted to appoint a Board of Directors if the partners (shareholder) decide to in the Memorandum of Association of the LLC, however this is not mandatory. If a Board is formed, the General Manager will report to the Board; if a Board is not formed, the General Manager will report to the partners.
Day-to-day management is undertaken by a general manager who is identified on the company’s commercial license and is vested with all the required authorities, unless specifically limited in the company’s memorandum of association or other power of attorney or granting instrument. A company may have more than one manager and in that case the partners may establish a board of managers/directors granting authorities in the memorandum of association, by power of attorney or other instrument, however, again, this is not mandatory.
For LLCs with more than seven partners, the partners must appoint a supervisory board consisting of at least three partners who may be re-elected or replaced by the general assembly. The supervisory board in this context is akin to a Board of Directors in the sense that it is charged with controlling the LLC’s balance sheet, annual report and dividend distributions. The managers may not vote on the election or dismissal of members of the supervisory board.
JSCs
JSCs have a single board which must have at least three directors and may have up to 11 directors, provided that females comprise at least 20% of the Board. In addition, a JSC is required to have a company secretary who is not a member of the board of directors.
2. What is the role of non-executive or supervisory directors?
LLCs
Non-executive directors are not required in the UAE for LLCs. However, LLCs with more than seven shareholders are required to have a supervisory board comprising at least three partners who will oversee the management and will report to the shareholders.
JSCs
JSCs must have executive and non-executive directors. At least one third of the board must be independent and a majority must be non-executive independent directors.
3. Who can be appointed as a director?
LLCs
There are no restrictions on who can become a director of an LLC.
JSCs
The chairman and the majority of directors of the board must be UAE nationals. If the percentage of UAE national members falls below the required percentage, this must be rectified within no more than 3 months, otherwise any resolutions of the board will be void upon expiry of this period.
Experienced persons who are not shareholders can be appointed as board members, but such persons must not make up more than a third of the board.
No person may be appointed or elected as a member of the board unless and until such person has accepted such nomination in writing, which includes disclosure of any activities conducted directly or indirectly which could be considered to be in competition to the business and a statement of other companies of which they are a board member or employee.
Directors may not:
- be a member of the board of more than five joint stock companies based in the UAE
- act as chairman or vice-chairman of more than two companies based in the UAE
- act as a managing director of more than one company in the UAE.
4. How is a director appointed?
LLC
The manager(s) and director(s) of an LLC are appointed by the partners (i.e. the shareholders), either in the memorandum of association, by separate agreement or by a resolution of the general assembly of shareholders. The general assembly determines the chairman and vice-chairman of the board (unless the memorandum of association specifies otherwise).
If the manager(s) and director(s) are listed in the memorandum of association, that document will need to be updated each time the manager or director is replace by a resolution of the shareholders executed before the UAE notary public.
JSC
The company’s articles of association determine the method of formation of the board of directors, including the number of members and the term of membership, provided that the number is between three and 11 and the term is no longer than 3 Gregorian calendar years (members may be re-elected for more than one term).
The board shall then elect from its members by secret ballot a chairman and a deputy chairman and may elect a managing director who cannot be an executive officer or general manager of another company.
If the company’s articles of association do not provide for a method of appointment, the directors are to be elected by secret ballot at the annual general meeting. Each shareholder has an equivalent number of votes to the shares held by them, and these can be allocated to one candidate or distributed between them. Save that on incorporation, the founding members may appoint the first board of directors in the articles of association.
The general assembly may appoint a number of experienced persons to the board who are not shareholders provided they do not exceed one third of the maximum number of directors set out in the articles of association.
If during a director’s term his/her position becomes vacant, the board of directors can appoint a new member to hold the vacant position until the expiry of the current term, provided that the appointment is referred to the general assembly at its first meeting for approval, unless the company’s articles of association provide otherwise.
If the Federal Government or the local government holds 5% or more of the capital of the company it will automatically have board appointment rights as provided for in the Companies Law.
5. How is a director removed from office?
LLCs
Unless a company’s memorandum of association (or other appointing contract) provides otherwise, a manager may be dismissed by a decision of the general assembly of the company (whether or not the board member is a partner). The court may also dismiss a manager at the request of one or more partners of the company if the court deems the dismissal justified.
A manager may file a written resignation to the general assembly with a copy to the authorities. The general assembly then has 30 days to decide on such resignation otherwise it is deemed accepted upon expiry of that period, unless the memorandum of association (or other appointing contract) provides otherwise.
The company must file notice of termination of the manager’s services and appoint a replacement within 30 days.
JSCs
A director may resign his/her office at any time by notice to the company.
A general assembly of the shareholders may resolve to remove all or any of the directors, even if the articles of association provide otherwise. If a board member is dismissed, the member may not be renominated for directorship for 3 years from the date of the dismissal decision.
Where a director is appointed for a fixed term, the director will seek reappointment periodically, but his/her appointment will terminate if he/she is not reappointed at the relevant time.
In addition, if a JSC board member is absent for three successive meetings or five intermittent meetings without acceptable excuse, he/she shall be deemed resigned.
Both LLCs and JSCs
A director may be liable for loss suffered if he/she resigns at a time likely to cause damage to the company. This could be of particular relevance to managers of companies in financial difficulties: while the temptation may be to resign from the company in an effort to minimise exposure to potential shareholder or third party claims, in doing so the director/manager may put himself/herself in breach of the UAE Civil Code, Federal Law No. 5 of 1985 (the “Civil Code”), if his/her resignation were to deprive the company of important skills and experience at a time when it was most in need of them.
In the event that a director is replaced, the company must also ensure that the power of attorney under which that director derives his/her authority to act is removed from the commercial register, because this will remain in force until such time as it is removed, regardless of whether the individual remains a director of the company.
6. What authority does a director have to represent the company?
LLCs
The basic proposition is that a company shall be bound towards third parties by the acts of its duly appointed managers/directors for decisions or actions taken in the “usual manner”. Although “usual manner” is not defined, we can assume this means decision/actions taken in the ordinary course, and absent any fraud or material impropriety or extraordinary circumstances. However, this does not prevent the company or its shareholders from then bringing a claim against a director for breach of duty which may have caused the company losses.
The authority of a general manager/director is assumed to cover the full powers required in order to manage a company to perform the business it is intended to carry on, unless there are specific restrictions set out in the company’s memorandum of association or in any other document under which the manager/director derives his/her authority. As a result, absent any specific restriction, the managers/directors are assumed to have full authority and discretion to manage the company, and those acts shall bind the company, provided the manager/director has made it clear that they are taking such actions in their capacity as a manager/director of that company.
In addition to restrictions set out in the company’s memorandum of association, the Civil Code refers to “limits of custom” and provides that even if the memorandum of association does not specify any restrictions on the capacity of a director’s actions and powers, they may still be liable for actions that the court deem as exceeding the limits of custom. There is no official definition of “limits of custom” under the Civil Code, therefore this term would be interpreted by the relevant court on a case-by-case basis, similar to the usual manner referred to above.
To be sure of due authority, third parties will usually request a specific power of attorney from the company granting relevant authority to managers/directors before entering into a transaction with a UAE company. From the perspective of a third party, a claim against a corporate entity would be preferable as the corporate entity is likely to have deeper pockets than an individual manager. A specific power of attorney also allows the manager to demonstrate that he/she was acting in accordance with his/her corporate authorisations to avoid personal liability to the company for mismanagement.
JSCs
Under the Companies Law, the board of directors is deemed to have all the required powers to do such acts as are required for the objects of the company, other than as may be reserved by the Companies Law, the articles of association of the company or the general assembly. Reserved matters under the Companies Law include entering into loans for periods in excess of 3 years, selling or pledging the property of the company or the store, mortgaging the company’s movable and immovable properties, discharging the company’s debtors from their obligations, and making compromises or agreeing on arbitration, each of which must be authorised under the articles of association of the company or within the objects of the company by nature or approved by a special resolution of the general assembly of the company.
The chairman of the company acts as the legal representative of the company before the Courts and in its relationships with third parties, unless the company’s articles of association provide for the general manager to act in such capacity. The chairman may delegate some of his/her powers to another member of the board and, as with LLCs, it is common for managers/directors to operate under a power of attorney granting them specific authority to enter into contracts with third parties.
Directors must act within the powers given to them by the company’s constitutional documents, and they are personally liable for a breach of the JSC's memorandum of association.
7. How does the board operate in practice?
LLC
Where the partners of an LLC establish a board of managers or directors, the proceedings of such directors shall be governed by the company’s memorandum of association or other constituting document, provided that the Board must meet at least four times per year.
If the LLC has more than seven partners, as noted above, a supervisory board is required to be established which may examine the company’s books and records and require the managers to provide management reports. The supervisory board controls the balance sheet, annual report and distribution of profits of the company and is required to report to the shareholders on these matters at least 5 days before the date of the general assembly.
JSC
The board is required to meet at least four times a year under an invitation from the chairman (unless the company’s articles of association provide for more meetings) in accordance with the procedures set out in the company’s articles of association. The chairman may also invite the board to convene whenever at least two members so demand, unless the company’s articles of association provide otherwise.
Meetings of the board are to be held at the head office of the company unless the board determines otherwise, and board meetings are not valid unless all the members are invited to the meeting and a majority are present in person, unless the company’s articles of association permit participation by technological means approved by the competent authorities. The Companies Law does not specifically permit or prevent telephonic meetings and it is fairly common practice for meetings to be conducted this way where directors are not all available in the UAE. The Companies Law does permit board resolutions to be passed as written resolutions which is one way to deal with logistical difficulties of convening all board members in one place.
Board decisions are generally passed by a majority with the chairman having a casting vote in the event of a tie. The secretary of the board must prepare the minutes of the meetings and they should be signed by the board members and the secretary. Any board member who disagrees to a decision passed by the board may (and for reasons related to liability discussed later, should) enter his/her objection in the minutes of the meeting. The signatories to the minutes are liable for the validity of the statements contained therein.
Directors may appoint another director as his/her proxy for a board meeting only where permitted by the company’s articles and provided that: (i) the delegated director represents only one other board member; and (ii) the number of the board members present in person is at least 50% of the board. No voting by correspondence is permitted and a delegated member shall vote on behalf of the absent member as determined in the deed of proxy.
8. What contractual relationship does the director have with the company?
Both LLCs and JSCs
The Labour Law governs most aspects of the contractual relationship between the individual and the LLC or JSC. Normally an employment contract is required, especially if the director (or manager in the case of the LLC) is a non-UAE national, as it is pursuant to that contract that the company sponsors the individual’s work visa.
It is therefore common to see two contracts in existence between the company and the director: a short-form service contract on the MOHRE’s prescribed form, and a more detailed employment contract setting out further employee provisions. In practice, the short-form service contract is the one used by the company to sponsor the individual’s work visa.
JSC
The articles of association of a JSC must specify the terms for calculating the remuneration of board members provided that the remuneration must not exceed 10% of the net profits of the ending financial year after deducting depreciation and reserves. Any penalties imposed on the company as a result of breaches of law or the articles by the board of directors during the ending financial year may be deducted from the remuneration of the board. However, the general assembly may resolve not to make such deductions if it determines that the penalties were not as a result of omission or error by the directors.
9. What rules apply in respect of conflicts of interest?
The Companies Law contains a positive duty on directors to avoid conflicts of interest. Any conflict should be declared at any board meeting convened to discuss the matter in question, where such conflict should be noted in the minutes and the director in conflict shall not be permitted to vote, failing which the conflicted contract may be annulled or the contravening director may be required to account to the company for any profits made.
Furthermore, the LLC provisions provide that a manager of a company may not undertake the management of a competitor or make deals in a competing trade (whether for his/her own account or for the account of third parties) without the consent of the company’s general assembly; otherwise the manager may be dismissed and required to pay compensation to the company.
JSCs are not permitted to provide loans to any board member (including his/her spouse, children or any of his/her close relatives) or execute guarantees or provide any collateral in connection with any loans entered by and granted to them. In addition, no loans may be granted to a company where a board member (or his/her spouse, children or any of his/her close relatives) holds, jointly or severally, over 20% of the capital of that company. Any agreement in conflict with the restrictions on such related party loans will be invalid.
See also restrictions on number of appointments for JSC directors as set out above.
10. What other general duties does a director have?
The Companies Law is the main piece of legislation setting out obligations and liabilities of managers and directors of onshore UAE companies and prohibits any provisions of the articles of a company which might seek to exempt any individual from personal liability. The statutory duties of directors and managers are as follows:
- to manage the company and preserve its rights to the level that a “diligent person” would. In this context, a “diligent person” is defined as a “person having sufficient experience and commitment required in the performance of his/her work”. This is the main basic standard of care expected of directors of companies under the Companies Law and is similar to the objective standard under English law, with the main difference here being that, under the Companies Law, there is no second subjective test (i.e. the Companies Law does not require courts to take into account the experience and commitment you actually possess), giving a lower overall threshold;
- to act in accordance with the objectives of the company and within the powers granted to them by virtue of authorisation in the company’s memorandum of association, any power of attorney or other appointing document;
- not to commit any fraudulent act or misuse of power;
- not to breach any applicable law or any provision of the company’s memorandum of association or any contract appointing the director (e.g. a service contract/employment contract);
- not to make any “gross error” or “error in management”. While these terms are not defined, we can take some indication from the definition of what a diligent person is deemed to be (see above). In that case, a court would consider whether the actions alleged to amount to a gross error or error in management fell below the standards that would be expected of a person having sufficient experience and commitment in the performance of that role on an objective basis; and
- not to put themselves into any position of conflict, take part in the management of any entity which competes with the UAE company, or make any trade or other deals in competition with the business of the company.
Directors/managers also have specific duties under the Companies Law including in relation to company filings, financial accounts, reports and distributions.
It should be noted that directors’ duties are personal obligations attracting personal liability for the individual in question.
For further information on this topic see CMS’s LawNow article: ‘Directors’ Duties in the UAE: Part 1 – Do you know your duties?’ https://www.cms-lawnow.com/ealerts/2020/04/directors-duties-in-the-uae-part-1-do-you-know-your-duties
11. To whom does the director owe duties?
For LLCs, directors’ duties are owed to the company, the shareholders and any interested third parties. Directors should be mindful that if the company becomes insolvent, or its solvency is doubtful, those duties may become owed to a wider cast of parties, including creditors and employees.
The position is the same for PJSCs. However, in addition, the SCA Code now also extends directors’ duties towards all “stakeholders” which can include employees, creditors, suppliers, and any other person who has an interest in the PJSC. So the cast of parties to whom directors duties are owed for PJSCs is potentially broader than for LLCs.
12. How do the director’s duties change if the company is in financial difficulties?
Directors and managers have specific duties in situations where the company is not profitable under UAE Federal Law; such duties vary depending on whether the company is an LLC or a JSC.
LLC
If the losses of an LLC reach 50% of its share capital, the directors or managers are required to refer the issue of dissolution to a general assembly of the partners and a resolution to dissolve can be passed by the same majority required to change the memorandum of association of the company (usually 100%). If the losses reach 75% of the company’s issued capital, a resolution to dissolve may be passed by partners holding only 25% of the capital. Given the relatively small amount of capital LLCs are usually set up with in the UAE (usually AED 100,000 to AED 300,000), this is something for managers and directors to be mindful of if the company finds itself in a loss-making situation.
JSC
If the losses of a JSC reach 50% of its issued share capital, the board of directors must call a general meeting of the company to decide whether to dissolve the company prior to expiry of its term or continue its business activities. Such invitation should be issued within 30 days of the filing of the relevant periodic or annual financial statements showing such position. If the board fails to invite the general assembly to convene, or if the shareholders do not issue a decision in the matters, any concerned party may file a motion with the competent court to seek dissolution of the company.
Bankruptcy provisions
In addition to the Companies Law requirements, the Federal bankruptcy law, Law No. 9/2016 (the “Bankruptcy Law”), imposes various duties and liabilities on directors in an insolvency situation. Under the Bankruptcy Law, directors must file for bankruptcy where a company is unable to pay its debts for over 30 consecutive business days due to financial difficulties or where the company’s assets are insufficient to cover the company’s liabilities. Directors can also be held liable for taking certain actions in insolvency situations (such as disposals at undervalue, preferential treatment of creditors, fraud, improper use of powers, providing false information or declarations etc). Therefore, it is imperative that directors give full consideration to their decisions in times of financial difficulties and after proceedings have been issued, including how such actions may affect creditors and other stakeholders and how they may be interpreted by a liquidator or a court in light of the Bankruptcy Law. https://www.cms-lawnow.com/ealerts/2020/05/directors-duties-in-the-uae-part-3-duties-in-times-of-financial-uncertainty
Full records and reasoning for all decisions should be kept and external professional advice sought.
13. What potential liabilities can a director incur?
Directors and managers are liable to the company, the shareholders and third parties for all fraudulent acts, abuses of power, and violations of the law or the company’s articles, in addition to mismanagement. The liabilities directors are exposed to can range from dismissal and disqualification as a director, to civil claims against the director brought by the company, its shareholders or other stakeholders, through to potential criminal sanctions of fines or, for more extreme cases, imprisonment.
Various circumstances in which a director can be found personally liable are set out under the Companies Law and can be summarised as situations involving: deception or fraud;
- misuse of power;
- violations of the law or the company’s constitutional documents, or
- “gross error” or management errors, which is broadly termed and can be considered to comprise any situation where a director did not meet the standard of care expected of him/her (described at point 10 above).
Any provisions attempting to relieve directors of liabilities in such circumstances are deemed invalid.
In the event of a breach of directors’ duties, all managers and directors are jointly liable if such breach arises from a resolution adopted unanimously. It is therefore important for any manager or director who does not agree with a proposed action to vote clearly against that resolution – and to have their objection noted in the minutes.
Simply not being present at the meeting in question is not a defence under the Companies Law and managers or directors, if not present, must show that they were not aware of the proposed action or, if they were aware of it, were unable to object.
Under the Penal Code, directors and managers can be found criminally liable for a variety of matters in the context of their position, including:
Criminal sanctions including fines and imprisonment are also imposed under the Bankruptcy Law for a wide range of actions, inactions and breaches of duty.
In addition, directors may also be liable for actions that the court deems to be exceeding the limits of custom referred to above.
14. How can a director limit his/her liability?
The Companies Law includes a general prohibition on limiting the liability of directors for fraud, misuse of power, legal violations and mismanagement. However there are some protections highlighted in the Companies Law, such as for directors who object to the relevant decision resulting in liability and have such objection noted on the record, or in the case of members of the board of supervisors of an LLC who shall not be liable for the actions of the managers unless they become aware of the faults committed and fail to mention these faults in their report presented to the general assembly of shareholders. As such it is important for directors to be fully engaged in the decision- making process, ensure such decisions are being made having considered all relevant information, and ensure full records are kept, particularly of any objections. It is also important to take professional legal and financial advice where there may be any risk of insolvency and, where the effects of decisions are uncertain, seek shareholder approval of proposed actions.
It is possible for companies to issue indemnities in favour of directors as against third party claims and/or take out an insurance policy against the financial risks to directors and officers from claims brought against them. Directors’ and officers’ insurance (“D&O insurance”) is increasingly important to attract and retain talented directors; however it has its limits, both in the nature of claims, costs, expenses and liabilities it may pay out on, and for the fact that it will not provide any protection against criminal sanctions or in cases of fraud.
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