Recent amendments to in Bahrain's Commercial Companies Law increase shareholders' rights

 

The most recent amendments to Bahrain’s Legislative Decree No. 21 of 2001 promulgating the Commercial Companies Law were ratified in January 2018, and built upon the shareholder-friendly trends of the 2014 and 2015 amendments to the decree.

Namely, they show a continued commitment to facilitating both local and foreign investment within the kingdom, in line with Bahrain’s long-term development plans outlined in the Economic Vision 2030, and reinforcing its reputation as an open and flexible place to do business in the region. The main amendments ratified in 2018 concern:

• Investment in competing companies;

• General assembly rules;

• The obligations of joint-stock companies;

• Broadening definitions of certain terms; and

• Penalties for non-compliance. Importantly, it should be noted that throughout the amended Commercial Companies Law, Central Bank of Bahrain (CBB) licensees and other companies under the supervision of the Ministry of Industry, Commerce and Tourism (MICT) are advised to look to the applicable conditions established by their respective authority regarding their obligations.

Easing of Restrictions on Shareholders

Article 18 (Bis 1), added by the 2018 amendments, allows a shareholder of one company to become a shareholder in a competing company, on the condition that they do not partake in the management of more than one of the companies.

As far as the provisions of the Corporate Governance Code and the companies’ constitutional documents are concerned, there is now no longer an obligation to obtain a no-objection letter to enter into such an arrangement.

Furthermore, the new Article 168 (Bis) facilitates litigation for shareholders whose interests have been adversely affected by unfair or prejudicial management, or where the company intends to do any act or refrain from any act that harms or is likely to cause damage to the shareholders’ interests.

Under the amended law, shareholders are given the right to:

• Call meetings of the general assembly;

• Receive advanced notice of general assembly meetings;

• Add new matters to the general assembly agenda;

• Be represented by a proxy at meetings; and

• Approve certain company transactions.

Joint-Stock Companies

Both public and closed joint-stock companies must convene a general assembly at least once a year. The amendments to Article 198 reduce the timeframe in which the assembly must take place from six months to three months after the end of the company’s financial year.

Previously, only shareholders with at least a 25% stake had the power to request an ordinary general assembly and had to prove a serious reason to make the request.

Pursuant to amended Article 198, auditors and shareholders with a minimum 10% holding may request a convening of the general assembly, with no need to show a serious reason for doing so as they were required to before, allowing more flexibility for shareholders and increasing the rights of minority shareholders.

Article 198 lists instances in which the MICT may request that a joint-stock company convene a general assembly. The amendments made in 2018 add two new possible instances:

• Where a company fails to convene within one month of a request by its board of directors to do so; and

• Where it has been requested to do so by the competent body supervising its activity. Shareholders holding at least 10% of shares no longer need to request the MICT to call a general assembly, given the new powers granted to request it themselves under the new Article 198.

An invitation to shareholders for the convening of a general assembly meeting must be published in at least two daily Arabic newspapers.

Amended Article 199 requires the invitation to be published even further in advance – 21 days before the scheduled meeting as opposed to the 15-day timeframe previously set.

If the joint-stock company is closed, the amendments require the invitation to be sent to shareholders by registered post, or by any other means capable of proving that the shareholder had advance knowledge of the time, venue and meeting agenda of the general assembly.

These changes intend to give shareholders more time to make arrangements to attend the general assembly, allow pre-meeting administrative procedures to be completed, and prevent shareholders from not attending a general assembly due to lack of knowledge about the meeting.

Article 202 now states that when the MICT sends a representative to attend a general assembly, they have no voting rights, but, subject to the minister of industry, commerce and tourism’s decision and Cabinet approval, may charge a fee for their attendance. For CBB-licensed companies, the amendments are silent with regards to such fees.

The new amendments also increase the flexibility with regards to general assembly agenda matters. Previously, new issues could only be raised out of urgency or if discovered during the course of the meeting.

Article 207 adds a third possibility, whereby the body supervising the company’s activity, shareholders holding at least a 5% shareholding or an auditor may submit a written request at least five days before the general assembly in order to have new matters included in the general assembly agenda.

With Limited Liability Companies

Amended Article 283 now states that the general assembly for with limited liability (WLL) companies shall convene at least once during the six months following the end of their financial year. This timeframe was previously set at four months.

Previously, only shareholders with at least a 25% shareholding had the power to request a general assembly. Pursuant to amended Article 283, shareholders with a minimum 10% shareholding may request a convening of the general assembly.

A request to convene the general assembly must be submitted at least three weeks in advance, an increase from the previous one-week timeframe, in order to allow, as with joint-stock companies, more time to prepare for attendance and complete administrative procedures beforehand.

While the law has long allowed for shareholders to attend general assembly meetings through a proxy, the conditions for doing so have been eased pursuant to the amended Article 284, which now allows one proxy to represent more than one shareholder. However, the proxy may not be the company’s director or from the control board.

The amendment to Article 285 requires that consent is obtained from the majority of shareholders, who hold at least 75% of the company’s share capital, in order to amend the company’s constitution, increase or decrease the company’s capital, or dispose of more than half of the company’s assets.

This requirement does not apply to mortgages, where the assets are moved to a subsidiary of the company or made in the ordinary course of business. Notably, no new partners may be added to the company and the existing partners’ financial obligations may not be increased without unanimous approval from the shareholders.

With regards to reporting, paragraph C added to Article 286 requires that managers of WLL companies take responsibility for providing the MICT with the company’s financial reports and auditor’s report or letter within six months from the end of the company’s financial year. Auditors are no longer implicated in the process of providing documentation to the MICT.

Obligation of Joint-Stock Companies

The board of directors and the board members of jointstock companies have stricter obligations under the amended law, which provides increased protection to shareholders – and in particular minority shareholders – in turn encouraging more confident investment.

Amended Article 172 obliges companies to include among the members of the board both independent and non-executive directors. The amended Article 173 prohibits a person acting as both chairman or deputy chairman and as a senior director in a company.

It is possible for directors to hold a board position for a maximum term of three years, which can be renewed for another term, but amended Article 172 allows this term to be extended by up to six months at the request of the board of directors, and with the approval of the CBB for companies licensed by it, or the MICT for other companies. Previously, the general assembly had to be informed of the details of any personal interest of any of its members in any matters presented to it. The new Article 189:

• Extends this obligation to chairpersons;

• Shifts the right to approve such interest from the general assembly to the board of directors alone;

• Lists the necessary disclosures to be made by any members with a personal interest in a matter;

• Denies the disclosing member attendance at resolutions concerning the interest; and

• Allows any shareholder with at least 10% of the company’s capital to access such disclosures. If a personal interest is disclosed by a member, this interest must be reported by the chairperson to the general assembly along with a report from an external auditor. Such matters are now required to be disclosed in the company’s financial statements and annual report.

If the conditions of amended Article 189 are violated, the interest may be deemed void if it is unfair or conflicting with the company’s interest, and compensation or refund of any profit distributed may be ordered upon the concerned member.

Article 184 (Bis) provides an important added protection for investors, and obliges the board to establish an audit committee with the authority to access and review all financial and accounting documents related to the company, and to ensure compliance with applicable policies and regulations. A report of the audit committee’s work must appear in the company’s annual financial statement.

Amended Article 176 introduces a new system of voting at general assemblies, whereby each shareholder has a number of votes equivalent to the number of shares they hold. Votes may now be distributed among candidates, giving more power to minority shareholders who may direct all votes to one candidate.

The new law simplifies the process of litigation within the company. Amended Article 187 extends liability for any damage caused to the company to both the chairman and board of directors, and, where the company is under administration, allows liquidators to file a lawsuit without the need for a resolution of the general assembly.

Amended Article 185 provides more protection to investors and voids any resolution or condition which absolves the liability of the chairman, members of the board and directors towards the company, shareholders and third parties.

In the case that a shareholder brings forward a lawsuit claiming that a resolution is void, they must now do so within 60 days from the date they are informed of this resolution, or within a year from the date the resolution was passed. If the claim is successful in court, the judgment must be published in a local daily newspaper by the board of directors.

Importantly, new Articles 120 and 236 (Bis) prohibit subsidiary companies from holding shares of public joint-stock companies and of closed jointstock companies listed on the stock exchange.

Penalties for Non-Compliance

Certain penalties for non-compliance with the new law have significantly increased, targeting company board members and senior management. A violation of Article 361 – including fraud and failing to send required documentation to authorities – has increased from BD5000 ($13,200) to BD10,000 ($26,500), with a maximum penalty of BD100,000 ($265,000).

A violation of Article 362 (including wilful ignorance and obstruction) has increased from BD5000 ($13,200) to a maximum penalty of BD50,000 ($132,500).

Broader Definitions of Certain Terms

Amended Article 27 provides more freedom to choose the company name of a general partnership. It is no longer required that the name includes the name of all or any of its partners and does not need to include the term ‘& Partners’, provided the MICT approves their choice of name.

A subsidiary company, under the new law, is now defined in Article 120 as a company that is directly or indirectly owned by a parent company, where the parent company owns more than half the share capital, or has the right to have control over the subsidiary’s resolutions, form its board and appoint the board’s members.

Although many of the most recent amendments to the Commercial Companies Law tighten the obligations of company management, they in turn provide further legal protection to shareholders and ease the restrictions on them that where in place prior to 2018. The introduction of this law is likely to boost the confidence of both local and foreign investors, and make doing business in Bahrain easier than ever.

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The Report: Bahrain 2019

Legal Framework chapter from The Report: Bahrain 2019

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