United Arab Emirates
What type of company is typically used in group structures?
Onshore UAE
In onshore UAE (to be differentiated from a UAE free zone), the most common type of company used in group structures is a limited liability company (LLC). This guide therefore focuses on the management of an onshore LLC.
Dubai International Financial Centre
While there are various company types available in the Dubai International Financial Centre (DIFC), the most commonly used company is a private company. This guide therefore focuses on the management of DIFC private companies.
United Arab Emirates
What is a "director"?
Onshore UAE
There is no complete definition of the term "director" in UAE company law. The law essentially regards someone who manages the affairs of a company on behalf of its shareholders as a director. In most cases, the terms "director" and "manager" are used interchangeably.
Dubai International Financial Centre
The DIFC Companies Law does not provide a complete definition of the term "director". However, a director is considered to be someone who manages the affairs of a company on behalf of its shareholders (whether they are called a director or not). If a person acts in this way they should be formally registered with the DIFC as a director.
What are the different types of director?
Onshore UAE
The UAE Companies Law does not distinguish between types of directors. It is nevertheless possible to define, to an extent, different types of directors in the memorandum of association of an LLC. This may include a designation as a managing director, for instance. The particular nature of such a designation would be defined in the memorandum of association.
Regardless of whether a director is appointed, a manager must also be appointed for an LLC. A director and manager may be the same person holding both roles.
Dubai International Financial Centre
The DIFC does not distinguish between types of directors and the DIFC Companies Law similarly does not provide for a variation on the designation of a director. If a company wishes to internally assign a prefix to a director denoting a particular role, then this should be acceptable. A director registered with the DIFC will assume the same responsibility and authority regardless of their internal designation, unless the articles of association of the company are amended to reflect this (the DIFC must approve the articles of association).
United Arab Emirates
Who can be a director?
Onshore UAE
A director must be a natural person who is at least 18 years old. There are no nationality or residency restrictions, however individuals from certain countries may be subject to additional security checks or denied a visa. A director in an onshore LLC must hold a valid UAE visa.
In some circumstances, a director may be required to hold a minimum legal of academic qualification in order to hold office, depending on the activities that the LLC is conducting (for example if the LLC conducts regulated financial activities).
Dubai International Financial Centre
A director must be a natural person who is at least 18 years old. There are no nationality or residency restrictions, however individuals from certain countries may be subject to additional security checks or denied a visa.
An individual may not be a director if they are:
- Convicted of a criminal offence, involving dishonesty or moral turpitude, in any jurisdiction in the past ten years.
- Guilty of insider trading or the equivalent in any jurisdiction at any time.
- Judged disqualified by any court.
- Disqualified by the Dubai Financial Services Authority.
- Disqualified pursuant to a provision specified in the articles of association of the company.
- An undischarged bankrupt.
Minimum / maximum number of directors
Onshore UAE
There is no minimum or maximum number of directors that may be appointed. The LLC's memorandum of association may, however, specify a minimum or maximum in this regard. A LLC must have at least one manager who is named on the licence issued to the company by the economic department of the Emirate in which the LLC is established.
Dubai International Financial Centre
A private company must have at least one director. There is no maximum number of directors. The company's articles of association may, however, specify a greater minimum number and/or specify a maximum, subject to approval by the DIFC.
United Arab Emirates
How are directors appointed?
Onshore UAE
Directors may be appointed by way of a resolution of the shareholders of an LLC, which should be duly notarised by a UAE notary public. The relevant signatories of any shareholders that are body corporates must produce at the time of signing their applicable authorising instrument (such as a power of attorney or resolution) in order for them to execute the written resolution. Documents originating from outside of the UAE must be notarised and legalised up to the level of the UAE embassy in the country of origin, translated into Arabic for use in the UAE and attested locally by the UAE Ministry of Foreign Affairs and Ministry of Justice.
The name of the director may also be listed in the memorandum of association of the LLC, however this is not mandatory. To do so, the memorandum of association must be notarised by a notary public in the UAE. The same conditions apply as noted above with regard to evidencing authority to sign the memorandum of association.
Dubai International Financial Centre
Directors may be appointed by way of a resolution of the shareholders of the company. Subsequently a filing of an online request with the DIFC Registrar of Companies through the portal account of the company must be made. This includes the submission of a director's declaration consenting to their appointment as well as a copy of a shareholder's resolution approving the appointment. A certified copy of the new director's passport must also be provided in line with the DIFC Certification Policy.
How are directors removed?
Onshore UAE
Directors may be removed by way of a resolution of the shareholders. Where the name of a director is listed on the memorandum of association, an amendment removing the name of the director is necessary, which must be notarised at a UAE notary public. The same conditions apply as with appointing directors with regard to signatories evidencing their authority to sign on these documents. Documents originating from outside of the UAE must be notarised and legalised up to the level of the UAE embassy in the country of origin, translated into Arabic for use in the UAE and attested locally by the UAE Ministry of Foreign Affairs and Ministry of Justice.
Dubai International Financial Centre
Directors may be removed by way of a resolution of the shareholders of the company. Similar to the process for appointing a director, an online request must be filed with the DIFC Registrar of Companies through the portal account of the company. The documents that must be filed for this process include either a resignation/termination letter or a copy of the shareholder's resolution approving the removal.
United Arab Emirates
Typical management structure
Onshore UAE
Boards of LLCs are unitary structures made up of all the company's directors. Each director has the same obligations and accountability to the company pursuant to the LLC's memorandum of association. The roles and responsibilities of directors are largely set out in the LLC's memorandum of association, but directors will typically be responsible for the management and operations of the company and for ensuring that the company meets it statutory obligations.
LLCs are generally not required to appoint directors. Pursuant to the UAE Companies Law, LLCs with more than fifteen (15) shareholders are required to appoint a supervisory board comprising at least three shareholders for three years starting at the date of appointment, to oversee the management of the LLC.
Dubai International Financial Centre
Boards of DIFC private companies are unitary structures made up of all the company's directors. Each director has the same obligations and accountability to the company. The directors are responsible (on a collective basis as a board) for the management and operations of the company and for ensuring that the company meets it statutory obligations.
How are decisions made by directors?
Onshore UAE
The manner in which directors can make decisions is set out in the LLC's memorandum of association (subject to adherence to the UAE Companies Law). In LLCs, the memorandum of association can provide directors with flexibility to determine between themselves how decisions are made – whether by physical meeting, telephone meeting or a written resolution. Other than single director LLCs, the minimum quorum for board meetings is set out in the memorandum of association. Unless the memorandum of association stipulates otherwise, voting at board meetings may be on a simple majority basis. When decisions are made in writing, the unanimous agreement of all directors is usually required, although the memorandum of association may specify otherwise.
Dubai International Financial Centre
The manner in which directors can make decisions is set out in the company's articles of association (subject to adherence to the DIFC Companies Law). In private companies, the articles of association typically provides directors with flexibility to determine between themselves how decisions are made – whether by physical meeting, telephone meeting or a written resolution. Other than single director companies, the minimum quorum for board meetings is generally two directors (although notice must be given to all), unless agreed otherwise by the directors. Unless the articles of association stipulates otherwise, voting at board meetings is on a simple majority basis. When decisions are made in writing, however, the unanimous agreement of all directors is usually required, although the articles of association may specify otherwise.
Authority and powers
Onshore UAE
The authorities and powers of directors are predominantly set out in an LLC's memorandum of association and are determined by the shareholders. Where this is not defined in a memorandum of association, the common approach is to issue powers of attorney to directors to enable them to represent the company. These powers of attorney should generally be notarised.
Dubai International Financial Centre
As far as third parties are concerned, directors are able to bind the company and enter into contracts on its behalf subject to internal limits on their power to do so (e.g. in the company's articles of association).
Normally, the company's articles of association gives the directors wide powers to manage its business and affairs as they think fit (although the articles may also provide that shareholders may give the board specific directions as to its conduct). Directors' powers are collective, meaning that directors should act together as a group on the company's behalf.
For a director or board to exercise their powers in onshore Dubai, it is typically a requirement for such powers to be clearly stated and unambiguous. This is to say that certain UAE authorities (including the notary public) may insist on seeing a power that specifically refers to the task a director is attempting to carry out. In some circumstances, a power of attorney or authorising written resolutions will be requested instead of relying on the powers set out in the articles of association of a company.
Delegation
Onshore UAE
The ability for a director to delegate their authorities is determined by what is permitted pursuant to the memorandum of association of the LLC or what is set out in a power of attorney authorising delegation.
Dubai International Financial Centre
If authorised by shareholders, or if permitted by the company's articles of association, the board can delegate their powers to committees and others (e.g. executives). However, the board retains overall responsibility for the company's operations and management.
United Arab Emirates
What are the key general duties of directors?
Onshore UAE
The duties of a director in an LLC include:
- General company obligations, such as the preparation and filing of accounts.
- Acting in a way which is compatible with the LLC's objectives.
- Exercising a degree of care in the discharge of management responsibilities.
- Acting within the powers granted.
- Disclosing any conflicts of interest.
- Complying with the statutory restrictions relating to loan arrangements.
Dubai International Financial Centre
The key duties of a director are set out in the DIFC Companies Law. These are duties to:
- Promote the success of the company. Directors must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard (amongst other matters) to: (1) the long term consequences of decisions; (2) the interests of the company's employees; (3) the need to foster the company's business relationships with customers, suppliers and others; (4) the impact of the company's operations on the community and the environment; (5) the desire to maintain a reputation for high standards of business conduct; and (6) the need to act fairly between shareholders.
There is no hierarchy to these factors and, where they conflict, a director will need to use their business judgement in weighing them against one another.
- Act with reasonable care, skill and diligence. Directors must meet the minimum standard of still and care expected of someone in their position and they must also bring to bear their particular skills and experience – therefore, the more qualified or experienced a director is, the greater the statutory standard required of them.
- Exercise independent judgement. However, a director may rely on other people (e.g. through proper delegation or by seeking advice) provided they judge that it is reasonable to do so. A director may not usually limit their discretion, however in certain circumstances they can do so by acting in accordance with an agreement entered into by the company or in a way authorised by the company's articles of association.
- Act within the company's articles of association and exercise their powers for the purposes for which they were given and not for any collateral purpose.
- Avoid conflicts of interest. Directors must not put themselves in a position where there is, or could be, a conflict between their personal interests or their duties to another person and the interests of the company (for example, where they are a director or employee of another company or where they may be in a position to take advantage of any property, information or opportunity they became aware of as a director). This duty is not breached if the situation cannot reasonably be regarded as giving rise to a conflict of interest or if the situation has been pre-authorised by the board (provided conflicted directors take no part in this decision) or by shareholders or in the company's articles of association.
- Not accept benefits from third parties, without prior shareholder approval. This duty is not breached if acceptance of such benefits cannot reasonably be regarded as giving rise to a conflict of interest.
- Declare interests in proposed transactions or arrangements with the company. Directors must disclose the nature and extent of their personal interests in a proposed transaction or arrangement with the company before it is entered into. Directors must also declare the nature and extent of their interest in a transaction or arrangement that has already been entered into by the company as soon as reasonably practicable.
What are directors' other key obligations?
Onshore UAE
Other obligations may include matters which are assigned to directors in the memorandum of association of an LLC and may vary according to how responsibility of managing the LLC is apportioned by the shareholders. This may include general company obligations such as maintaining records or calling annual general meetings.
Dubai International Financial Centre
The DIFC Companies Law requires directors to cause annual accounts to be prepared in relation to each financial year of the company.
Unless otherwise provided in the articles of association, the directors of a private company must also submit copies of the annual accounts to the shareholders together with an auditor's report, and file these with the DIFC within 30 days after circulation to the shareholders if:
- annual turnover exceeds USD5,000,000 calculated on a consolidated basis including all subsidiaries; and
- the company has more than 20 shareholders for the whole of that year.
The directors of a private company shall within 6 months after the end of the financial year, or earlier, appoint an auditor to hold office from such date until the end of the next period for appointing auditors.
Transactions with the company
Onshore UAE
A director should be expressly authorised in an LLC's memorandum of association or by way of a power of attorney in order to transact in the name of an LLC. In most cases, such authority is scrutinised in the UAE depending on the nature of the transaction and holding the position of director is not always sufficient in and of itself to permit a director to bind an LLC.
Dubai International Financial Centre
The DIFC Companies Law indicates that the validity of an act by a company shall not be called into question on the ground of lack of capacity by reason of anything in its articles of association or by any act of its shareholders. Without limitation to the generality of this position, a person acting in good faith when dealing with the company is not affected by any limitations in its articles of association relating to its directors’ powers to bind the company, or authorise another to bind the company.
With respect to director's transactions with the company, as above, directors must disclose the nature and extent of their personal interests in a proposed transaction or arrangement with the company before it is entered into. Directors must also declare the nature and extent of their interest in a transaction or arrangement that has already been entered into by the company as soon as reasonably practicable.
United Arab Emirates
Breach of general duties
Onshore UAE
In certain circumstances directors may face liabilities where they have acted unlawfully, including:
- Disclosing corporate secrets.
- Participating in a competing business.
- Fraud and embezzlement, misuse of power, violation of the UAE Companies Law or the company's memorandum and gross error/mismanagement.
- Any act carried out in the course of their duties which causes harm to another person.
- Exceeding authority.
- Unlawful competition.
- Issuing a cheque with insufficient funds.
- Certain violations prescribed under the law (such as, the Federal Environmental Law, the Federal Labour Law, etc.).
- Certain acts in the event of a company's bankruptcy, such as engaging in transactions defrauding creditors.
Depending on the nature of the unlawful act, action can be taken against a director for breach of legislation (including the UAE Companies Law, Civil Code, Penal Code, Commercial Code or Bankruptcy Law) or breach of the LLC's memorandum of association.
Dubai International Financial Centre
Pursuant to the DIFC Companies Law, a breach by a director of any one or more of the duties set out in the Law shall constitute a contravention by that director of the relevant duty. On this basis, the company may bring action against the director.
Where it is apparent to the DIFC Registrar of Companies that a director should not hold office, they may apply to the DIFC Courts for an order against that director. This consideration is based on whether the director has breached any of the duties prescribed in the Law or the Registrar of Companies has otherwise determined, based on the given circumstances, that a director is unfit to be involved in the management of a company.
Remedies may be sought against the director by filing a claim with the DIFC Courts. These may include remedies against a director for breach of duty including damages, recovery of misapplied property (including the payment of unlawful dividends), accounting for profit made in breach of duty, an injunction to prevent breach and rescission of a contract.
Liabilities on insolvency
Onshore UAE
On insolvency, a director may face potential civil liability where an LLC's funds are insufficient to repay 20% of creditor liabilities. The court may order the manager to contribute to the company's losses and the court has wide discretion in relation to the terms of the order the director to contribute to the LLC's losses.
With regard to events leading to insolvency, a potential criminal liability may arise and directors may face up to five years imprisonment and a fine amounting to AED1,000,000 where they engage in any of the following acts:
- Hid all or some of the company's books and records, or destroyed or amended those books and records with the intent to cause prejudice to the creditors.
- Embezzled or concealed any part of the company's assets.
- Declared/acknowledged debts that were not due from the company while being aware of that fact, whether the declaration was in writing, verbally or in the accounts or they refrained from submitting evidence or clarifications while being aware of the outcome of such inactions.
- Obtained preventive composition or restructuring (within the meanings of the Bankruptcy Law) for the company by way of fraud.
- Made false declarations concerning the subscribed or paid-up capital, distributed fictitious profits or seized bonuses exceeding the amount set out in the law, the company's memorandum of association or articles of association.
Dubai International Financial Centre
Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading. These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties. Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors. In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.
Other key risks
Onshore UAE
In some circumstances, directors who engage in any of the following activities could face criminal liability and up to two years imprisonment:
- Did not maintain commercial books sufficient to reveal the company's financial position or assets.
- Refrained from providing the data required by the bankruptcy trustee or the court, or intentionally provided incorrect data.
- Disposed of the company's assets after becoming cashflow-insolvent with the intent of depriving the creditors of those assets.
- Paid the debt of a creditor, while cashflow-insolvent, to the detriment of the other creditors or treated a creditor preferentially to other creditors, even if such acts were conducted with the intent of achieving a preventive composition or restructuring procedure.
- Disposed of company assets at a value less than their market price, or acted in a manner detrimental to the interest of the creditors with the intent to obtain funds in order to avoid or delay cashflow-insolvency, the adjudication of bankruptcy or the termination of a preventive composition or restructuring procedure.
- Spent disproportionate or excessive sums in gambling or speculative activities outside the company's usual business.
- Entered into disproportionate undertakings in favour of a third party without having regard to the financial status of the company at the time such acts were decided.
The UAE bankruptcy laws provide defences for directors/managers not involved in the crime or who vote against resolutions approving such acts.
Dubai International Financial Centre
A director may also be disqualified by the court from acting as a director. A disqualification order can be made for a variety of reasons (eg conviction for criminal offences relating to the running of a company, persistent breaches of statutory obligations such as filing documents with the companies register, being found liable for fraudulent or wrongful trading and generally for conduct which makes a director unfit to manage a company).
Failure to comply with company-related obligations, such as the preparation and filing of accounts, can also lead to fines for individual directors.
United Arab Emirates
How can directors be protected from liability?
Onshore UAE
- Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
- Indemnity. Although it is not possible for an LLC to exempt its directors from liability, an LLC is able to indemnify its directors against certain liabilities incurred to third parties, to the extent permissible under the law. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.
Dubai International Financial Centre
- Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
- Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings. The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity. The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.
What practical steps can directors take to avoid liability?
Onshore UAE
Directors should:
- Keep informed about the affairs of the company, particularly its financial position. Directors should have access to up to date financial information, prepare thoroughly for and regularly attend board meetings and familiarise themselves with key legislation affecting the business.
- Make full disclosures to the board and shareholders if they have outside positions or interests which may give rise to a conflict of interest and/or if they have a personal interest in any proposed or existing transaction or arrangement with the company.
Dubai International Financial Centre
Directors should:
- Keep informed about the affairs of the company, particularly its financial position. Directors should have access to up to date financial information, prepare thoroughly for and regularly attend board meetings and familiarise themselves with key legislation affecting the business.
- Make full disclosures to the board and shareholders if they have outside positions or interests which may give rise to a conflict of interest and/or if they have a personal interest in any proposed or existing transaction or arrangement with the company.
