Wednesday, January 2, 2013

Corporate Governance Law Update: Changes to Definition of 'Independent Director'

The Code of Corporate Governance issued by the Capital Market Authority was recently amended to redefine the terms ‘independent director’ and ‘related party’ in public listed companies.

While this amendment largely preserves the definition of ‘related party’ with minor changes, the definition of the ‘independence’ of an independent director has been changed significantly.

The earlier definition of independent director construed the term quite liberally; only persons who had held a senior position in the company during the preceding two years and persons who had entered into financial transactions with the company or its affiliates were excluded from holding the position of ‘independent’ director. Moreover, a 2002 clarification issued by the CMA had also made it possible for shareholders and shareholders’ representatives to become independent directors. This latter step naturally resulted in some tension with the principle of having an independent director on the board to impart an objective and unbiased standpoint without being clouded by real or perceived conflict of interest.

The recent amendment to the Code of Corporate Governance has significantly tightened up the definition of ‘independent director’ with the aim of improving corporate governance and better protecting shareholders’ rights and interests. The new definition requires that an independent director must enjoy complete independence from the company and contains an array of exclusions to prohibit persons with potential vested interests from holding the position of independent director. The new definition of ‘independent director’ excludes, inter alia, (i) shareholders holding more than 10% of the shares of the company or its affiliates and (ii) representatives of a shareholder holding more than 10% of the shares of the company or its affiliates, from holding the position of independent director.

Companies impacted by this amendment would be well advised to seek legal assistance to better understand the implications of the amendment for the composition of their Board of Directors and Audit Committees.