Briefing Note UAE Corporate Governance Regime

February 2010 Briefing Note UAE Corporate Governance Regime At a Glance > Corporate governance is the system by which companies are directed and controlled. It deals largely with the relationship between the constituent parts of a company the directors, the board (and its committees) and the shareholders and generally seeks to import a degree of independence on the boards of listed companies. > Corporate governance has been regulated in the UAE for a number of years by the UAE Securities and Commodities Authority ( SCA ) through Decision No. R/32 of 2007 on Corporate Governance (the Old Code ). > However, in October 2009, the UAE Minister of Economy issued Ministerial Resolution No. 518 of 2009 concerning Governance Rules and Corporate Discipline Standards (the ) which replaced the Old Code. > The refines, clarifies and updates the Old Code taking into account international standards and local law and circumstances. The is mandatory (i.e. there is no voluntary opt out) and must be complied with by most listed companies by no later than 30 April 2010. > The covers a number of issues including: - Board Structure - a balance of executive, non-executive and independent directors - Directors Duties - the duties and responsibilities of directors - Chairman and CEO - roles must be separated - Board Committees - appointment of an audit committee and a nomination and remuneration committee - Internal Control - including the appointment of a compliance officer - External Auditors - the restrictions on external auditors Contents At a Glance... 1 Application of the Law and the... 2 Mandatory Effect of the... 2 Key Features of Corporate Governance in the UAE... 3 Board Structure... 3 New Board Members. 3 Board Meetings... 4 Directors Duties and Liabilities... 4 Chairman and CEO... 4 Board Committees... 5 Directors Remuneration... 5 Internal Control... 6 Management Authorisation... 6 External Auditor... 6 Governance Report... 6 Contacts... 7 Appendix Comparison of Corporate Governance Regimes... 8 - Governance Reporting - annual compliance report to shareholders and the SCA This Briefing Note provides an overview of the principal contents of the New Code and the relevant law in the UAE on corporate governance. 1 UAE Corporate Governance Regime - February 2010

Application of the Law and the The UAE Commercial Companies Law 1984 (the Law ) applies to companies incorporated in the UAE. 1 For the most part, the Law (unlike the ) does not apply to foreign companies. 2 Therefore, where relevant, this Briefing Note outlines the requirements of the Law and the separately. The The applies to all companies and institutions whose securities are listed on the Dubai Financial Market ( DFM ) or the Abu Dhabi Securities Exchange ( ADX ) (except as set out below). The also applies to the board members (i.e. directors) of such entities. There are a number of exceptions: > companies and institutions that are wholly owned by the UAE Federal Government or a local government; > companies and institutions to which the UAE Federal Government or a local government subscribes that have been exempted by SCA from the application of certain provisions; and > although not specified in the, the UAE Ministry of Economy may grant other companies and institutions (e.g. foreign companies subject to laws that conflict with the ) an exemption from the application of certain provisions on case by case basis. Mandatory Effect of the Companies and institutions to which the applies are required to comply with the corporate governance requirements in the by no later than 30 April 2010. Unlike corporate governance regimes in certain other jurisdictions (e.g. the United Kingdom ( UK ) where compliance is not mandatory, but noncompliance must be publicly disclosed and explained), but in common with regimes in jurisdictions such as the United States ( US ), compliance with the is mandatory. Breach may result in penalties including a warning, suspension of listing, delisting or a fine. 3 For comparison purposes, the Appendix to this Briefing Note highlights some of the corporate governance requirements in the UAE, the Dubai International Financial Centre ( DIFC ), the UK and the US. 1 2 3 Unless such a company is incorporated in a free zone or is otherwise exempt from the provisions of the Law. Some provisions apply if the foreign company has a branch in the UAE. Article 16 of the. 2 UAE Corporate Governance Regime - February 2010

Key Features of Corporate Governance in the UAE Board Structure Responsibility for the management of a company is vested in the board of directors (the Board ). The Board should consist of between three and fifteen directors. 4 The chairman and the majority of the Board must be UAE nationals. If the proportion of nationals is less than the required number, the position should be rectified within three months otherwise resolutions adopted by the Board after this time are void. 5 A person may not be: (i) a director of more than five public joint stock companies; (ii) a chairman or vice chairman of more than two companies; or (iii) an executive managing director of more than one company, whose head offices are in the UAE. 6 The Board should include a balance of executive, non-executive and independent directors. The majority of the Board must comprise of nonexecutive directors and at least one third independent directors. 7 The New Code contains definitions for these categories of directors. The definition of independent director is narrower than in the Old Code. However, difficulties may arise from the inability of the Board to treat an otherwise impartial and independent director as independent - a flexibility that exists in other regimes such as the DIFC and the UK. New Board Members Board members are required to be elected at a general meeting. 8 However, the Board may appoint a director to fill a vacancy provided that the appointment is put to the vote at the next general meeting. 9 The requires a company to open nominations for Board membership by advertising in two daily newspapers (at least one Arabic newspaper). 10 The details of Board nominees must be published in the same daily newspapers at least two weeks prior to the meeting. 11 Biographies of proposed Board members must be circulated to shareholders prior to voting at a general meeting. 12 Once appointed, new Board members are required to be trained in relation to the company s organisational structure and business as well as his or her duties under the law and the company s policies. 13 4 Article 95 of the Law. 5 Article 100 of the Law. 6 Article 98 of the Law. 7 Article 3(2) of the. 8 Article 96 of the Law. 9 Article 102 of the Law. 10 Article 12(5) of the. The application period must be open for at least one month. 11 Article 12(5) of the. 12 Article 12(2)(b) of the. 13 Article 5(1) of the. 3 UAE Corporate Governance Regime - February 2010

Board Meetings Quorum at a Board meeting is attendance by a majority of the directors. Board resolutions are adopted by the majority of votes present or represented at the meeting and, in the event of a tie, the chairman has a casting vote. 14 Board meetings should be held at least once every two months and minutes should be taken. 15 The reinforces and elaborates on the Law. For example, the Board and its committees should be provided with sufficient and timely information to enable it to make sound decisions. 16 Directors Duties and Liabilities Board members can be liable for a number of matters under the Law. For example, the chairman and directors are liable towards the company, the shareholders and third parties for all acts of fraud, abuse of authority, any violation of the Law or the company s articles (e.g. voting where he/she has a conflict of interest) and for mismanagement. 17 The sets out a number of positive directors duties that echo those in other jurisdictions. 18 For example, duties of honesty and loyalty and to consider the company s and shareholders interests. Particular duties are set out in relation to non-executive Board members including the duty to participate in Board meetings to give an independent opinion. 19 Chairman and CEO Under the Law, the chairman must be a UAE national and must not hold a chairmanship/vice-chairmanship of more than two companies (see above). is silent as to the separation of the roles of chairman and managing director/ceo. The describes the duties of the chairman. 20 It also requires the chairman and managing director/ceo to be different individuals. 21 This is in line with the requirements in the DIFC and the UK. A significant proportion of 14 Article 105 of the Law. 15 Article 107 of the Law. 16 Article 5(2) of the. 17 Article 111 of the Law. 18 Articles 5(3) and 5(4) of the. 19 Articles 5(4) of the. 20 Article 4 of the 21 Article 3(3) of the 4 UAE Corporate Governance Regime - February 2010

companies in the Middle East and North Africa region combine these two functions. 22 Board Committees Under the, the Board of the Company must establish and maintain an Audit Committee and a Nomination and Remuneration Committee. Audit Committee The Audit Committee must comprise not less than three non-executive directors, the majority of which are independent directors (one of whom should head the committee). At least one member of the committee should have financial expertise. The committee should meet at least once every quarter or whenever necessary. The duties of the committee include, for example, reviewing the company s financial statements and accounting policies, reviewing financial control, internal control and risk management systems and overseeing the independence of the external auditor. 23 Nomination and Remuneration Committee The Nomination and Remuneration Committee must comprise not less than three non-executive directors, at least two of which are also independent directors (and one of these should head the committee). The duties of the committee include verifying the ongoing independence of independent directors, organising and following up of procedures to nominate board members and the formulation of a remuneration policy. 24 Other Committees Whilst not a requirement under the, a Board should establish other committees as needed for the effective management of the Company s business. For example, banks and Sharia a-compliant companies require additional Board committees whether due to regulation, structure or business need. Reporting Each of the committees must submit a written report to the Board specifying its procedures, results/findings and recommendations. 25 Directors Remuneration Under the Law, the remuneration of Board members may not exceed 10% of the company s net profits following deductions for depreciation, reserves and shareholder distributions of no less than 5% of the company s capital. 26 22 Corporate Governance Survey of Listed Companies and Banks across the Middle East and North Africa (2008) commissioned by the International Finance Corporation and Hawkamah. 23 Articles 6 and 9 of the 24 Article 6 of the. 25 Article 6(3) of the. 26 Article 118 of the Law. 5 UAE Corporate Governance Regime - February 2010

Whilst the makes clear that the company may pay ancillary expenses or fees or a monthly salary if a Board member works in a committee, makes special efforts or undertakes additional duties beyond the normal duties of a Board member, it is unclear whether or not such payments are subject to the limit set out in the Law (see above). 27 Internal Control The requires that the Board establishes (in consultation with management and for implementation by an internal control department) a precise internal control system to, amongst other things, assess risk management, sound application of governance rules and compliance with applicable laws, regulations, resolutions and internal policies and procedures. A compliance officer must also be appointed to verify the scope of compliance by the company and its employees with laws, regulations and resolutions. 28 Companies are likely to seek external advice from advisers in designing and implementing an internal control system and process. Management Authorisation The allows for the delegation by the Board of authority in management matters to the company s management provided that such delegation is specific in terms of scope and duration. 29 External Auditor The requires an external auditor to be independent from the company and its Board. The external auditor may not perform other services for the company (such as, for example, consultancy services) that may affect its decisions and independence. 30 Although the Old Code contained a similar prohibition, the goes further in limiting the non-audit services that can be provided by an external auditor. Governance Report The requires a governance report in the prescribed form to be published and sent to the SCA on an annual basis or upon request. The information required will include statements as to the company s corporate governance principles, violations of the (including causes and methods of remedy and avoidance of future occurrence) and information on the board and CEO. 31 Companies are therefore required to monitor their own compliance with the on an ongoing basis and notify the SCA of any violations or breaches of the. Such information may result in the SCA imposing some form of penalty on the relevant company. 32 27 Article 7 of the. 28 Article 8 of the. 29 Article 11 of the. 30 Article 10 of the. 31 Article 14 of the. 32 Article 16 of the. 6 UAE Corporate Governance Regime - February 2010

Contacts Contacts For further information please contact: Ewan Cameron Regional Senior Partner, Dubai (+971) 4 369 5810 ewan.cameron@linklaters.com Scott Campbell Partner, Dubai (+971) 4 369 5811 scott.campbell@linklaters.com Nick Garland Partner, Dubai (+971) 4 369 5818 nick.garland@linklaters.com Hardeep Plahe Managing Associate, Dubai (+971) 4 369 5820 hardeep.plahe@linklaters.com Omar Rashid Managing Associate, Dubai (+971) 4 369 5860 omar.rashid@linklaters.com Authors: Linklaters This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.. All Rights reserved 2010 Linklaters converted to Linklaters LLP on 1 May 2007. References in this document to Linklaters for the period following 1 May 2007 accordingly refer to Linklaters LLP and, where relevant, its affiliated firms and entities around the world. Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. Suite 4, Third Floor Gate Precinct Building 3 Dubai International Financial Centre PO Box 506516 Dubai United Arab Emirates Telephone (+971) 4 369 5800 Facsimile (+971) 4 369 5801 Linklaters.com A11660014 marketing.database@linklaters.com 7 UAE Corporate Governance Regime - February 2010

Appendix Comparison of Corporate Governance Regimes The table below contains a high level comparison of the corporate governance requirements in the UAE, the DIFC, the UK and the US. Topic UAE DIFC UK US Requirement for independent directors One third At least 2 Half 33 Majority 34 Separation of roles of Chairman and CEO 35 Audit Committee Nomination and Remuneration Committee(s) 36 37 38 39 Internal controls External auditor independence Is compliance mandatory? 40 41 33 A lower requirement applies to smaller companies (i.e. companies below the FTSE 350 throughout the previous reporting year). 34 However, the audit committee must consist of only independent directors. 35 The SEC has adopted rules requiring issuers to disclose why the Chairman and CEO positions are combined or separated. 36 The role of Nomination Committee and Remuneration Committee is combined in the UAE. 37 The Nomination Committee and the Remuneration Committee are separate. The establishment of these committees is not mandatory. 38 The Nomination Committee and the Remuneration Committee are separate. 39 The NYSE requires separate committees known as the Nominating/Corporate Governance Committee and the Compensation Committee. The Nasdaq does not require separate committees, however it does require that independent directors make all decisions relating to such topics. 40 The UK adopts a comply or explain approach. 41 The SEC generally requires disclosure, while the NYSE and Nasdaq generally require compliance. 8 UAE Corporate Governance Regime - February 2010