Sample Law Essays on UAE and U.S. Company Laws

Directors’ potential personal liabilities under the UAE and U.S. company laws

Introduction

In the present economic times, the role played by management in companies’ uncertain transactions and other financial issues is likely to be highly scrutinized by companies, their shareholders, and other stakeholders. For this reason, all stakeholders with an interest in the performance of various companies as well as the directors of these companies should strive to understand the responsibilities of directors (Loos, 2010). In the United Arabs Emirates (UAE) and the United States, each has its company laws that spell out the duties and the potential obligations of the company directors in those countries.

This essay presents an analysis of the duties and personal liabilities of directors in the UAE and U.S Company laws for the acts of fraud and mismanagement. The basics of company law are explained as well as the company laws in both the U.A.E and the U.S that are used in governing the business activities and management of companies in the two countries. A brief introduction of what entails fraudulent and wrongful trading is provided as well as what it means to lift a veil of incorporation. Consequently, these laws explain the kind of duties and potential obligations that directors owe such as implied duties, the scope of management and conflict of interest. They also identify particular parties that directors owe these duties and obligations. In both laws, directors also have a collective responsibility and there they have remedies that they can use against claims that have been brought against them (Loos, 2010).

Company law

Company law relates to the law concerned with business organizations such as companies and corporations that conducts any kind of economic activities or charitable activity. The scope of company law includes regulating the establishment of businesses companies, management of the business of companies, defining the rights and obligations of the shareholders and founders. Company law also plays a key role in reorganization, cessation and liquidation of companies. Company law is therefore concerned with the interaction between shareholders, employees, directors, creditors and other stakeholders like consumers while carrying put the business of a company. Under company law, companies have separate legal personality while the liability of the shareholders may be either limited or unlimited. The board of directors manages the company on behalf of the shareholders while the day-to-day operations of the company are delegated to full time executives. Different countries have their own company laws, which are applied in incorporating or registering their corporations (Loos, 2010).

Company Laws in U.A.E

In U.A.E, the Commercial Companies Law (UAE Federal Law 8 of 1984) that was amended in the year 2015 provides a number of general obligations, which are placed on the board of directors involved in managing companies in the UAE. The UAE Commercial Company Law (CCL)  allows different kinds of companies to be formed in UAE whereby the most common is the limited liability companies (LLC) as well as the publicly traded companies established as pubic joint stock companies (PJSC) (Silver, 2015).

Fraudulent Trading and Wrongful Trading

Directors and managers acts as the agents, thus, they owe a fiduciary duty to the owners for a company that is a separate legal entity since the ownership is separated from the control. Fiduciary duties come from the act of delegating of roles to non-owners allowing them to have significant discretionary powers. Fraudulent and wrongful trading arises when directors and mangers carry out activities that is not within their delegated control and which results to fraudulent acts.  The principle of a company being a legal person with a corporate personality that is distinct from its members is also referred to as the veil of incorporation. In certain circumstances veil of incorporation may be lifted by the courts in order to find out the true form or character behind the veil. This ensures that the corporate form of a company is not abused or misused. In the event that directors and managers engage in fraudulent and dishonest activities on behalf of the company as a separate legal entity, the veil of incorporation is lifted such that they become personally liable for their activities (Loos, 2010).

Duties and Potential Obligations Owed by Directors in U.A.E

In UAE, directors and managers are liable for acts of wrongful trading and fraudulent trading which under the UAE commercial code these acts relates to negligent bankruptcy and fraudulent bankruptcy. All types of bankruptcy including negligent and fraudulent bankruptcy are ascertained after a company is unable to pay its debts. If a director is found guilty for fraudulent bankruptcy by a criminal court in UAE, he can be sentenced to a prison term not exceeding five years and in the case of gross negligent bankruptcy he can be sentenced to two years in prison and a fine of AED 20,000 while negligent bankruptcy carries a fine of AED 10,000. Article III of the UAE Companies Law infers several duties that a director is required to handle. The duties include one, a duty to act in an honest manner, second, a duty to act within the law and the scope of the powers set out in the company’s constitutional documents and third, a duty to act within the powers of a director. The third duty is possibly concerned with a duty not to make outside profits in one’s capacity as a director. The article also probably infers two other duties including a duty to maintain a degree of care and judgment while carrying out the director’s role and a duty to take actions that are only in the best interests of the company (Kamal Hassan, 2009).

Under UAE CCL, the wording of Article III has been drafted in a wide manner such that it highlights the likelihood that there are claims that can be brought against directors. No specific part of the Article that provides guidance on when a valid claim can be brought against a director for neglecting to perform their tasks they are required to carry out as per the Companies Law. However, a claim may be brought against a director even when the type of duty that has been neglected is more of a general nature. For instance, where the director actions do not match the standards of management and, where it would be reasonable to expect such actions from an individual with their education level, experience and occupying a similar position in the company. Another situation involves the board doing authorization of a transaction in an unreasonable manner leading to losses being experienced by shareholders (Adawi & Rwegasira, 2011).

The UAE Company Law stipulates that directors should avoid having conflicts of interest by engaging in activities that conflict with the interests of the company. According to Article109, where a director has a personal interest in a business deal being presented to the board for authorization, he or she is required to inform the Board of Directors about if the deal presents a conflict of interest with those of the company. In such situations, a director does not have the right to vote on the resolutions of the board associated with that particular transaction. This implies that the director’s interest should be revealed before the company enters into the transaction. Additionally, Article 108 of the Company Law dictates that a director does not have a right to be in direct competition with the business of the company or be involved in activities that are similar to those the company is involved. However, a director can compete with the company’s business if prior approval had been acquired from the shareholders in a general meeting and the approval is renewed every year. In relation to the conflict of interest, an individual is not allowed to be a director of more than five companies in UAE or become a chairperson of more than one company (Baydoun et al., 2012).

Parties that a director owes duties and potential obligations

In UAE, directors may owe personal obligations to the company and the shareholders according to Article 111 of the UAE Companies Law. A company has a right to take action against the directors under Article 113 whereby such an action is taken on behalf of the shareholders. In such a case, a resolution of shareholders is necessary since it makes specifications on who will take the responsibility for the proceedings. Moreover, Article 114 stipulates that in the event that a shareholder suffers a loss that is only related to him or her, and the company does not take any action on his or her behalf after being notified, he or she can take action on his or her account. The Article also provides that a director may be exposed to criminal liability for several actions such as presenting false information on corporate documents or distributing the documents knowingly. Secondly, distribution of dividends in a way that is not within the provisions of the company’s law or company constitution. Third, providing false information or willfully omitting significant information in the accounts of a company and, sharing the secrets of the company to benefit themselves or third parties. In case a company is not performing well financially, Article 289 of CCL provides that directors have a duty to refer the question of dissolving the company to shareholders if it has sustained losses that amount to one-half of its capital (Adawi & Rwegasira, 2011).

The wide scope of Article 111 of CCL in UAE provides a potential claim by third parties for the directors conduct explained under this section. Third parties include employees, creditors, and any other individual who has incurred losses due to the actions of the directors. Nevertheless, it is not clear whether a third party faces limitations in their ability to make a personal claim against a director for their loss resulting from the actions of the director, as they would face in a claim against the company (Grant, Golawala & McKechnie, 2007).

In UAE, a director may be forced to assume personal liability to third parties in circumstances where a director executes a contract without the right approval of the company to do so. The concept of ostensible or apparent authority implies that any obligations that a company director agrees to are binding on the company as they are against innocent third parties where the director is acting in that apparent capacity. Hence, if a director did not seek for proper authorization from the company to enter into a contract on its behalf, other contracting parties are still entitled to enforce the contract against the company. The company may bring a legal action against the director for breach of duty. This is part of the reason third parties will go ahead to ask for a specific power of attorney from a director before entering into a transaction with a UAE company.  This is despite the fact that a manager is allowed to act in full capacity and authority in managing the company and to bind it as it is stated in the memorandum and articles of a company.  A claim brought against an individual manager is considered a less valuable claim as compared to a claim against a corporate entity from the standpoint of a third party. Article 110 of the Companies Law explains that in relation to JSCs, companies will be required to pay compensation for the loss resulting from the directors’ unlawful actions in the course of their management duties to the company. Thus, third parties have an alternative of turning to the company for the ultra vires actions of its directors (Feulner, 2011).

Collective Responsibility

The UAE Companies Law  provides that there is a joint liability for actions of all company directors in case of an issues arising from a decision of the board. The joint liability is extended to the directors who were not present at the board meeting unless the director did not have any knowledge of the resolution or could not be in a position to vote against the resolution. According to Article 112, an exception to this rule is applied whereby directors do not bear any joint liability for an act if they voted against the resolution and who stated their objection in the minutes of the meetings (Loos, 2010).

Remedies against directors for a breach of their duties and protection from claims

Damages are provided as a primary civil remedy against directors who have breached their duties and responsibilities. It is not easy to obtain an injunction in the UAE court and thus, to restrain a director from acting in a particular manner is not an option under the UAE law.

Directors may protect themselves against claims in a number of ways including, seeking to be granted indemnity by the company, which will take care of the awards of damages made and costs spend defending claims. Another way to protect them is getting an insurance policy that covers directors against these kinds of awards of damages and costs. Moreover, directors may seek for ratification of certain acts by the shareholders that may result in a breach of the director’s duties (Silver, 2015).

Company Law in the U.S

In the United States law, the corporate law is applied in regulating the powers, finances and governance of corporations. The U.S constitution allows each territory and state to establish its corporate code. There are also the minimum standards for trading in corporate shares and governance rights that are created by the federal law. These laws are mainly found in the securities exchange act of 1934 and Securities Act of 1933. Laws such as the Dodd-Frank Act of 2010 and Sarbanes-Oxley Act of 2002 have been used in the amendments to the federal laws. Most of the corporations in U.S are incorporated under the Delaware General Corporation law while others states follow the Model Business Corporation Act (Kocaoglu, 2008).

Duties and Potential Obligations Owed by Directors in the U.S

In the U.S, the corporate law requires directors of corporations observe three significant duties in their management role. These duties include a duty of care, a duty of loyalty and a duty of obedience. The duty of care calls for execution of director’s corporate responsibilities in a manner that reasonably shows that the director is not opposed to the best interests of the corporation. The directors should act in good faith, exercising adequate caution that an ordinary prudent individual in a similar position is expected to exercise. The duty of loyalty expects directors of a corporation to exercise their powers in the interests of the corporation only. They should not take advantage of the opportunities that may be available in the corporation for their benefit and at the expense of the corporation. The duty of obedience requires directors should present all the disclosures of a corporation in a timely manner, issue dividend payments correctly and follow the rules set in the corporation’s articles of incorporation. The size of a corporation or the executive or non-executive roles of the director determine the different levels of care, loyalty, and obedience that are expected from the directors (Black, Cheffins, & Klausner, 2006).

Under the U.S corporate law, the directors owe a fiduciary duty to the company. The legal nature of their offices requires them to act as agents of a company, thus, they are required to act in the best interest of the company and its shareholders. During the decision-making process, they should concentrate on the actions that will maximize the wealth of shareholders (Johnson, 2011).

The U.S corporate law does not also allow directors to take part in an activity that results in a conflict of interest with the corporation that the director owes a fiduciary duty. According to Delaware General Corporation Law, the actions of a director actions considered not to present a conflict of interest in three circumstances including; they had been approved by disinterested directors after full disclosure, the shareholders had approved after disclosure and, it has been approved by the court as being fair. Therefore, directors can pursue business transactions that are beneficial to them as long as it is possible to show that the transaction is not in any way unfair to the corporation in any way even if they have self-interest in it. The burden of proving unfairness is left with the plaintiff after disclosure (Johnson, 2011).

Parties that a director owes duties and potential obligations

Under the U.S Corporation Law, directors’ duties to a corporation are stipulated in the state law in which the corporation is incorporated, and they include the duty of care, duty of obedience and duty of loyalty. Failure to comply with these responsibilities may require the directors to face potential liability, mostly through a derivative action. Shareholders file these lawsuits against the director on behalf of the corporation and, where a lawsuit brought against a corporate director in a derivative proceeding is successful, the damages awarded, the corporation recovers the damages and not the shareholders. In year 2011, in a case challenging the sale of Grupo Mexico SAB’s 99.15 percent stake in Minera Mexico SA, the Delaware Court of Chancery awarded to Southern Peru Copper an about US $2 billion in damages and US $300 million attorney fees to the firm of the plaintiff. In Aronson v. Lewis, 473 A.2d 805, directors were found liable for rarifying material transactions without conducting the right analysis and consideration.

The federal securities laws require that publicly traded company directors in the U.S fulfill their duty of providing their shareholders with open, honest and timely disclosures of the corporation’s financial situation. The Securities Act of 1933 has two main objectives that involve requiring publicly traded corporations to provide investors with any essential information that is concerned with securities being offered to the public for sale. It also prohibits deceit, misrepresentation and other fraud in the sale of securities. Section 11 of this Act provides that a shareholder can sue directors if materials misrepresentations are found in a signed registration statement filed with the U.S government (Black et al., 2006)

Directors in U.S corporations also have duties to the third parties. The corporate veil protects the directors of the U.S companies against the claims of company creditors. Most state laws provide that the only reason for bringing a legal action by a creditor in relation to the collection of outstanding obligations may be limited by the terms of the contract signed. It is rare that creditors will enter into a contract that allows them to bring legal action against the corporate directors. Nevertheless, when a corporation issue debt obligations such as corporate bonds or debentures to the public and there are subsequent defaults in these obligations, the directors face potential liability for misrepresentation to the creditors. Additionally, the duties and obligations of the directors towards a creditor can transform depending on the state law under which a company is incorporated, in cases where that a corporation becomes insolvent. For instance, the Delaware Supreme Court has previously ruled that, if there is corporate insolvency, a creditor may have a right to take the position of a shareholder. For this reason, creditors have a right to initiate a derivative claim against directors of insolvent companies for the breaches of fiduciary duty. More to this, corporate directors have the potential to face liability to law enforcement agencies such as SEC and various state attorney generals. For example, the SEC has the power to impose fines and penalties on the corporate directors when they engage in civil violations of the 1933 Act, 1943 Act among other federal laws (Johnson, 2011).

Under the U.S corporate law, Corporations are liable for the claims of their directors if they carried out the actions within the scope of their actual or apparent authority. The director is considered as an agent of the company, and it is within his rights to make decisions or take actions that are within the scope of his actual or apparent authority (Kocaoglu, 2008).

Remedies against directors for a breach of their duties and protection from claims

When a shareholder on behalf of a corporation in the U.S takes a derivative action, corporate directors typically use the business judgment rule as a defense against liability. The rule brings out the assumption that the director had undertaken the correct business judgment with due care and had put into consideration the business model of the corporation, which is not verifiable within the competence of the court. In a claim of misrepresentation of information, corporate directors have the right to use assertion as defense stating that they have enough reasons to believe that statements made were true and without any omission of important facts (Kocaoglu, 2008).

Conclusion

Directors have a wide range of duties and potential obligations under both the UAE Company Law and the U.S corporation law. The analysis brings out various similarities and differences of duties and potential obligations of company directors. In UAE, the company law that was revised in 2015 is referred to as Commercial Company Law. On the other hand, corporate law is applied in the U.S states with different state laws governing the corporations incorporated in their state. Both laws explain that directors owe their duties to similar kind of parties. They also explain the kind of duties and potential liabilities that these parties are owed as well as the remedies for claims against directors.

References

Adawi, M., & Rwegasira, K. (2011). Corporate boards and voluntary implementation of best disclosure practices in emerging markets: Evidence from the UAE listed companies in the Middle East. International Journal of Disclosure and Governance8(3), 272-293.

Baydoun, N., Maguire, W., Ryan, N., & Willett, R. (2012). Corporate governance in five Arabian Gulf countries. Managerial Auditing Journal28(1), 7-22.

Black, B., Cheffins, B., & Klausner, M. (2006). Outside director liability. Stanford Law Review, 1055-1159.

Feulner, G. R. (2011). UAE Commercial Companies Law: Recalled to Life, The. Arab LQ4, 216.

Grant, J., Golawala, F. S., & McKechnie, D. S. (2007). The United Arab Emirates: the twenty‐first-century beckons. Thunderbird International Business Review49(4), 507-533.

Johnson, J. J. (2011). Secondary Liability for Securities Fraud: Gatekeepers in State Court. Del. J. Corp. L.36, 463.

Kamal Hassan, M. (2009). UAE corporations-specific characteristics and level of risk disclosure. Managerial Auditing Journal24(7), 668-687.

Kocaoglu, K. (2008). A Comparative Bibliography: Regulatory Competition on Corporate Law. Georgetown University Law Center.

Loos, A. (2010). Directors’ liability: a worldwide review. Kluwer Law International.

Silver, J. (2015). The Impact Of The New UAE Companies Law On Existing LLCs. Mondaq Business Briefing.