At Omam Legal Consultancy, we understand that good governance is the cornerstone of a successful business, and one of the critical aspects of corporate governance in the UAE is the process of removing board members from private joint-stock companies. This is a crucial decision that can impact the company's performance, stability, and future growth. Whether you're a shareholder, board member, or business owner, understanding the legal framework surrounding the removal of board members is vital to ensure compliance and protect your rights.
In this blog, we will break down the key reasons, procedures, and legal considerations related to removing board members in private joint-stock companies in the UAE, based on the Commercial Companies Law and relevant judicial rulings.
Why Would a Board Member Be Removed?
Removing a board member is not a decision that should be taken lightly. In most cases, a board member may be removed for the following reasons:
- ● Non-performance or underperformance: If a board member fails to meet the company’s expectations or does not fulfill their duties adequately.
- ● Conflict of interest: If the board member's interests are in direct conflict with those of the company or other shareholders.
- ● Personal reasons or frequent absenteeism: A board member who is frequently absent from meetings or unable to contribute effectively to the company’s governance.
- ● Violation of laws or ethical standards: If a board member is found to have breached company rules, violated legal standards, or acted unethically.
- ● Incompetence or mismanagement:If the board member has contributed to poor decision-making or financial mismanagement.
Legal Framework for the Removal of Board Members in Private Joint-Stock Companies
In the UAE, the legal framework surrounding the removal of board members in private joint-stock companies is governed by the Commercial Companies Law (Federal Law No. 2 of 2015), the company's Articles of Association, and various judicial rulings. Let’s delve into the key legal aspects:
1. The General Assembly's Authority
According to Article 170 of the Commercial Companies Law, the General Assembly of shareholders holds the power to remove board members. The law grants the General Assembly the right to dismiss one or more board members at any time, provided the decision is made in the best interest of the company. This decision can be taken regardless of any provisions in the company’s Articles of Association that may contradict this.
The law also allows for the election of new members to fill the vacancies created by the removal of any board member.
2. Secret Voting Requirement
To ensure fairness and transparency, the law mandates that voting for the removal or election of board members must be conducted secretly. According to Article 188 of the Commercial Companies Law, any decision to remove a board member must be made through a secret vote at the General Assembly. If this principle is not followed, the decision will be deemed invalid.
3. Procedures According to the Company’s Articles of Association
While the Commercial Companies Law provides a broad framework, the specific procedures for removal may be further outlined in the company’s Articles of Association. If the company’s Articles of Association do not specifically address board member removal, the provisions of the Commercial Companies Law will take precedence.
The Legal Steps for Removing a Board Member in a Private Joint-Stock Company
Let’s break down the practical steps involved in removing a board member, based on the UAE’s legal system.
- Step 1: Board Report and NoticeA board member or shareholder may raise concerns regarding a fellow board member's performance, actions, or behavior. The Chairman of the Board will issue a notice calling for a General Assembly meeting to discuss the removal. This notice is often accompanied by a report from one of the board members, which outlines the issues or violations concerning the board member in question.
- Step 3: VotingThe General Assembly will then vote on the proposal. According to the law, the voting process must be secret to ensure that all shareholders feel free to cast their vote without fear of repercussions. Only those shareholders present in the meeting are eligible to vote.
- If the majority of shareholders approve the removal, the board member will be dismissed from their position.
- Step 2: Proposal for RemovalAt the General Assembly meeting, the shareholders will discuss the proposal for removing the board member. The proposal must be presented clearly, with supporting evidence, and must be included as an agenda item in the meeting.
- Step 4: Filling the VacancyOnce a board member is removed, the company may open a nominations process to fill the vacancy. This process is typically governed by the company’s Articles of Association, which may also specify how new members are to be nominated and elected by the shareholders.
Judicial Rulings on Removing Board Members in the UAE
The UAE's Court of Cassation has provided important rulings that further clarify the rights of shareholders in removing board members:
2.Ruling from 31-12-2020 (Appeal No. 2020 / 385 Civil Appeal):
The Court affirmed that the General Assembly has the authority to remove board members at any time if it serves the company’s best interests. The Court further emphasized that the relationship between the General Assembly and board members is one of agency, meaning the Assembly can make this decision without needing specific reasons if it deems it necessary for the company’s success.
2. Ruling from 11-01-2012 (Appeal No. 2011 / 34 Civil Appeal):
In this case, the Court reiterated that voting on the removal or election of board members must be conducted secretly. Failure to adhere to this requirement will result in the decision being considered null and void.
Can the Regulatory Authorities Reject the General Assembly's Decision?
Under the Commercial Companies Law and the rulings of the UAE courts, the General Assembly has the final say in removing board members. However, if a shareholder feels that the decision is unjust or detrimental to their interests, they can request the competent authority to suspend the General Assembly’s decision.
This request must be made within three working days of the decision, and the concerned shareholder must demonstrate that the decision harms their rights or the interests of a specific group of shareholders. The competent authority, such as the Ministry of Economy, may review the request, but it cannot outright reject the General Assembly’s decision.
What Happens if the Ministry Refuses to Approve the General Assembly’s Decision?
If the Ministry of Economy refuses to approve the General Assembly’s decision, shareholders can file a complaint with the Ministry or take the matter to court. The complaint can be submitted through the Ministry’s complaint reception service, and shareholders have the right to request the suspension of the Ministry’s decision if it negatively impacts their interests.
Conclusion:
Protecting Shareholder Rights and Company Interests
The process of removing a board member in a private joint-stock company in the UAE is a legal procedure that requires transparency, fairness, and adherence to the law. The General Assembly, as the supreme decision-making body, holds significant power in ensuring the company’s best interests are safeguarded.
As a shareholder or board member, it is essential to understand the legal steps and rights associated with board member removal, as well as the implications of these decisions on the company’s future. By following the correct procedures and staying informed about your rights, you can ensure that the governance of your company remains aligned with the best practices and legal standards.
At Omam Legal Consultancy, we are here to provide you with expert advice and guidance on corporate governance matters, helping you navigate the complexities of UAE business law with confidence.
For more information on company law, governance, or to discuss a specific legal issue, feel free to contact us today.
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