Omani LLCs: The Optimum Approach To Drafting Constitutive Documents

Key features of the Oman LLC - is it the appropriate corporate form for a particular business venture and investor relationship?

An “LLC” is probably in practice the form of limited liability Omani company (whether wholly Omani, or mixed Omani/foreign owned) most frequently chosen by investors for the conduct of business in Oman. The reasons for this choice are typically the lower minimum capital requirement of an Oman LLC, and a perception that an LLC is generally simpler and cheaper to operate, with fewer regulatory requirements, in comparison with an Oman joint stock company (an SAO) (either closed or public).

However, if an LLC is the chosen corporate vehicle, it is important for its founding shareholders to recognise at the outset the key differences between an Oman LLC and joint stock company, to be sure that the LLC form is in fact the optimum form of corporate vehicle for their proposed shareholder relationship and the achievement of the proposed corporate objective. Key LLC features which differ from those of an Oman SAO are as follows:

• a “shareholder”, or more accurately a “partner”, in an LLC should be regarded as having more of a “participating interest” in the LLC than as holding “shares”, since under the Commercial Companies Law promulgated by Sultani Decree 4/74 (the CCL), an LLC’s shares may not be represented by negotiable instruments;
  
• under the CCL, unlike an SAO’s shares, an LLC’s shares are not mortgageable, so an LLC is not an appropriate corporate form if company shares need to be charged to lenders as security for debt finance;


• an LLC’s shares must be fully paid up on subscription, unlike an SAO’s shares, the value of which is only required to be paid as to 50% on subscription with the remaining 50% payable within three years of incorporation;


• the sale of existing LLC shares are subject to a mandatory pre-emptive purchase right of the other partners, which probably cannot be effectively waived in advance of the proposed sale;


• an Oman LLC, by law, may not be managed by a board of directors. The CCL prescribes that an LLC’s management function is divided between managers (i.e., natural persons) appointed in this capacity by the partners, and the partners themselves, with the managers generally responsible for the LLC’s day-to-day management decisions and the partners for the LLC’s more strategic management decisions. Accordingly, if investors wish the company they incorporate to be managed by a board in the manner of a common law limited liability company, an SAO is likely to be a much more appropriate form of Omani company than an LLC. If an LLC is the chosen corporate form, the partners need to be alive to the fact that certain management decisions will need to be approved by a partners’ resolution rather than a decision of the manager(s).

Having said this, if the statutory features of an Oman LLC as described above are considered by investors to be generally appropriate for their purposes, the law applicable to an LLC allows its partners significant flexibility as to the terms on which they contract with respect to the LLC.

An LLC’s corporate agreements - constitutive contract and partners’ agreement

An LLC’s primary corporate document is its constitutive contract which is required to be registered with the Oman Ministry of Commerce & Industry (MOCI). LLC founders often elect to use the MOCI’s standard short form constitutive contract (which contains the bare minimum of corporate terms, e.g. the agreed corporate name, address, capital, partners and their participating interests, objects, etc). In accordance with its terms, the short form contract will be supplemented, where it is silent, by the applicable provisions of the CCL. In addition, LLC founders typically further supplement the short-form constitutive contract by an unregistered partners’ agreement, which may contradict the registered constitutive contract or mandatory provisions of the CCL.

We would not recommend that LLC founders adopt this approach to the incorporation of their LLC for the following reasons. Firstly, the standard terms of the CCL, which will as a matter of law be incorporated into the short-form constitutive contract, may not reflect the founders’ intentions as to their relationship as LLC partners and the operation of the LLC. Secondly, terms of a partners’ agreement which contradict those of a registered short-form constitutive contract, as amplified by the CCL, will not be enforceable. The CCL, although containing some mandatory requirements, allows much greater flexibility to founders as to the terms of their constitutive contract than might be initially thought. Accordingly, contracting on the basis of an expanded and “customised” constitutive contract in the manner permitted by the CCL, together with a partners’ agreement that merely amplifies and does not contradict this form of constitutive contract, is much more likely to provide an LLC’s founders with enforceable corporate contracts on terms which reflect their mutual intentions.

Customising a constitutive contract - key areas where the CCL permits flexibility in constitutive contract terms

As mentioned above, the CCL imposes some mandatory (including some minimum) requirements with respect to an LLC’s constitutive contract. However, the CCL also permits a substantial degree of flexibility as to constitutive contract terms. The following are three key areas in respect of which the CCL permits flexibility, and which can therefore be provided for in a constitutive contract in a manner which reflects the founders’ intentions as closely as the CCL permits.

Partners’ meeting approvals

The CCL prescribes the minimum quorum for an LLC’s partners’ meetings. This minimum quorum can however legitimately be increased in a particular constitutive contract, if the founders wish to ensure that a certain percentage (including 100%) of the “shareholding” is required to constitute a valid partners’ meeting.

The CCL also prescribes minimum percentage approvals for various kinds of partners’ resolutions. Once again, a constitutive contract can legitimately require increased approval percentages for particular types of partner resolutions, if this reflects the founders’ intentions as to partner decision-making.

Partners’ participation in LLC profits and losses and net assets on dissolution

The CCL does not require an LLC’s partners to participate in the LLC’s profits and losses in the same proportions as their capital participations. The CCL merely provides that a constitutive contract may not deprive a partner from any profit/loss participation. Accordingly, under both law and practice, a constitutive contract may specify each partner’s profit/loss participation as agreed by the founders, even down to a very small percentage participation, so long as it does not amount to nil.

Management control

The CCL provides that an LLC’s mangers will be appointed by or pursuant to its constitutitve contract, provided that the same does not contravene mandatory provisions of law. The MOCI’s standard short-form constitutive contract actually names the first managers, incidentally requiring an amendment to the constitutive contract (and thus 75% capital approval) on each change of manager. However, naming the individual managers from time to time in the constitutive contract is not a mandatory requirement of law. A constitutive contract can legitimately be drafted so that, for example, a manager may be appointed either by the partners’ meeting (on majority approval of those attending a quorate meeting) or by the decision of one partner only. As regards dismissal of a manager, the only mandatory CCL provision is that the partners’ meeting cannot be deprived of its statutory right to dismiss a manager. However, once again, providing in a constitutive contract that one partner only may also be so empowered is not contrary to mandatory law. Accordingly, by customising in this way the management provisions of a constitutive contract, it is possible to ensure, if desired, that in almost all circumstances an LLC’s management is within the control of a named partner.

Conclusion

In conclusion, we would recommend the following for investors considering the incorporation of an Oman LLC as the vehicle for their conduct of business within Oman. First, investors should consider whether the statutory characteristics of an LLC as described at the beginning of this article are compatible with their objectives, particularly in terms of their relationship as corporate shareholders/partners. If so, investors should seek to expand on the MOCI standard short-form constitutive contract and additionally customise it to achieve their mutual objectives in a manner permitted by law. In so doing, investors will be ensuring that their mutual agreement regarding the LLC is to the greatest extent possible enshrined in a registered contract which complies with the law, thus rendering its enforceability more certain. Finally, to be enforceable, any additional partners’ agreement should merely amplify matters agreed in the constitutive contract, and in particular should not contradict matters of Oman law as agreed under the constitutive contract.

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The Complexity of Jurisdiction

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An issue which is often overlooked when drafting a contract is the clause about jurisdiction.

“Jurisdiction” refers to the entity which will hear any dispute between the two parties. Dispute resolution is normally performed by the courts or via an arbitration panel. However, it is not uncommon to read legally inaccurate contractual provisions, which state something such as: “The Oman Courts will settle any dispute via arbitration.” Sentences such as these can lead to confusion as regards what the parties’ intention actually was; one party will argue that it is clear that the Oman Courts have jurisdiction to hear the dispute, whereas the other party might argue that the Oman Courts cannot hear the dispute, as the Oman Courts are only empowered by the clause to decide who will act as arbitrator. The confusion arises because resolution via the courts is something different to resolution via arbitration.

Strictly speaking, when the parties agree in a contract that the Courts of a certain country will have jurisdiction, the ensuing case is known as “litigation” and the ultimate decision by the judges is known as the Court’s “judgment”.

In contrast, when the parties agree in a contract that the dispute will be settled by arbitration, the ensuing proceedings are known as “arbitral proceedings”, and the ultimate decision of the arbitrator(s) is known as the “arbitral award”.

It is vital, before entering into a contract, to think very carefully about the entity which would have jurisdiction to hear any later dispute. Let us say that an Omani entity is considering entering into a contractual relationship with an English company. The Omani company may want the jurisdiction to be “Omani Courts”, on the basis that the procedures, etc of the courts here are well-known and familiar to that entity. However, what happens if the two entities later have a dispute which is settled by a final, non-appealable Omani court judgment? The difficulty may only be faced by the Omani entity at that juncture, because obtaining a court judgment is not the same as actually receiving the monetary damages/compensation in your company’s bank account.

The truth is that one has to think, before even entering a contract, as to what might happen if you have a dispute at a later date with your contractual counter-party. Let us say, in the example above, that the English company simply decides not to abide by the final Omani court judgment and, frankly, tries to disregard and avoid it. Let us also suppose that the English company has no assets in Oman and no presence in Oman.

The Omani company has a paper final Omani Court judgment in its favour, but how will it enforce that judgment (ie get the money which the English company has been ordered to pay)? The fact of the matter is that the Omani company may then have to start fresh court proceedings in England, where the Omani court judgment may only have evidential, rather than binding, weight. This could lead to extra cost and years of dispute, at the end of which the Omani company may not get what was decreed by the Omani Courts.

But what would have happened if the contract in question stated that any dispute between the Omani company and the English entity would be settled by arbitration in Muscat? The answer is that the Omani arbitral award would be automatically enforceable in England against the English entity. The reason for this is because both Oman and England have signed the New York Convention on the recognition of foreign arbitral awards. In the above specific circumstances, an Omani arbitral award would have much greater value to the Omani entity as compared with an Omani court judgment.

To conclude, legal advice is always recommended as regards the drafting of the jurisdiction clause. The decisions made pre-contract in this respect could be crucial to your business in a few years’ time.

-James Harbridge, Partner (Oman)

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Focus on Litigation: Employment Letters

An issue in Oman which can cause many problems is the simple letter offering employment. To minimise these problems, it is important to bear several points in mind.

First, it can be helpful to make offers of employment time-limited, so that the recipient of the offer must decide whether to accept the offer within a reasonable timeframe, and cannot argue that the offer is still existing many months after the offer was made.

Furthermore, it is important to explicitly state in the offer letter that the offer of employment is subject to the fulfillment of certain standard conditions, such as the employee’s completion of a three-month probationary period (as set out in Oman’s Labour Law, Sultani Decree No. 35/2003), a reference check by the employer, and the employee’s passing of a medical examination.

In addition, it may be helpful to explicitly list in the employment offer letter examples of employee misconduct which would be grounds for fair and justified dismissal of the employee pursuant to the Labour Law.

The employment offer letter should be signed by both the employer and the employee before the employee begins work.

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Events of Default in a Loan Agreement

There is typically an ‘events of default’ clause in every loan agreement, except for those loan agreements relating to an overdraft facility only. (An overdraft facility is simply repayable on demand by the lender so no events of default are required.)

The events of default clause sets out the events or circumstances that will give the lender the right to accelerate the repayment of the loan (i.e., declare the loan due and payable before the scheduled repayment date), cancel any further loan installments due under the loan agreement and/or declare the loan immediately due and payable. In addition, the lender will have the right to enforce any security. These are clearly drastic powers which should only be exercisable while a default is continuing, and should cease once the default has been remedied or waived.

There may be a large number of triggering events or circumstances – perhaps twenty or more – listed in the events of default clause. Typically, the clause would include at least the following as events of default:

• non-payment of any amount due under the loan agreement;
• breach of the financial covenants or any other obligation in the loan agreement or any security documents;
• cross-default (a default between a third party and the borrower in relation to any other financial indebtedness);
• insolvency; and
• material adverse change.

This article explores two key events of default from the above list – cross-default and material adverse change – in further detail.

Cross-Default

A cross-default provision allows the lender to call a default under the loan agreement when there is a default between a third party and the borrower in relation to any other agreement, even if such third party does not choose to exercise its right to call a default under the other agreement. The lender could be in a difficult position if the borrower defaults under other agreements (particularly other facility agreements) and the lender is unable to protect its own position. The lender will clearly need to know that the borrower is in default under the other agreements, therefore, the information undertakings in the loan agreement should include requiring the borrower (i) to notify the lender if there is a default under the loan agreement, and (ii) to confirm to the lender (following a request from the lender) whether there is a default at such time.

For the borrower, it is important to ensure that the scope of this provision is limited appropriately because a technical breach of one agreement could trigger cross-defaults in other agreements, creating a domino effect with serious consequences. The borrower should ensure that the provision is subject to a threshold de minimis amount (which amount would depend on the borrower, the size of the loan and the other agreements). The cross-default provision should also be limited to other agreements relating to borrowings, or perhaps to a wider class of financial indebtedness, but should exclude trading contracts where there could be late payments or other breaches in the ordinary course of performance of those contracts. There should also be no default if the relevant debt is being disputed in good faith, or is paid within applicable grace periods, and there should be time to pay amounts repayable on demand.

Material Adverse Change

However, from the borrower’s perspective, the uncertainty that a material adverse change provision introduces can be problematic and, while it may rarely be used by the lender to call an event of default, there are occasions where such provisions have been used to freeze facilities. At the very least, it can give the lender leverage (e.g., to impose a tough deal or higher pricing) in negotiations with a borrower which is in a difficult situation. Generally, a borrower should seek to ensure that any material adverse change provision (i) is not triggered by deterioration in the condition of individual companies, but only by deterioration in the condition of the group as a whole, and (ii) is limited to something which materially affects the ability of the borrower to comply with its payment obligations under the loan agreement.

The material adverse change provision is usually very broadly drafted to protect the lender from any unforeseen adverse change. There will often be specific events of default to cover the areas of concern that the lender can foresee. The broad nature of this provision means that a lender is often reluctant to call a default based on it, as it is not clear-cut whether it has been breached or not. Lenders usually prefer to call a default following a non-payment as there is no room for discussion as to whether the payment has been made or not – it is just a question of fact.

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Sharia Law in Oman

Companies that are new to Oman often ask us about Sharia law (Islamic religious law) and its influences on Omani law. This article provides a brief introduction to Sharia law and highlights some key points that companies doing business in the Sultanate should bear in mind.

What is Sharia law?

Sharia law is the divine law of Islam. The Arabic word sharia literally means ‘way’ or ‘path’.

Traditionally, there are two primary sources of Sharia law. The first is the Qur'an, the holy book of the Islamic religion. The second is the Sunnah, which records the sayings and deeds of Islam’s founder, the Prophet Mohammed.

In addition to these two primary sources, Islamic jurisprudence (figh) recognises a number of secondary sources, which may include consensus analogical deduction and reasoning by religious scholars. As there are a number of schools of Islamic jurisprudence, the selection, weight and prioritisation of secondary sources vary across Islamic religious communities.

How does Sharia law influence Omani law?

In principle, Sharia law is the bedrock foundation for all Omani law. The Basic Law of the Sultanate of Oman (Sultani Decree No. 101/1996), which serves as a form of national constitution, sets forth the fundamental principles which guide the Sultanate’s laws and policies. In Article 2, the Basic Law states that “The religion of the State is Islam and the Islamic Sharia is the basis of legislation”.

At a practical level, however, Sharia law in Oman is manifested principally in family law matters such as marriage, divorce and inheritance (Miraath). In family law, Sharia law actively governs and all matters are carried out strictly in accordance with Sharia principles.

When it comes to the Omani law governing commercial matters, however, Sharia law typically supplies guiding background principles rather than specific rules.

Indeed, Article 5 of the Law of Commerce (Sultani Decree No. 55/1990) provides that the following hierarchy – placing Oman’s explicit commercial law provisions at the top – shall apply to commercial transactions:

“If there is no legal provision then custom shall have effect and special or local custom shall take precedence over general custom. If there is no custom then the provisions of the noble Islamic Shari’a shall apply, and after that the principles of equity.”

A number of Omani Supreme Court decisions, the latest of which was issued in 2008, have confirmed that the role Sharia law plays in commercial transactions is different to that which it plays in other areas such as family law. In commercial matters, Sharia law will typically not come into play, except perhaps to fill in gaps among the explicit provisions of Oman’s commercial laws.

What does Sharia law mean for businesses in Oman?

The main takeaway for businesses is that Oman takes a strictly Sharia-based approach to family law matters, but takes a more secular and capitalistic approach to most commercial law matters. This means that Omani companies are usually free to follow standard international commercial practices without restriction from Sharia law. For example, while other countries may require the use of traditional Islamic financing methods such as Sukuk, Murabaha and Mudharaba, Oman typically does not require this.

The key caveat, however, is that businesses should be mindful of areas where family law can intersect with commercial law. The prime example of this is that inheritance issues – a family law matter adjudicated by Sharia law – can affect a company’s succession planning or shareholder composition. Navigating these intricacies is yet another way in which legal professionals can assist companies in crafting their corporate structures.

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Company Formation FAQ’s

We frequently assist clients in the formation of Omani companies. Clients who are not accustomed to doing business in Oman tend to have quite a few questions regarding the company formation process, on everything from complex subjects like corporate governance to more mundane - but important – things like naming the Omani entity. From time to time we publish such ‘frequently asked questions in the Client Alert for the benefit of all of our readers.

What name should we give to our Omani company?

For many of the clients that we help to form an Omani corporate entity, one of their first questions is what name they should give to the new company. Many wish to include the word “Oman” in the name, as in “Acme Widget Company (Oman) LLC”. However, due to internal regulations of the Ministry of Commerce and Industry, an Omani company must have a minimum capitalization of 500,000 Omani Rials (approximately US$1,300,000) in order to carry “Oman” in its name. This is significantly higher than the 150,000 Omani Rials (approximately US$400,000) capitalization that is normally required for Omani companies with foreign ownership. As a result, many of our clients choose names for their Omani entitiy that reference the region rather than the country, such as “Acme Widget Company (Gulf) LLC” or “Acme Widget Company (Middle East) LLC”.

How long does it take to form an Omani company?

We normally estimate that it takes one to two weeks to set up an Omani company once all of the appropriate corporate paperwork has been arranged, although the formation process can sometimes take as little as a few days depending on the availability of government authorities. Careful planning is the key to maximizing the speed of the process and minimizing headaches, and professional advisors can play a helpful role in determining which documents are necessary and how to prepare and/or obtain them most efficiently.

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Focus on Litigation: The Enforceability of Omani Court Judgments

The enforceability of Omani court judgments is an issue which can cause concerns.

A Primary Court judgment is not enforceable, provided an appeal is filed with the Appeal Court no more than 30 days after the oral pronouncement by the Primary Court of its judgment.

However, an Appeal Court judgment is, prima facie, enforceable – even though an Appeal Court judgment can be appealed to Oman’s third and final tier of justice, the Supreme Court. As a result, the loser of an Appeal Court case is best advised to file an appeal to the Supreme Court, and also file an application with the Supreme Court, requesting the suspension of any enforcement of the Appeal Court judgment.

These scenarios are intricate and somewhat complex, so we recommend that detailed legal advice is sought as early as possible in order that rights are best protected.

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The Basic Law of Oman: Principles for Business

The Basic Law of the Sultanate of Oman, promulgated as Royal Decree 101 of 1996, holds a unique place in Oman’s pantheon of laws.

All other royal decrees are statutes that govern a particular area of law, setting out specific rules and providing guidance for governmental authorities to enact further regulations.

The Basic Law is different. It forms the bedrock of all Omani law. As its name suggests, the Basic Law is a foundational document that is very broad in scope. Although the Basic Law does contain specific directives, such as on succession procedures for the position of Sultan, it mainly addresses the overall structure of Omani government, including the legislative and judicial framework. The Basic Law enshrines the fundamental rights of the citizens and the guiding principles of the State.

Several of these principles, in particular, can be illuminating to companies that seek to do business in Oman:

“The basis of the national economy is justice and the principles of a free economy … constructive, fruitful co-operation between public and private activity … to achieve economic and social development that will lead to increased production and a higher standard of living for citizens ….”

The above-quoted text, from the first of the Economic Principles listed in Article 11 of the Basic Law, is perhaps the most important to companies, because it embodies the Sultanate’s economic approach. The Omani government views foreign investment and cooperation between the public and private sectors as key to increasing the nation’s workforce skills, economic development and living standards. As we have seen in our own work, most Omani businessmen and government officials are very welcoming, professional and helpful because they truly want Oman to be ‘Open for Business’.

“Freedom of economic activity is guaranteed within the limits of the Law and the public interest, in a manner that will ensure the well-being of the national economy.”

This principle sums up another key feature of the Sultanate’s approach to business: Oman has not let its zeal for further economic development cause it to abandon prudent and upstanding business practices. We have often heard Omani businessmen and government officials make clear that they want long-term, responsible development, not the ‘fast buck’ or ‘hit-and-run profits’. Oman is most interested in long-term, conservative and sustainable business.

“The State encourages saving and oversees the regulation of credit.”

This principle, in some ways, may be the best sign of all for companies seeking to do business in Oman. It reflects Oman’s culture of financial conservatism, which has helped the Sultanate avoid the excesses that have put some of its neighbors under severe stress. Omanis plan carefully not just to be open for business today, but for generations to come.

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Legal Developments in Oman - March 7, 2011

Guarantees and Indemnities
Guarantees and indemnities are both forms of what is known in legal terminology as ‘suretyship’. Suretyship refers to a promise by one person to be liable for the payment of another person’s debts or the performance of another person’s obligations in the event of that person’s failure to pay or perform (or a failure in relation to some other condition).

Guarantees and indemnities are often confused, but there are important distinctions between them.

Guarantees

A guarantee is a promise by the guarantor to a third party that a principal will meet its obligations to the third party – whether by the payment of a debt or by the performance of a duty. In essence, the guarantor says to the third party, “if the principal fails to pay you or perform for you, I will do so.”

Indemnities

An indemnity is a promise to be responsible for another party’s loss and to compensate them for that loss on an agreed basis. For example, the indemnifying party might say, “if it costs more than $100 to repair your car, I will reimburse you for any amounts over $100.”

Guarantees vs. Indemnities

The key distinction between a guarantee and an indemnity is that a guarantee presupposes an original contract, while a contract of indemnity is original and independent.

A guarantor cannot be liable for anything more than what was promised by the principal. The concept is that the obligations of the guarantor stand behind those of the principal and only come to the fore once the principal is in breach of its obligations. The guarantee can therefore be seen to be an accessory contract to the principal’s main contract.

An indemnity, in contrast, provides for concurrent primary liability with the principal to answer for a third party’s loss.

Whether the contracting parties choose to use a guarantee or an indemnity, it is important to record all important contractual promises in writing.

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Legal Developments in Oman - March 2, 2011

Audit Committees
The Commercial Companies Law requires the board of directors of an Omani joint-stock company to form various committees from among its members to discharge some of the board’s delegated functions.

One such committee is the audit committee, which a publicly listed joint-stock company (an “SAOG”) is required to have. The composition and functions of an SAOG’s audit committee are prescribed by the ‘Rules on the Constitution of Audit Committee’ published by the Capital Markets Authority.

Composition and Purpose of the Audit Committee

The audit committee must consist of at least three non-executive members of the company’s board of directors – i.e., directors who are not salaried employees of the company. A majority of the audit committee members, including the chairman of the audit committee, must be independent directors – i.e, they and their first-degree relatives must not have occupied a senior post in the company (such as Chief Executive Officer or General Manager) over the past two years. At least one member of the audit committee must have financial and accounting expertise.

The purpose of the audit committee is to assist the board in ensuring the:

• reliability of financial reporting;
• effectiveness of internal controls; and
• legal and regulatory compliance.

The board decision appointing the audit committee should, inter alia, specify the terms of reference for the committee’s functioning, the location and quorum requirements for the committee’s meetings, and the methodology for the committee’s execution of its responsibilities.

The audit committee should specify in its charter for the board’s approval its objectives, membership, powers, responsibilities and liabilities, and the remuneration of its members.

Functions of the Audit Committee

An audit committee’s predominant function is the oversight of financial reporting and internal disclosure mechanisms within the company. This is why the Capital Market Authority requires audit committee members to be non-executive (and majority-independent) directors: an independent audit committee significantly enhances internal controls, the financial reporting process and corporate governance.

Additionally, the audit committee may also carry out related functions such as supervising the company’s regulatory compliance and business ethics, and developing independent reporting mechanisms that help the company detect and combat fraud and financial irregularities.

As described below, the CMA Rules delineate the functions for an audit committee and the specific responsibilities within each function.

External audit functions include:

• Recommending external auditors and overseeing their terms of engagement, independence, qualifications, and performance; and
• Reviewing the external audit plan and ensuring for the external auditors the accuracy and completeness of, and access to, documentation.

Internal audit functions include:

• Oversight of the internal audit plan and the performance of internal audit function and its efficacy; and
• Monitoring the adequacy of internal control mechanisms by analysing periodic reports generated by the auditors.

Financing reporting functions include:

• Developing a financial reporting system to detect financial irregularities and fraud based on best practices in accounting policies and principles;
• Monitoring any change in accounting policies and any significant departure from international accounting standards or non-compliance with the disclosure requirements prescribed by the CMA;
• Ensuring the accuracy of financial reporting generally and the accounting principles adopted; and
• Reviewing quarterly and annual financial reports and, in particular, the qualifications in the draft reports.

Corporate governance functions include:

• Serving as the liaison among the board of directors, external auditors and internal auditors and financial management;
• Reviewing risk management policies and practices;
• Reviewing proposed related party transactions and making appropriate recommendations to the board; and
• Formulating rules for small value-related party transactions without requiring the prior approval of the board or the audit committee.

Finally, many private companies also have audit committees that perform many of the same functions as public company audit committees. Although the Capital Market Authority’s ‘Rules on the Constitution of Audit Committee’ are not mandatory for companies that are not publicly listed, these rules represent the type of robust audit framework that every company should have to ensure strong and effective internal controls and financial integrity.

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