Home / Knowledge Hub / News

Introduction to Corporate Governance Regimes in Oman: Examining Directors Duties

Corporate Associate and Legal Consultant at a leading International Law Firm. Licensed before Primary Courts in the Sultanate with particular experience and interest in Corporate, Commercial Matters and Mergers and Acquisitions.

As a matter of introduction, the main backbone legislation for determining the duties that are required from directors are the Code of Corporate Governance of 2016 and the Omani Commercial Companies Law of 1974. The Code of Corporate Governance provides a legal framework and clarifies the principles for the management and control of SAOGs listed on the Muscat Securities Market (MSM), and outlines the composition of the board as mentioned in Principle 2 in the case for Omani companies, as well as the functions and powers attributed to them in Principle 3.

The case with LLCs

It is worth mentioning that under the Omani laws and regulations mentioned above, only a joint stock company, whether closed or public, is required by law to appoint a board of directors (BoD) as the company's management arm. Omani limited liability companies (hereinafter abbreviated as 'LLC's') are not required by law to have them, instead they shall be managed by one or more 'executive managers', who are required by law to be natural persons, they may or may not be shareholders in the company. Omani LLCs are relatively simple to form, in general they are subject to straightforward annual statutory filing requirements, therefore they are typically the vehicle of choice for most business operations in Oman.1

Article 152 of the Omani Commercial Companies Law provides:

"The Managers of the Limited Liability Company may perform all acts in pursuance of the Company's objectives unless their authority is limited by the Company's Memorandum of Association or by subsequent agreements made between all the partners of the Company and registered in the Commercial Register.

The Managers, however, shall not perform the following acts unless they are expressly authorized to do so by the Company's Memorandum of Association or by a unanimous decision of all the partners:

A. Make donations, except donations required by business and, in ordinary, small amounts.

B. Sale of all or a substantial part of the Company's assets.

C. Mortgage or pledge the Company's assets except to secure the Company's debts incurred in the ordinary course of the Company's business.

D. Guarantee debts of third parties, except guarantees made in the ordinary course of business for the fulfilment of the Company's objectives." 2

As is evident from the article and its subsections, the principle document that determines the duties of directors in LLCs is the memorandum of association of said company. Unless explicitly stated within the memorandum of association, the managers of an LLC can give donations (which are generally prohibited as per subsection A), the managers can also sell substantial parts of the company and mortgage, pledge or guarantee debts using the business's assets.

As provided in the article, managers of a Limited Liability Company in the Sultanate must act in the best interest of the business and pursue the company objectives mentioned in the constitutive contract or memorandum of association. It is common practice amongst businesses in Oman to establish a 'Board of Directors' even though they are not legally required to do so. Due to ease of establishment, LLCs are currently the vehicle of choice when doing business in Oman.

The importance of a manager abiding by the duties and prohibitions instilled by the above article or explicitly included in the memorandum of association arises from the fact that article 153 states that the company shall be bound by all acts performed by the manager acting in the name of the company and within the scope of their respective powers. Considering the acts of the manager as an act of the company therefore creates the need to limit their powers. The powers of a manager are limited by article 152 of the Omani Commercial Companies Law of 1974 or by the company's memorandum of association. The law furthered the duties required of respective managers and instilled a financial duty under article 154 where it states that:

"In respect of each financial year, the managers shall withhold 10% of the net profits of the Company after deduction of taxes as a legal reserve until such reserve amounts to, at least, one third of the capital of the Company. The legal reserve shall not be distributed to the Company's partners as dividends"3

The case with Public Joint Stock Companies (SAOGs)

In the case of Public Joint Stock Companies (SAOG's), which are procedurally and structurally more complex than the LLC's, the primary legal framework is the Code of Corporate Governance. The Code was issued on 22 July 2015 and came into force 22 July 2016. However, it must be noted that Principle 8, regarding independent directors, will apply to each publicly listed joint stock company upon the expiration of the validation period of the board of directors (regardless of whether the validation period expires before or after 22 July 2016).4

In the case of SOAG's in Oman, they are typically directed towards foreign investors. Changes made by the Ministry of Commerce and Industry (MOCI) provide that all new Omani public joint stock companies must permit at least 49 per cent non-Omani ownership. Subject to further governmental approval, an even high percentage of foreign ownership is permitted, usually up to 65 per cent. In special circumstances, for projects which "contribute to the development of the national economy" and have been approved by the Development Council following a recommendation from the Minister of Commerce and Industry, up to 100 per cent of the Omani company can be foreign owned.5 However one should note that there is no standardized test to determine which projects enhance and develop the national economy, the decision is based solely on the aforementioned recommendation from the minister and the approval of the Development Council.

Concerning the Corporate Governance vis-à-vis directors' duties in SAOGs in Oman, one should first and foremost examine and dissect the Code of Corporate Governance (hereinafter known as CCG) promulgated in July 2015 which came into action July 2016. The objective of the CCG is, "To provide a binding and optimum framework for corporate governance in public stock companies vis-à-vis their direction, organization and supervision, through a series of specific and defined policies, processes and procedures."6 The CCG "shall apply to all public joint stock companies (the "company", "corporate", "companies" or "corporates") listed on the Muscat Securities Market."7 This leaves no room for further explanation as to whether only SAOGs are concerned with the scope of application of said code. It is worth noting that the code has fourteen principles in total and those principles are espoused with explanatory notes and procedural guidelines.

Principle 2 of the CCG outlines that the most important objective for the Board of Directors is the company's interest above all else, and the implementation of accountability measures that seek to achieve the company's interest first and foremost. This can be done through the vehicle monitoring the members' performance to ensure active participation. It is also important that the board strives to ensure a level of effectiveness of internal control throughout the company as well as approve the internal regulations that deal with the management of company affairs. However, it is pivotal that the board does not interfere with the management's day-to-day activities or any other operational activity.8 Observing this point, explanatory note (a) to the second principle states that all members of a company's Board of Directors of a must be non-executive directors.

The Code also details minimum requirements the Board must adhere to, including but not limited to:

"defining the company's vision with relevance to its objectives and implementing methods to measure performance and keeping these updated regularly; monitoring the performance of the executive management, adopting a reasonable policy to delegate powers, determining the functions and powers they are to possess, and appointing rights and responsibilities of certain positions of the executive management; approving financial statements and commercial and financial policies in respect to its business activities; and establishing specialised committees and assessing the performance of the Board's specialised committees and executive positions at least once a year."9

The seventh principle highlights the point that, "The board of directors and the executive management shall achieve high standards of professional conduct and abide by professional ethics while performing their duties."10 Explanatory note (1) to the seventh principle provides that the board of directors shall draft an internal code of ethics and professional conduct. Annexure (2) of the code provides a model for the code of ethics and standard ethics this includes:

Professionalism: It is set out in the code that the director is required to possess apt knowledge of the performance of his/her duties as director. They are responsible for acquainting themselves with the adequate education and endeavor to improve their efficiency as director. The director is also responsible under the professional aspect of this standard code of conduct for the awareness and comprehension of the company's affairs and business dealings and operations.11

Due Diligence: The director must act with due diligence and care during the fulfilment of his duties as director of the company. Assisting the board of directors to improve the management of the company and to enhance and safeguard the shareholder's primary interest. The director is also required to attend all the meetings of the company and adhere to both ethical and legal dogmas.12

Integrity: The director is required by law to be honest at all times, act in good faith and perceive what is in the best of interest of the company at all times. The director must exercise and maintain independence when it comes to judgements and resolutions at all times. Any compromise to the independence of the director must be avoided. In the case where the director is appointed at the instigation of a major shareholder he shall at all times act in the interest of the company and the shareholders as a whole and not only in the interest of the shareholder who has nominated the director. Where any obligations to other persons or bodies preclude a director from taking an independent position on an issue, the director must disclose this position and refrain from taking part in the board's consideration of the issue.13

Conflicts of Interest: A director shall at all times maintain full transparency and strive to avoid personal and professional conflicts of interest that might hamper the best interests of the business (refer to point 3). Disclosure of all direct or indirect contractual interests with the company is required. Exploitation of board membership to hoard inappropriate and additional benefits is prohibited. Specifically, the director shall maintain the confidentiality of all information obtained in his capacity as a member. Any information that is not publicly available and might have an effect on the price of the company's securities and/or firm value shall not be provided to anyone who may influence offers of purchasing or selling of the shares. Full disclosure of any actual or potential conflict of interest must be made to the board. One must take into consideration the importance of potential conflicts, related or expected results. In the case of a conflict of interest arising, the director must refrain from participating in deliberations and voting on the subject of the conflict. It is recommended that the director exit the meeting and return all documents pertaining to the same issue. In the case of a continued material conflict of interest, the director must consider resignation from the board of directors. Ex officio information acquired by the director shall not be used. Finally, the director shall hold fast to and comply with regulations and directives in regards to the selling and buying of company stock as well regulations regarding share trading and the controls laid out by the board. Any dealings of the shares of the company based on short term considerations is prohibited.14

Compliance with the Law: The director is required to obtain all knowledge regarding the legal and regulatory framework that compromises the company's operation. The director is required to ensure full compliance in both his capacity as a director and as the company itself. The director is also required to obtain legal, financial and/or professional advice on the company affairs or on discharging of the director's fiduciary duties and obligations. In the case of a suspected conflict of interest arising or doubts as to the objectivity of the advice obtained, the director is required to seek advice from independent advisors and consultants outside of the company.15

Access to Information: The director is entitled to insist on procuring full and comprehensive information on all material developments in the company and employment such information to the benefit of the company whereby it will allow the director to play an effective role in the company's evolution. The director should insist on providing sufficient information to all other directors within appropriate time for them to consider the issues that are brought up by the information given to them by the director. In the case of lack of satisfactory information on any issue, directors may abstain from voting on particular issues due to the lack of sufficient time to address the issue at hand. It is might also be appropriate to not vote on any resolution rather they should strive to postpone it until such time when appropriate information is available.16 Conclusion and Legal Analysis

As is evident when legally analyzing the aforementioned Standards of Professional Conduct, it is organized into subheadings, each subheading deals with a duty that is required according to the model implemented by the director. However, it is worth noting that these standards were provided as a supplementary document to the Code of Corporate Governance and are considered a model that can be applied by Board of Directors of a company. Therefore, one should consider these standards as complimentary rules that may or may not be applied by the company. Quoting the explanatory point (1) to the seventh principle of the code, "The board of directors shall draft an internal code of ethics and professional conduct, such as those set out in Annexure (2) of this Code, to be adopted and implemented by the directors and executives."17 Hence likening the internal ethics code and professional conduct to those standards that were explicitly mentioned in the model, without enforcing the exact wording or structure of it. While this might be advantageous to the company, the ambiguity of such explanatory note on the principle does have its effects. For example, it is not clear in what form companies have the freedom in their internal code of ethics and professional conduct when compared to the model standard attached. Are companies to follow such model strictly or does the code give them some sort of leeway to shape and form each individual code of ethics drafting the duties required from directors?

Under article 102 of the Omani Commercial Companies Law of 1974, the board of directors of SAOGs and SAOCs shall have the full authority to perform all acts required for the management of the company for achievement of its objectives and for the implementation of resolutions adopted at the company's General Meeting. Only the relating Law and Articles of Association can limit those acts.

The article further prohibits members of joint stock companies from participating in the management of any other company in contention with that of the company, nor are they permitted to take advantage of any information accessible to them, or have any direct or indirect interests in the transactions or contracts concluded by the company, unless an exception applies.18

In conclusion, quoting the importance and correlation between board of directors and their duties, responsibilities and liabilities and an effective corporate governance regime or structure "People often question whether corporate boards matter because their day to day impact is difficult to determine. But, when things go wrong, they can become the focus of all attention. This was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of their own pockets"19 It is therefore evident that there is a correlation between the board's actions and their impact on the company.

Although a relatively new on the scene in the Sultanate, the Code of Corporate Governance mentioned in this article hailed favourable scholarly opinions regarding the effective strides it took in codifying the responsibilities and duties expected of directors in comparison to the otherwise ambiguous duties conferred under the Omani Commercial Companies Law of 1974. Considered new when compared to the global governance scene, it is one of the oldest in the Gulf Cooperation Council.20

In 1998, a collapse in the Muscat Securities Market was attributed to the self-audit, buying and selling, record keeping and lien/mortgage procedures of the market. This ultimately led to the focus to be entirely on the day to day practices rather than having a rather influential auditing role in the market which led to an unprecedented collapse in the market. Since the collapse of 1998, the reform procedures have focused on the restructuring of the relative industries and the division of three vehicles, the Capital Market Authority, Muscat Securities Market and Muscat Clearing & Depository (S.A.O.C). Having done that, Oman became the first market in the region to separate the legislative and auditory vehicles of the market from the executive vehicle. In order to attract more international investors, reform of the Omani Commercial Companies of 1974 was devised to better suit the corporate governance regimes worldwide. These reforms essentially focused on internal auditing issues, the scope and duties of the board of directors and instilling a limit of membership in only four public companies' boards.

Click here to view the article online.

Published: July 2017
Publication: mondaq.com

Introduction to Corporate Governance Regimes in Oman: Examining Directors Duties

Authors: Nasser Al Riyami
Related Insights
Got a question or enquiry? Contact us