Legal Update: Amendments to the Corporate Governance Code
Our Associate, Budoor Al Halwachi explains the amendments to the Corporate Governance Code.
Budoor Al Halwachi – Associate ([email protected])
The Ministry of Industry, Commerce and Tourism (the “MOICT”) have been at the forefront of the introduction of Resolution No. (91) of 2022 amending (the “Amendments”) the Ministerial Decree No. (19) of 2018 Issuing the Corporate Governance Code of Bahrain (the “Code”), taking effect the day after the publication in the Official Gazette on 19 September 2022.
The Code (as amended) shall only apply to all public and closed joint stock companies incorporated in the Kingdom of Bahrain that are registered in accordance with Decree Law No. (19) of 2001 Issuing the Commercial Companies Law (the “CCL”), whereby virtue of the Amendments it is now titled “The Management and Corporate Governance Code” where it was previously titled “The Corporate Governance Code”. We note the following Amendments for your consideration, where all references to paragraphs, principles and sections in this update are those under Chapter 2 of the Code unless stated otherwise.
Record and Book-keeping
Companies are now required to keep all records, paper and electronic documents, minutes of meetings, reports of the Board of Directors (the “BoD”) and committees and governance reports in its head office for at least 10 years as per paragraph 9 of Section 2, Chapter 1 of the Code. Where shareholders’ right in the company to inspect the company’s books, records and documents is an expressly incorporated part of the Code as per Principle 7 of paragraph 5, Section 7.
Composition of the Board of Directors (BoD)
Public joint stock companies are now required to appoint at least one female member to its BoD formally requiring the representation of women to be considered in the composition of the Board, where the Code further requires disclosure of gender membership statistics in the annual corporate governance report to monitor compliance. However, these requirements only apply to public joint stock companies and not closed joint stock companies as per paragraph 1 of Section 1 of the Code.
Conflict of Interests and Required Disclosures
Companies are now prohibited from allowing directors and officers of the BoD from attending, participating or voting in meetings involving transactions in which they have any interest as per Principle 2 of paragraph 5, Section 2 of the Code. Failure to disclose a conflict of interest will render the directors and officers liable to pay compensation to the Company, provided that its shareholders bring a claim forth to the court to invalidate the transaction. Article 189 of the CCL already covers this restriction; however, the Code further extends the responsibility to officers of the Company. The importance of disclosure is clearly emphasized as this restriction is included in the Code indicating the likelihood of close monitoring by the Ministry.
In addition, the MOICT further places an additional disclosure obligation requiring companies to complete designated forms by the Ministry. This includes the disclosure of the total remuneration and benefits paid to the Chairman, Board members, the Chief Executive Officers and Chief Financial Officer each year. The Company’s annual corporate governance reports should also include details of any benefits, share in profits and any allowance received by the Board members in their capacity as employees or administrators as per Appendix 5 of the Code.
Moreover, the BoD must disclose to its shareholders if the nominated directors are directly or indirectly running any business which is a competitor to the Company’s business and to include the details of any other companies in which the nominated director serves on the Board. The Code also places a new reporting obligation where these Board nominations to the shareholders should be supplemented with a summary of the Nomination Committee’s report on the proposed nominations and must be disclosed in the Company’s annual report.
Audit Committees and External Auditors
Companies are now required: (i) to have at least three members in its Audit Committee; and (ii) the chairman of the Audit Committee must be an Independent Board Member as per Principle 3 of paragraph 1, Section 3. However, closed joint stock companies are permitted to appoint auditors from outside the company to its Audit Committee. Whereas public joint companies must have the majority of its Audit Committee comprise of its board members.
Closed joint stock companies are now required to appoint at least one external auditor for a term of one fiscal year, renewable up to a maximum of five (5) years, as per Principle 10 of paragraph 1, Section 10, whereas this previously only applied to public joint stock companies.
Shareholders and their Voting Rights
Shareholders may now participate in their deliberations and exercise their right to vote using an electronic voting system and any modern technology, explicitly recognizing the right of shareholders under the recent changes to the CCL, as per Principle 7 of paragraph 2, Section 7.
Penalties
Most notably the Code introduced penalties as per Principle 7 of paragraph 5, Section 7 (in line with Article 362-bis of the CCL) on both public and closed joint companies in the instance of the violations where the Ministry may order the company to cease the violation and the following: (i) suspend the commercial registration of the company for a period not exceeding six months; (ii) impose an administrative fine calculated on a daily basis not exceeding BHD 1,000 where the violation is committed for the first time and BHD 2,000 where another violation as been committed; (iii) impose an administrative fine not exceeding BHD100,000; and (iv) strike off the commercial registration of the Company from the Commercial Register.
Concluding Remarks
Attaining best practices in corporate governance has been hindered by a patchwork system of regulation, a mix of public and private policymakers, and no accepted metric for determining what constitutes success. However, as the Code places greater obligations of transparency, disclosure, diversity and consequences on joint stock companies, these Amendments highlight Bahrain’s commended efforts in advancing its corporate governance practices in line with international standards and the CCL.
For more information, please contact us on [email protected].