Enhanced Regulations for Private Joint Stock Companies in the UAE

In an effort to improve governance and transparency within the corporate sector, the Ministry of Economy has issued Ministerial Decision No. 137 of 2024, which issued on 30 July 2024, entered into force on 15 August 2024 and further circulated to all private joint stock companies on 14 October 2024 (“Regulations”). These Regulations, amend Ministerial Decision No. 539 of 2017 and Decision No. 797-2 of 2018, putting in place enhanced standards for private joint-stock companies and the operations of their boards. These updates aim to improve decision-making, strengthen corporate governance, and promote a more robust business environment in the UAE. 

Key Highlights of Regulations 

The Regulations focus on several critical areas, including board composition, obligations, internal controls, Committees and financial reporting. Find below the most significant updates: 

1. Diversity Requirements for Board of Directors

The Regulations introduce specific diversity requirements for the board of directors of private joint-stock companies: 

• Independent Board Members: At least one-third of the board must consist of independent members, ensuring unbiased decision-making and effective oversight.
• Technical Expertise: The majority of non-executive board members must possess technical skills relevant to the company’s operations.
• Gender Diversity: For the first time, the Regulations mandate that at least one seat on the board must be held by a woman, promoting gender diversity in corporate leadership.
• All private joint stock companies are required to comply with the above requirements upon the end of the term of the board of directors in force at the time of the entry into force of the enhanced Regulations in August 2024. 

2. Board Obligations

The Regulations clearly define the board’s responsibilities, which include: 

• Ensuring compliance with laws and regulations.
• Overseeing the execution of the company’s strategy.
• Maintaining internal controls and ensuring the implementation of policies on conflicts of interest and stakeholder relations.
• Establishing and overseeing programs aimed at preventing insider trading.
• These duties clearly confirm the board’s central role in the governance of the company, ensuring accountability and transparency in decision-making. 

3. Loss of Independence for Board Members

A board member’s independent status may be revoked under certain circumstances. A member will lose their independent status if they, or their close relatives, have held an executive role, have significant financial interests, consulting relationships, or auditing ties with the company within the past two years. Substantial share ownership or personal service contracts may also affect the independence of a board member. 

4. Standing Committees

The Regulations introduce the requirement for standing committees within the board: 

• Nominations and Remuneration Committee: This committee must meet at least once a year and oversee the nomination of board members, assess their independence, review executive remuneration policies, and ensure succession plans are in place.
• Audit Committee: The Audit Committee must include members with financial expertise and meet at least quarterly. The committee’s role includes overseeing financial integrity, internal controls, and risk management, as well as ensuring the independence of external auditors.
• Both committees are to be chaired by independent members and must consist of at least three members.

5. Founder’s Committee

The Regulations remove the previous requirement for a minimum of two members for the Founder’s Committee. This change provides greater flexibility for companies in structuring their committees.

6. General Meeting Provisions

Changes to the provisions regarding general meetings have also been introduced: 

• Shareholders’ Rights: Shareholders who represent at least 5% of the private joint stock company’s share capital now have the right to request that an item be added to the agenda of the general meeting. Previously, this threshold was set at 10%, giving minority shareholders a greater opportunity to influence the company’s governance.

7. Financial Reporting and Bond Issuance

Several key updates have been made to the financial reporting and bond issuance processes: 

• Issuance of Bonds or Sukuks: Private joint stock companies issuing bonds or sukuks are now required to publish their balance sheet and profit/loss accounts, unless the issuance is guaranteed by the state.
• Mergers and Transformations: Private joint stock companies transitioning from public to private must now provide balance sheets for the past five fiscal years, as opposed to the two-year requirement in the previous regulations.

9. Internal Control and Governance Reporting

The Regulations place a strong emphasis on internal controls and governance reporting: 

• Internal Control System: Private joint stock companies must maintain a robust internal control system to assess and manage risks, ensure legal compliance, and verify the accuracy of financial data. This system must be overseen by an independent internal control department.
• Governance Report: A governance report must now be submitted to the registrar of the Department of Commercial Registration and Agencies at the Ministry of Economy. prior to the annual general assembly, ensuring transparency and accountability in governance practices.

10. Regulation of Registrar’s Work

The Regulations also introduce provisions regarding the regulation of the register of private joint stock companies with the Ministry of Economy to enhance efficiency. Under the Regulations, processing times are reduced to five (5) working days and all data are to be stored electronically and integrated with the register referred to by virtue of the provisions of Federal Decree-Law No. 37/2021 on the Commercial Register. for streamlined operations and long-term reference. 

11. Company’s Retention of Documents

Under the Regulations, a private joint stock company can keep electronic copies of its documents, ensuring they are securely stored, organized, and accessible, with a retention period of at least ten years. This approach promotes efficiency, security, and long-term document preservation. 

12. Introduction of New Definitions 

Lastly, but most importantly, the Regulations have incorporated a class of new definitions. A noteworthy example of this is the evolution of the definition of a relevant party to include the parent company, major shareholders of the company, the chairman and board of the parent company and companies in which any of the chairman or members of the board of the company or members of the senior executive management is a member of its Board or a senior executive therein. This robust definition amongst others will increase shareholder protection. 

Conclusion: 

The enhanced Regulations represent a significant advancement in the UAE’s corporate governance landscape. By imposing new requirements on board composition, internal controls, and financial reporting, the decision aims to create a more transparent, accountable, and sustainable business environment for private joint-stock companies. These changes are expected to enhance decision-making, improve corporate governance, and foster investor confidence. 

It is essential that companies review the full details of the decision and ensure compliance within the required timeframes. At our law firm, we are ready to assist businesses in understanding and navigating these new Regulations. Our team of legal experts can provide tailored advice and support to help ensure your company meets the new governance standards.