As a director, you will gain status and have a direct impact on the policy and strategy of a business. It is important to understand and comprehend the role and responsibility this position demands. This article sets out the scope of authority and duties of the board of directors (the “Board”) as well as outlines some procedural requirements that are required by Omani law such as appointment of directors and their liabilities in joint stock companies.
Appointment and Removal of Directors
The management of a joint stock company is entrusted to a board whose term of office and composition is specified by a company’s Articles of Association. In accordance with the Commercial Companies Law pursuant to Royal Decree 4 of 1974 as amended (the “CCL”), the Board must consist of a majority of non-executive directors and a minimum of one third of the Board must be independent. Members of the Board must be elected by the annual general meeting (AGM). The shareholders are permitted to remove any member of the Board by resolution that has passed by simple majority.
Unlike a manager of an LLC, any person, if elected, is permitted to become a director of a joint stock company. Therefore it is not necessary to be an employee of the company prior to, or at the time of, election.
Duty and Authority of Directors
The Board has full authority to perform all acts required for the management of the company pursuant to its objectives, subject to its Articles of Association and under Omani Law. The decisions of the directors are taken collectively by the Board. As such, a director is not permitted to act as a director in his sole capacity. Decisions are either taken by majority vote at board meetings or by the signing by all the directors of a written resolution.
Whilst the Board has authority to fulfil many activities, acting always in good faith for the promotion of the business, as directors of the company unless the Articles of Association or a resolution of a General Meeting of the company permits, the following acts are not permitted by the Board as set out in the CCL:
- make donations, except business donations in small and customary amounts;
- sell all or a substantial part of the company’s assets;
- mortgage or pledge the assets of the company, except to secure debts of the company incurred in the ordinary course of the company’s business; and
- guarantee debts or third parties, except guarantees made in the ordinary course of business pursuant to the objectives of the company.
The Code of Corporate Governance issued by the Capital Markets Authority circular No. 11/2003 (the “Code”) and applicable to public joint stock companies, provides that the Board shall, among other things, strive to achieve “high ethical standards and integrity in their personal and professional dealings.”
Liability of the Board
Members of the Board, as well as managers of an LLC have a duty to act in the best interests of their company and are liable to the company, the shareholders and third parties for damages caused by:
- acting in violation of the law;
- acting beyond the scope of their authority;
- fraud or negligence in the performance of their duties; and
- their failure to act as prudent men under certain circumstances; or rather failing to act to a high standard of care, skill and diligence which is expected as a director.
As well as the above, if a member of the Board is found to have used his position on the Board to secure a benefit to either himself or a member of his family, then he shall be liable to point 2 of the CCL above and shall be liable under the Code which only permits “normal contracts and transactions in the ordinary course of business.” If a transaction is not carried out to achieve the company’s objectives and is not carried out on a regular basis, such transaction may be void.
A member of the Board must have neither a direct or indirect interest in transactions or contracts concluded in respect of the company. Accordingly, a director must avoid conflicts of interest and is not permitted to participate in the management of any business that is a competitor of the company, unless approval has been obtained in the General Meeting of the company and so long as such approval is annually renewed. Article 17 of the Code provides that disclosure is mandatory whereby “disclosure shall be made, by the management to the Board, relating to all financial and commercial transactions, where they have personal interest (for self and relatives up to first degree), that may have potential conflict with the interest of the company at large (e.g. dealing in company’s shares and commercial dealings with bodies which have shareholding of management and their relatives.” A director found to have utilized information accessible to him by virtue of his position on the Board or failed to make timely disclosure to the Board may be found to have acted in bad faith and is therefore liable to the company.
The liability of the Board and managers is joint and several and any provision limiting the liability of the Board shall be null and void. Accordingly, being a director brings with it a high degree of responsibility and, increasingly, the risk of personal liability. However, the company may provide directors and officers liability insurance (or D&O insurance). This is insurance payable to indemnify the individual concerned in the event the insured is absolved from liability in any civil or criminal action brought against him. As such, a director may be afforded with greater financial protection against personal liability if the company opts to provide D&O Insurance. Such insurance however, would cover a director acting within the realm of their authority and in the course of ordinary business only.
Each member of the Board has a duty to act responsibly and to carry out their activities in such a way as not to commit fraud or act negligently, violate any law, act beyond the scope of their authority, or for failing to act as prudent men in the circumstances. In addition to striving for high ethical standards and integrity in their personal and professional dealings, directors must have the potential to “contribute towards effective stewardship of the company” pursuant to Annexure 1 of the Code. Accordingly, a director should steer the business in a manner that is ethically and legally sound to avoid liability for acting in bad faith.