UAE Commercial Companies Law Imposes Rigorous Governance Standards on Company Boards

Corporate governance under the UAE Commercial Companies Law (Federal Decree-Law No. 32 of 2021) has evolved into a comprehensive regulatory framework that governs the structure, duties, liability, and conduct of company boards. Compliance with these rules is not only a legal requirement but also essential to maintaining investor confidence, attracting foreign capital, and supporting sustainable commercial growth. The law applies to most forms of UAE commercial entities, particularly Public Joint Stock Companies (PJSCs), and sets out standards that align with international governance best practices.

1. Applicability and Governance Scope
   
   

The Commercial Companies Law applies to commercial companies established in the UAE, including mainland and certain free-zone companies, except for those established in financial free zones with separate regulators such as the DIFC and ADGM. PJSCs are subject to the strictest governance rules because they raise capital from the public and have obligations to shareholders, markets, and regulators. Private joint stock companies and limited liability companies (LLCs) are also subject to governance provisions, particularly relating to director responsibility, fiduciary duties, and accountability.

 

2. Board Formation and Composition Requirements
   
   

The law prescribes that PJSCs must have a board consisting of no fewer than three and not more than eleven directors elected by shareholders at the general assembly. The roles of executive, non-executive, and independent directors must be proportionally balanced to ensure objectivity in decision-making. Independent directors are particularly crucial as they provide impartial oversight and reduce the risk of conflicts. Furthermore, gender diversity has been incorporated into the governance framework, with listed companies encouraged to include female members on their boards.

 

3. Director Appointment, Tenure, and Removal

Directors are elected for a term not exceeding three years but may be re-elected. The law includes provisions for early removal through shareholder resolutions in cases of misconduct, non-performance, or violation of legal or contractual obligations. Board vacancies must be filled following procedures outlined in the company’s articles of association to ensure continuity and compliance.

 

4. Duties, Responsibilities, and Decision-Making Obligations
   
   

The law codifies the duties of directors, including the duty to act in good faith, preserve confidentiality, and serve the best interests of the company and its shareholders. Directors must avoid misuse of power and refrain from engaging in activities that may harm the company. They must exercise due care, diligence, and professional judgement, similar to a prudent businessperson under comparable circumstances. Decisions must be based on accurate information, and directors must avoid taking actions that may result in personal gain at the company’s expense.

5. Conflicts of Interest and Related Party Transactions
   
   

The law strictly regulates related party dealings. Directors are required to declare any personal or indirect interest in proposed transactions or contracts involving the company. If such a declaration is made, the interested director is prohibited from voting on the related resolution. Transactions exceeding a specific financial threshold require shareholder approval to ensure transparency and fair valuation. The purpose of such requirements is to prevent abuse of power and protect minority shareholders.

6. Board Committees and Internal Control Framework
   
   

Public joint stock companies must establish key board committees such as the audit committee and nomination and remuneration committee. The audit committee must include non-executive directors, with at least one having relevant financial expertise. These committees strengthen oversight and internal control processes, helping ensure that the company’s financial, operational, and legal risks are effectively managed. Internal audit functions must report directly to the board or its committees, and companies must implement statutory compliance systems.

 

7. Board Meetings, Record-Keeping, and Documentation

The law requires boards to hold meetings at least four times annually, with proper notice, agenda circulation, and minute-taking. Accurate minutes must be maintained to document discussions, voting outcomes, dissenting opinions, and decisions taken. These records serve as legal evidence of compliance and decision-making integrity, especially in disputes or regulatory inquiries.

 

8. Director Liability and Legal Consequences

 

Directors may be held personally liable for violations of law, fraud, mismanagement, or abuse of authority. Liability may extend to both civil and criminal consequences, depending on the nature of violation. Shareholders may file claims directly against directors if their misconduct causes financial loss. Directors may also be held jointly liable, particularly in cases involving inaccurate financial reporting.

 

Conclusion

 

Corporate governance under the UAE Commercial Companies Law is designed to safeguard corporate integrity, enhance stakeholder confidence, and prevent misuse of corporate authority. By defining strict board composition rules, director duties, transparent reporting obligations, and liability standards, the law elevates corporate accountability in the UAE. Boards that actively adopt these standards not only achieve compliance but also contribute to the country’s economic reputation as a transparent, well-regulated, and investment-friendly market.

 

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