The directors of an ADGM company play a significant role in the management and governance of the company. In addition to the duties that a director owes to the company and its shareholders, the ADGM Regulations also impose responsibilities and liabilities on directors. It is therefore important that the role of a director is clearly understood before accepting an appointment.
Role of a Director
ADGM is a financial free zone with its own courts and legal system modelled on English Common Law. Under Common Law, it is the directors of a company who collectively make decisions on the day-to-day management of the company and these decisions are recorded in company resolutions or the minutes of board meetings. The directors may choose to delegate certain authorities by resolution or a power of attorney, but the directors remain ultimately responsible for the exercise of delegated powers, as if they had exercised the powers themselves.
The role of the directors is outlined in the company’s Articles of Association (Articles). The starting point in the ADGM model Articles is that the directors are responsible for the management of the company’s business “for which purpose they may exercise all the powers of the company.” This broad power is then subject to any regulatory restrictions, reserved shareholder powers that are included by amending the model Articles or any resolutions passed by the shareholders that require directors to take or refrain from certain actions.
For example, the ADGM Regulations require a shareholder resolution to approve changes to a company’s Articles. It is also common to see carve outs of director powers included in the Articles, such as requiring shareholder approval for material changes to the company’s business or substantial transactions.
It should be noted that the ADGM Regulations do not distinguish between executive (employed by the company) and non-executive (not employed) directors or record titles such as CEO, COO, CFO. These are internal governance matters for a company.
Duties of a Director
The ADGM Companies Regulations outline the following duties of a director:
Duty to act within powers: Directors must act in accordance with the company's Articles and use their powers only for the purposes they were granted.
Duty to promote the success of the company: Directors must act in good faith and consider the long-term consequences of their decisions, including the interests of employees, business relationships, community impact, and fairness among members.
Duty to exercise independent judgment: This is particularly important when directors are appointed by parent companies or ultimate beneficial owners.
Duty to exercise reasonable care, skill, and diligence: There are no formal qualifications required to be appointed as a director. However, it is expected that they exercise reasonable care, skill and diligence in their role as a director.
Duty to avoid conflicts of interest: A director must not exercise any of their powers as a director in relation to a matter in which they have or could have an interest that conflicts with the interests of the company. A director can seek approval from non-conflicted directors to be involved in the matter.
Duty not to accept benefits from third parties: A director must not accept a benefit from a third party that is being gifted because they are a director or for the director taking or refraining from action as a director.
Duty to declare interest in proposed transactions or arrangements: If a director has any interest in a proposed transaction or arrangement, they must declare the nature and extent of the interest to the other directors.
Directors who are also employees or shareholders of a company must be very careful to understand in what capacity they are making decisions. If a matter requires a board resolution, they must put aside all other interests and make the decision in their capacity as a director in accordance with the duties that the role requires.
In addition to the general director duties, the ADGM Companies Regulations also contains the following director obligations:
1. Maintain the records of the company, including:
A register of the shareholders and the directors of the company.
Minutes of all meetings and copies of resolutions.
Accounting records that show and explain the company’s transaction and disclose the financial position of the company.
2. Notification to the Regulator, including filing:
Amended Articles and shareholder special resolutions.
Changes in directors and authorised signatories (or changes in their details such as residential address), and all shareholding changes.
Changes to the share capital, including new share classes, change in share class rights, increase or decrease in share capital and cancellation of shares.
The appointment an Auditor for the company, unless the directors reasonably resolve otherwise on the ground that audited account are unlikely to be required.
3. Notifications to others:
Circulate annual accounts to shareholders and debenture holders.
Provide certain company documents to shareholders and other key stakeholders upon request.
Issue share certificates following an allotment or share transfer
Circulate written resolutions proposed by directors or shareholders in accordance with the rules in the Regulations.
Inform and provide a copy of a strike off application to all shareholders, employees, creditors, directors of the company within 7 days from the application being made.
4. Maintain the company in good standing with the Regulator, including filing:
The commercial licence and data protection renewal before each anniversary of the company’s incorporation.
The annual confirmation statement at renewal to confirm the accuracy of information on the register.
Financial accounts, along with the auditor’s report (if applicable) and director’s report. The company’s accounts must be approved by the board and signed on behalf of the board by a director of the company.
Consequences of a Breach of Duties
A breach of a director duty can result in a broad range of consequences, from a fine up to criminal proceedings under the UAE Penal Code for the most extreme breaches:
Company Action: the company may take action against the director by removing the director from the board, filing an injunction or taking civil action against the director to claim for damages or compensation.
Regulator Action: the director may receive a fine imposed by ADGM or may be subject to a disqualification order in the case of persistent breaches of the ADGM Companies Regulations, fraud or participation in wrongful trading in connection with the insolvency of the company. This could then have consequences on existing and future appointments as a director in other jurisdictions.
Civil Action: in some instances, shareholders can bring an action against a director to claim for loss on behalf of the company.
Criminal Action: a director could face criminal liability or imprisonment for criminal actions such as fraud, embezzlement, or breach of confidentiality under the UAE Penal Code.
Directors of an ADGM company may shield themselves from some of the above actions by seeking indemnities from the company or arranging director & officer insurance coverage. However, this protection is generally limited to civil liability from third parties and not liability to the shareholders or criminal liability under the Penal Code.