Corporate governance is a system by which companies are directed, controlled and regulated, and it defines the relationships between the board of directors, management and owners of a company. The most notable concepts of corporate governance include the designation of responsibility, accountability, transparency and rights, and treatment of minority shareholders. Companies that lack a strong corporate governance system are sometimes exposed to poor management, financial risk, and criminal and civil liability.
An increased focus on corporate governance practices developed in Kuwait following the 2008 global economic downturn. Many analysts believe that the primary cause for this increased interest in relation to corporate governance practices was largely due to a general lack of awareness and regulation with respect to corporate governance issues. Although they were not immune from the effects of the financial crisis, Kuwait’s financial institutions were not significantly impacted by the global recession, compared to other global economies and financial systems. Lessons were learned on a global scale in the aftermath of the crisis, which afforded Kuwait a timely opportunity to improve its own legal and regulatory regimes, with the view of attracting foreign direct investment and assisting local economic growth.
Although Kuwait was on the right track in terms of improvements to its commercial, financial and regulatory systems, feedback from both foreign and local investors continued to express concern regarding their ability to safely and efficiently conduct business in Kuwait in accordance with international best practices. One such concern was that corporate governance regulations and practices in Kuwait were behind the global pace and therefore required attention.
New Companies Law
Recently, Kuwait has taken major steps to reform, integrate and codify the concepts of corporate governance, with the goal of setting requirements to ensure strict adherence by all forms of companies through the introduction of the new companies law of Kuwait, Law No. 25 of 2012 as amended, as well its corresponding executive regulations, collectively the New Companies Law (NCL). The NCL introduce a more defined and strong application of corporate governance principals.
Prior to the passage of the NCL, 2010 saw the establishment of the Kuwait Capital Markets Authority (CMA) and the regulation of securities activities through the introduction of Law No. 7 of 2010 (as amended) along with its executive regulations (collectively the “CMA Law”). Further to the increased development of capital markets in Kuwait and the need to address a policy for full disclosure to achieve transparency, justice, and to avoid conflicts of interests, the CMA issued the corresponding internal instructions: Instruction No. CMA/QR/AM/2/2012 (the “Instructions on Disclosure”) was issued concerning disclosure of substantial information and the mechanisms for its announcement, as well as Instruction No. HAM/QR/H.SH/5/2013 (the “Insider Trading Regulations”) in connection with the regulation and disclosure of securities trading in relation to the board of directors, executives and other informed persons in joint stock companies.
As such, the CMA issued Decree No. 25 of 2013 in connection with the issuance of governing rules of companies subject to the supervision of the CMA (the “CMA Decree”). Without prejudice to the rules and regulations that are set forth under the NCL and the NCL Executive Bylaws, the CMA Decree encompasses rules for creating a uniform framework of corporate governance for companies regulated by the CMA.
In order to further develop the Kuwait capital markets and to improve corporate governance issues such as transparency, full disclosure, conflicts of interest, exploitation of internal information and guaranteed compliance with the Kuwait capital markets laws, the NCL provides for the CMA to regulate such issues in relation to those firms that are subject to its supervision. Specific entities that are under the supervision of the CMA are set forth in the CMA Decree, however, the scope of this article will primarily focus on the implementation of the corporate governance systems for publicly listed companies in Kuwait and the significant benefits that result from implementing a good corporate governance system.
Building A Strong Board Of Directors
Good corporate governance plays a vital role in the success and value of a company. When executed effectively, a company with a good corporate governance system generally outperforms other companies, attracts investors, and adds value and robust competition in the market. In light of the financial crisis and reflecting the changes in the global economy, the CMA Decree, which was issued on June 27, 2013 sets forth the prescriptive and binding rules and principles of implementing sound corporate governance systems for companies subject to CMA supervision. As such, the foundational structure of a good corporate governance system is represented through a set of 11 rules as follows: Rule 1: Build a balanced structure for the board of directors; Rule 2: Duties and responsibilities; Rule 3: Selection and qualifications of the board of directors and executive management; Rule 4: Financial Reporting; Rule 5: Risk management and internal controls; Rule 6: Professional and ethical behaviour; Rule 7: Disclosure and transparency requirements; Rule 8: Shareholder’s rights; Rule 9: Role of stakeholders; Rule 10: Fostering and encouraging performance; and Rule 11: Social responsibility.
In considering the 11 rules, paramount to building a good corporate governance system is building a good board. It is the board that is ultimately responsible for the company, including making strategic decisions on behalf of the company, overseeing the day-to-day operations, mitigating risks, and implementing and ensuring the practice of corporate governance. However, implementing corporate governance systems are often perceived as onerous and expensive, and as a result companies do not proactively institute these systems. In keeping with this perception, a recent forum held by Thomson Reuters Accelus, the Second Governance, Risk and Compliance Forum in Kuwait, addressed issues related to corporate governance. Delegates were polled during the “corporate governance” session and 41% indicated that boards of directors and senior management did not place sufficient emphasis on governance. Without a corporate governance system, firms cannot compete in the long term. Hence, the CMA issued a mandate that all entities subject to its supervision, including publicly listed companies, must institute corporate governance systems by June 30, 2016 in compliance with the CMA Decree.
The fundamental principles for reinforcing good corporate governance are transparency, accountability, and sound administrative organisation. These principles are reflected in the substantive laws and regulations of the NCL and the CMA Decree. The following articles set forth in detail the sound legal basis for building a good board, which include the necessary qualifications of board members; electing board members; balancing of powers; defining the role of the board; board liability; and the general assembly and the recording of the minutes.
In regulating the eligibility for membership as a board of director, the NCL requires that those nominated for such membership must meet all of the following con-restricting punishment, or a crime of mortal turpitude; and
• With the exception of independent board members, be an owner of a number of the company shares. The NCL also introduced strict requirements when composing the board of directors to ensure they possess the proper understanding and knowledge of their position in order to act in the best interest of the company and the shareholders. Additionally, the CMA Decree pursuant to Principle 1.3 of the Third Rule provides in more detail that the board shall establish a committee to nominate and identify individuals qualified to become members of the board. The nominating committee shall consist of at least three members, provided at least one is an independent member and the chairman of the nominating committee is a non-executive member of the board of directors. The chairman of the board of directors may not be on the nominating committee.
Notwithstanding the requirements that have been provided for under the NCL with respect to the composition of the board of directors to build a balanced structure of the board of directors, Principle 1.1 of the CMA Decree provides the following requirements and expands the requirements listed under the NCL:
• The company articles of association state the number of the board of directors provided that it is not less than five members. It is to be noted that the NCL increased the minimum number of board of directors for a shareholding company from three to five.
• The shareholders are required to elect the board of directors by means of secret ballot for a period set forth under the company articles of association provided that the term does not exceed three years; members of the board of directors may be re-elected unless the company articles of association stipulates otherwise.
• A majority of the members of the board of directors should not be part of the executive management and the independent members shall not exceed half of the board members.
• It is prohibited for the posts of board chairman and executive president to be held by the same person.
• Upon termination of the directorship of one of the board of directors’ members by any means of directorship termination, the company shall notify the CMA immediately and explain the termination.
• A director cannot be a member of a board of more than five Kuwaiti shareholding companies or a chairman of more than one Kuwaiti company.
• The company general assembly may retire the board chairman, or any member of the board, pursuant to the proposal of the absolute majority of the board or pursuant to a request signed by a number of shareholders holding not less than one fourth of the underwritten capital.
• The legal person entitled, according to the company articles, to appoint its representatives to the board of directors may not vote on the election of other members in the board of directors. The NCL makes clear that the role of the board of directors is to carry out all actions required for the company’s management and according to the objectives of the company. In order to clarify and tighten the scope of the board of directors, the NCL specifically states that the articles of association must indicate the extent of the powers of the board of directors in areas relating to borrowing, mortgaging the company’s property, guarantee contracts, arbitration, conciliation and donations (Article 215). Principle 1.3 of the CMA Decree provides that the board of directors shall dedicate sufficient time to undertake the tasks and responsibilities entrusted to them.
Similarly, Principle 2.1 of the Second Rule under the CMA Decree also addresses the importance of establishing clear roles and responsibilities of the board of directors in more detail. Principle 2.1 requires that the company outline in detail the tasks, responsibilities and duties, as well as the powers and authority delegated to each member of the board of directors and executive management in order for them to achieve the objectives of the shareholders and the company. Principle 2.1 also provides a lengthy list of examples of board tasks and responsibilities. Some examples of tasks and responsibilities are as follows:
• Approval of the company objectives, strategies, business plan and policies;
• Creating clear policy for distributing profits to achieve the interests of the shareholders and the firm;
• Ensuring the company is in compliance with all applicable laws, regulations, policies and procedures;
• Ensuring the accuracy and safety of data and information, which should be disclosed as per applicable disclosure and transparency policies (to be discussed under “Disclosure Rules” herein below);
• Disclosing and periodically making announcements on the progress of the company;
• Establishing effective channels of communication in order to allow the shareholders to review aspects of the company’s various activities;
• Establishing a corporate governance mechanism;
• Controlling and supervising the performance of the executive management; and
• Establishing a mechanism to regulate transactions involving certain parties in order to mitigate any conflicts of interest. In defining the role of the board, the NCL allows the board to distribute work amongst its members. Specifically, the NCL permits the board to authorise one of its members or any third party to undertake a specific task; supervise one aspect of the company’s business; or exercise powers or authorities entrusted to the board of directors. As for the Principle 2.2 of the CMA Decree, the board of directors is to form specialised independent committees for purposes of enabling the board of directors to perform its tasks efficiently and in line with the interests of all shareholders and the company. Such specialised independent committees should include independent members, members of the board, non-executives and those who possess the necessary qualifications, experiences and technical skills.
The board members are responsible for safeguarding the integrity of financial reports. Principle 4.1 of the CMA Decree mandates that the board of directors and executive management shall oversee the soundness and impartiality of the financial reports prepared by the company by submitting written undertakings. Principle 4.2 requires that the board of directors form an internal audit committee whose main role shall be to ensure the same. The external auditor shall be insured, and be in good standing and professionally competent in his field. Principle 5.1 under the Fifth Rule provides that the board shall form a risk management committee whose main role is to lay down risk management policies and regulations. Principle 5.1 includes the minimum powers and authorities of such committee. Finally, Principle 5.4 adds that the board of directors shall form a committee named as the “governance committee” whose role is to provide corporate governance practice in line with the CMA requirements.
Liability Of Boards Of Directors
After the 2008 financial crisis, the decisions of the board of directors, especially with respect to publicly listed companies, faced greater scrutiny by shareholders, management and other interested parties. The board of directors must discharge their duties in good faith, recognising at all times their fiduciary duties.
Pursuant to Article 21 of the NCL, a company is committed to the works and acts conducted by its manager or board of directors, under its name and for its account so long as such acts fall within the company objectives. This applies even where the managers or board of directors’ scope of authority, as set forth in the company memorandum, was exceeded. Given the aforementioned liabilities affecting the firm, the NCL requires the manager or its board of directors to apply due care in exercising their powers and competencies. The NCL states that board members are liable, either personally or jointly, to the company, shareholders and third parties for all acts of cheating, abuse of power, mismanagement and for each violation of the law or company memorandum. Further, the general assembly’s voting to discharge the liability of the board of directors shall not preclude the filing of a claim against such board members (Article 232).
Notwithstanding the potential outlined liabilities, the General Assembly is entitled to discharge, at all times, the liability of the board of directors with respect to a certain matter or from their entire management throughout a whole lapsing fiscal year.
It is worth noting that the NCL provides the right to file a claim against board members for any errors causing damages to the company (Article 234). Under such provision, the company may file such a claim or if the company is under liquidation, the liquidator. Moreover, the NCL now allows for a shareholder to file a claim against the board personally for any error causing damage to him or through a derivative action on behalf of the company (Article 235). The statute of limitations for such claims is five years from the date of holding the ordinary general assembly meeting passing a resolution discharging the liability of the board or confirming its error. Notwithstanding the above, if the acts of the board represent a criminal offence, then the statute of limitations to file the case shall only abate with the lapse of the statute of limitation to file a criminal case (Article 236). It is to be noted that Principle 6.1 of the Sixth Rule under the CMA stresses the importance in promoting ethical standards and responsible conduct among from the board members. Principle 6.1 requires that the company establish a code, comprising standards and criteria to promote ethical values of the firm.
Requirements For General Assembly Meetings & Approval Of Minutes
The NCL provides that a board of directors meeting is not valid unless it is attended by half the number of the members, provided the number of those present is not less than three, unless the company memorandum stipulates a higher percentage or number. It is worth mentioning that in the interests of flexibility, the NCL eliminated the physical attendance requirement by permitting a board meeting to be held through the use of modern communication and further allows board resolutions to be passed by circulation; however such resolution must be passed with unanimous approval of all board members. The CMA Decree provides that a member of the board of directors shall attend a minimum of four meetings annually and an independent member of the board of directors shall attend a minimum of 75% of the board meetings. However, for meetings that include material matters and require substantial decisions, then the independent member(s) shall attend all of the meetings with such respect.
Furthermore, in addressing the previous limitations of corporate governance concerns, the NCL now requires that board of directors’ minutes of meetings be in writing and signed by all the members present at the meeting as well as the secretary of the board. The members who do not approve a board resolution are required to confirm their objections in the minutes of the meeting (Article 222).
The CMA Decree states that the board of directors shall appoint a secretary for the board from its members, executive management or externally, and identify the secretary’s tasks and responsibilities. The board secretary may not be appointed or dismissed unless through a resolution passed by the board of directors.
With respect to the nullification of board resolutions, the NCL permits shareholders to file a lawsuit requesting the courts to annul any decision taken by the board of directors or general assembly, ordinary or extraordinary, which violates any provision of the law or the firm’s memorandum. The statute of limitation for filing the lawsuit is two months from the date of passing the general assembly resolution or the shareholder’s consent of a board resolution (Article 251).
Furthermore, the scope and extent of the director’s duties are defined in the CMA Decree. Pursuant to the First Rule of the CMA Decree, it is clear that the intent of the Authority is to have a proactive board of directors that conducts the day-to-day business of the firm.
It states as follows, “Upon composing the board of directors, diversity in practical and professional experience and specialised skills shall be taken into account, and that the members are informed of the relevant laws and regulations, rights and duties of the board of directors, as well as possess full understanding and knowledge of the company activities and all the risks to which its financial position may be exposed.”
For the purposes of balancing powers, the company board of directors meetings shall be conducted in the presence of one of the independent directors. If the independent director expresses an opinion that is different from the decisions concluded by the board of directors, the dissent must be recorded in the minutes of the board meeting.
Eliminating Conflicts Of Interest
The board of directors of a company is expected to act ethically and exercise good faith at all times. The board should take all reasonable steps to avoid any foreseeable conflicts of interest with the company and the shareholders.
For publicly listed shareholding companies, Principle 6.1 of the Sixth Rule pursuant to the CMA Decree provides that a member of the board of directors or executive management shall not use his job to influence his position and to achieve a personal interest for him or any third party.
Principle 6.2 of the CMA Decree provides that the board of directors shall set forth an approved policy and mechanism to limit any potential conflict of interests and the methods of addressing and dealing with the same. Some examples of potential conflicts of interests listed under Principle 6.2 include the following:
• A member of the board of directors has a direct or indirect interest in any contracts concluded for the company’s interest (except where the operations carried out by public tender and if the member of the board of directors is the holder of the best bid and where there is permission from the general assembly renewable every year); and
• A member of the board of directors fails to inform the board of his personal interest in the operations and contracts concluded for the company. If such confirmation is received, then it has to be recorded in the minutes of the meeting;
• Participation in any competitive business to the company or trade in one of the business activities practiced by the company without receiving permission from the general assembly renewable every year. With respect to board decisions, the company, management, shareholders and other interested parties have a right to presume that the decision making process is objective, independent and in the best interest of the company and its shareholders.
For this reason, the NCL and the CMA Decree, provides that the CMA may require companies under their supervision to include on their board of directors one or more independent members elected by the ordinary general assembly. The independent board members cannot exceed half of the board nor are such independent members required to own shares of the company. The First Rule, Principle 1.2 of the CMA Decree provides that, “The board of directors shall comprise independent members entrusted with consultancy tasks related to the company’s various activities, to assist the board of directors to take the right decisions which contribute in achieving their company’s interests.”
Understanding the importance in avoiding conflict of interests, the CMA Decree enumerates the requirements of an available independent member such as:
• He cannot own 5% or more of the company’s shares;
• He cannot be or have been a senior executive of the company, or any company of its group or of which it is part of its group within the past two years;
• He must not have a first or second degree relationship with any member of the board of directors;
• He must not be a member of the board of directors or have been a director;
• He must not be an employee in the past two years or any related parties of the company or any company of its group; and
• He should not have been an employee over the past two years holding controlling shares of the firm. With respect to the management of a public shareholding company and mitigating any potential risks that board decisions are influenced by conflicting interests, Article 214 of the NCL and the Principle 1.1 under the First Rule of the CMA Decree it is prohibited for the chairman of the board directors to be the CEO of the company. Separating the chairman and the CEO gives the board the direct responsibility of hiring and firing the CEO, and the board of directors is charged with the general oversight of the company’s affairs and its management. This separation of interests creates an opportunity for the board to effectively address any abuses that may occur as well as address the performance of the CEO. Furthermore, an independent chairman and CEO deter the potential conflicts of interest abuse. For example, in a unified chairman/CEO role, he may use his position and abuse his power by concealing from the board potential problems and any issues created by his management. Ultimately, by having an independent chairman and CEO, and by having the active engagement of independent board members, the damaging effects of conflicts of interest remain limited and it allows the firm to safeguard shareholder interests, especially through protection of minority shareholder rights. In furtherance of promoting transparency of the company, the NCL provides that the board appoints a board member or non-board member (other than the chairman) as the company’s CEO to manage the company with the board and specifying his remuneration and authorities to sign on behalf of the company. In line with the Principle 2.1 of the CMA Decree, provides that the chairman will be responsible for the proper progress of the board of directors’ work to ensure that it is carried out in a suitable manner.
Another important aspect of good corporate governance is the requirement for timely and accurate disclosure of information related to the company, including the financial position, performance, ownership and governance of the company. A strong disclosure policy is pivotal for attracting capital, for a shareholder’s ability to exercise his ownership rights, and for building trust and confidence in the financial sector by providing access on all aspects related to the activities of the company and its financial statements to the investors.
However, during the 2nd Governance, Risk and Compliance Forum in Kuwait held by Thomson Reuters Accelus, 37% of the delegates considered disclosure of information to be the most difficult criteria to meet within corporate governance. At issue is how to strike the proper balance between disclosure of the company’s information and at the same time protection of proprietary information, Pursuant to Article 227 of the NCL, members of the board of directors may not disclose to shareholders or to third parties in other meetings other than the general assembly meetings the company secrets known by virtue of their management of the company. Otherwise, board members will be removed from their positions and must compensate for damages resulting from such disclosure.
Therefore, developing and implementing a comprehensive disclosure strategy is paramount in reducing harm to the company when identifying what constitutes public disclosure of information versus revealing company secrets. In this respect, the CMA Decree provides the implementation mechanisms when considering public disclosure policies.
Under the Seventh Rule, Principles 7.1 through 7.5 of the CMA Decree provide the implementation methodology for timely and high-quality disclosure, such as: the board of directors shall lay down the quality disclosure and transparency policies and regulations; the board of directors shall lay down policies and procedures for the timely disclosure of both financial and non-financial information; the company shall provide disclosure without discrimination; the company shall create a register; the company shall disclose in detail the remunerations and benefits and advantages offered to the board of directors and executive management prepared by a Remunerations Committee; and the company shall implement and use information technology to interact with shareholders, investors, and stakeholders on the firm’s website.
For investors to exercise their shareholder rights, the CMA Decree addresses the requirements beginning from the internal preparation related to the activities of the company and its financial statements through to the board approving and regulating the disclosure, and internal and external auditor requirements. The inherent checks and balances of a comprehensive disclosure programme ensure the fundamental objective of transparency and protection of shareholder rights.
Minority Shareholder Rights & Protections
Although the directors run the day-to-day business of a company, ultimately it is the shareholders who have control of the company. Among the most significant objectives of corporate governance rules is the protection of shareholders. Broadly speaking, Article 208 of the NCL provides the statutory rights and obligations of shareholders. The relevant portion of the law provides that all shareholders shall enjoy equivalent rights. Moreover, what is most notable about the NCL and the corresponding laws and regulations are the specific provisions which carve out the rights and protections of minority shareholders, creating a level field.
Minority shareholders are sometimes undervalued, despite their role and influence in making an impact on the direction of the company. Majority shareholders can take advantage of the fact that the minority shareholders do not possess a controlling interest in the firm, which has resulted in abuse. However, minority shareholders can play an essential role in the development and sustainability of a company. Recognising the value minority shareholders have on a company, the substantive laws and the intervention of the CMA grants minority shareholders the ability to become more active participants in the company. Most notable are the right to fair treatment; the right to information; the right to participate in the meetings of the general assembly and cumulative voting; and the right to receive profits and to bonus shares. This section examines the impact corporate governance has on protecting the minority shareholders’ in a publicly listed company.
A minority shareholder’s access to the company’s information may be limited. Hence, the objective of the CMA and the substantive laws provide that the paramount objective in conferring greater minority shareholder rights is through transparency. Such notions of transparency are provided under Article 239 of the NCL which provides that all shareholders, regardless of the number of shares held, are entitled to attend the general assembly. Additionally, the CMA Decree provides the implementation mechanism pursuant to Article 239, and more specifically provides minority shareholders, who do not hold positions in management, to exercise their rights to information and to participate in the meetings of the general assembly through the following rules:
• Eighth Rule, Principle 8.2 provides that all shareholders can access the shareholders register.
• Eighth Rule, Principle 8.3 provides that shareholders holding not less than 10% of the company capital or pursuant to the request of the auditor may invite the assembly to convene pursuant to a justified request.
• Eighth Rule, Principle 8.3 enables shareholders holding 5% of the company capital to add items to the general assembly meetings’ agenda.
• Eighth Rule, Principle 8.3, Second, Point 8 prohibits the imposing of any fees for the attendance of any category of shareholders of the general assembly meetings or giving any preferential advantage to any category of shareholders. Pursuant to the CMA Decree, Eighth Rule, Principle 8.3, Second, Point 6 recognises that every shareholder, voting for members of the board of directors, is a “genuine right”. In light of this voting right, the NCL provides the statutory right for cumulative voting arrangements. Cumulative voting arrangements give minority shareholders leverage in electing a member of the board of directors. Specifically, Article 240 provides that with respect to the election of the board of directors of a Kuwaiti shareholding company, the memorandum of association may stipulate that voting may be carried according to the cumulative voting system. Such a voting system enables minority shareholders to cast their votes and gain representation on the board of directors in proportion to their total contribution. This law understands that board seats are valuable and provides the minority shareholder to proactively hold a seat on the board through cumulative voting arrangements. A shareholder is entitled to use his entire shares to elect one board of director or may distribute the shares among other candidates.
This right allows minority shareholders access to information, representation of minority interests, and even to shape the policy of the company. In light of the foregoing, the NCL introduced a concept in the management of the Kuwaiti public shareholding companies that requires that the board appoint a board member or a non-board member (other than the Chairman) as the company’s CEO to manage the company with the board specifying his remuneration and authorities to sign on behalf of the company (Article 214). Similar to the European model, the separation of powers not only provides the necessary measures to protect the firm overall from conflicting interests; minority shareholders, by exercising their voting rights, have the power to influence the composition of the board of directors.
Additionally, in an effort to ensure that the firm’s management is being conducted in a proper manner and to mitigate any potential biased decision-making, the NCL provides that shareholding companies under the supervision of the CMA may be required to include on their board of directors one or more independent members elected by the ordinary general assembly. The number of independent board members cannot exceed half of the board nor are such independent members required to own shares of the company (Article 218).
Given the importance of this concept, the CMA Decree also provides specific requirements, which should be available in the independent member to ensure that such person(s) meets the necessary requirements and qualifications to assist the board of directors to make the right decisions in furtherance of the company’s interests while enjoying the complete independence from any pressure or issues from other board members (Principle 1.2). Examples where the independence would be compromised would be where the nominated independent member is an owner of 5%or more of the company shares or any of its subsidiaries for which he is nominated to be an independent member, or if the purported independent member has a first or second degree relationship with any member of the board of directors or the company senior executives or any of its subsidiaries.
Additionally, minority shareholders by nature of their interest in the company, may not have the authority to compel dividends or benefits from a company. Under this view, board members may exercise their authority to divert value from the minority by awarding themselves large compensation arrangements or paying their managers large salaries. As such, a shareholder’s interest can be impacted by what a company does or decides not to do, especially the value of the interests of a minority shareholder.
Hence, pursuant to Article 209, the NCL expressly provides that every shareholder, irrespective of his ownership interest in the company, shall benefit from their investment by “[receiving] profits and obtaining the bonus shares determined for distribution” and “[ participating] in the company management by membership in the board of directors, attending the general assemblies and participating in its deliberations, as per the provisions of the law and the company memorandum. Every provision in the company memorandum contrary to the above shall be invalid.”
Therefore, the interests of the minority shareholder, coupled with his voting rights and the right to receive profits from interest in the firm, influence the value of his investment in the business. Finally, in the interest of fairness, specific provisions in the NCL and the CML provide the statutory rights for minority shareholders to apply to the CMA and the relevant regulatory bodies and on particular issues to the court. Article 235 of the NCL provides that every shareholder, including a minority shareholder, may bring a liability claim either individually or on behalf of the company.
Another notable provision under Article 251 of the NCL provides that the ordinary and extraordinary general assembly’s resolutions which prejudice the rights of minority shareholders may be challenged. Furthermore, the objection must be carried out by a number of shareholders owning at least 15% of the firm’s shares who did not approve the resolution. Likewise, the statute of limitation for filing the above lawsuit shall be two months from the date of the general assembly’s resolution. Upon filing of the aforementioned lawsuit, the court may support the resolutions, amend or cancel them, or postpone their execution pending a settlement through the purchase of the shares owned by the opponents provided that such purchase is not carried from the company capital.
An added protection with respect to protecting minority shareholder’s rights is the supervision and enforcement of a proactive regulating authority. In the interest of protecting minority shareholder rights, the regulating authority can intervene under specific instances. Most notably, pursuant to Article 327, a new provision was introduced which grants the Ministry of Commerce and Industry (MoCI) the authority to inspect a company’s records and documents and to insure that no violations of the applicable law or the company’s memorandum have taken place. The MoCI will consider any complaint submitted by any party having an interest of enforcing compliance under the NCL.
If the MoCI determines that the aforementioned violations have taken place or that the company’s founders or management have undertaken transactions detrimental to the interests of the company, partners or shareholders, or the national economy, then it may request the general assembly of the company to convene to remedy such violations (Article 328).
The NCL also allows shareholders or partners holding at least 5% of the company capital to submit a request for the appointment of an inspector by the MoCI in connection with the violations they attribute to the manager, board members, auditor or the executives of the company in performing their duties, whenever they have reasons justifying such request (Article 329). If, following the inspection, the MoCI or any of the supervisory authorities determines that the allegations were incorrect, then they may publish all or some of the inspection report in two daily newspapers and the company’s website at the expense of the applicants to confirm such inaccuracy (Article 330). On the other hand, if the MoCI rejects the aforementioned request of shareholders or partners, then the NCL permits such parties to submit a petition to the head of the Kuwait Court of First Instance requesting a court appointment inspection (Article 331). In connection with any inspection contemplated, whether by MoCI appointment or court appointment, the companies’ management, employees and auditors are obliged to cooperate with the representative of the MoCI and grant him access to any requested documents or records (Article 333).
The previous discussion has been chiefly concerned with the exercising of certain rights of a minority shareholder. The following provisions of the CMA Executive Bylaws and corresponding internal instructions for disclosing information, the Instructions on Disclosure, however, focus on the protection of minority shareholders during the organisation of acquisition operations. Often during an acquisition offer, minority shareholders’ interests can be squeezed out and therefore, minority shareholders are compelled to sell their interests. Effectively, minority shareholders are limited in exercising their rights during the transaction. However, through specific disclosure requirements and ensuring the minority shareholders are given the time and the information to make fully informed decisions during an acquisition offer such circumstances as those stated above can be prevented. Under Article 247 of the CMA Executive Bylaws, an acquisition offer is defined as an offer, attempt or request to hold:
• “All the shares of a listed company or all the shares of any category or categories within a listed company in addition to the shares held by the offeror, affiliated parties thereto or ally thereof on the date of submitting the offer;
• “All the remaining shares in the company which are requested to be purchased from other shareholders in such company as a result of the offeror, the affiliated parties and ally parties thereof acquiring a majority percentage in the company enabling it to control the board.” The issuer submitting or intending to submit an acquisition offer must first comply with the relevant rules under chapter seven of the CMA Executive Bylaws. As a general matter, the Instructions on Disclosure provide the mechanisms of disclosure requirements during the organisation of an acquisition offer and the announcement of the offer upon approval of the CMA and the Kuwait Stock Exchange. Additionally, the Instructions on Disclosure defines the Issuer as “[T]he legal person whose securities are listed in the Exchange”.
Article 3 of the Instructions on Disclosure provides that the Issuer must make timely disclosure of substantial non-public information when any influential changes such as an increase or decrease in the assets, liabilities, revenues and expenses affect the Issuer. Any Issuer intending to make an acquisition offer must immediately disclose substantial information to the CMA.
The Instructions on Disclosure defines substantial information as “[A]ny information with the Issuer relating to its business, personality, financial position or management thereof which information is not available for the public and transactors, has impact on its assets, liability, financial position or general course of business and could cause to change the price or volume of trading the security or cause to attract or distract the transactors for the security or could affect the Issuer’s ability to fulfill its obligations.” The substantive disclosure rule pursuant to Article 7 of the Instructions on Disclosure strictly prohibits selective disclosure. However, selective disclosure may be considered among persons dealing with:
• Issuer’s advisors;
• Persons with whom the issuer negotiates or intends to negotiate with respect to any commercial, financial or investment transaction and the advisors of those person;
• Major shareholders of the Issuer;
• Issuer’s lenders;
• Credit ratings agencies; and
• Governmental and supervisory authorities. The role of the CMA in an acquisition offer is crucial to the protection of minority shareholder rights because the Issuer must first obtain the written approval of the acquisition offer by submitting the offer document. Additionally, Article 73 of the CML allows a minority shareholder to apply to the CMA for assistance where the general assembly’s resolutions inflict harm on the minorities’ rights during the organisation of an acquisition offer. Hence, the NCL, the Executive Bylaws, the CMA Decree, and the Instructions on Disclosure, taken separately or in conjunction, provide the minority shareholders with powerful weapons for improving their position in the company.
Good corporate governance is represented by the inherent principles of ethical behaviour, transparency, equity and justice. In light of the recent reforms instituting good corporate governance practices, broader enforcement and regulation of illegal insider trading began in Kuwait. The chilling effects of the 2008 financial crisis were primarily blamed on illegal insider trading. Illegal insider trading generally occurs when a security is bought or sold by a party or parties who possess material inside information and breach their fiduciary duty or other relationship of trust and confidence. Globally, insider trading violations continue to be a high priority area for regulators because insider trading fundamentally undermines the integrity and fair functioning of the capital markets. Consequently, in an effort to attract and gain the confidence of investors in Kuwait – both domestically as well as internationally – in 2010, the CML was enacted along with substantive laws regulating illegal insider trading. Most notably, the new law designates the CMA as the regulatory body to regulate the securities market and give them the authority to enforce the law with vigor with the goal of protecting investors.
In Kuwait, illegal insider trading is a crime and punishable by imprisonment for a period of up to five years and a monetary fine (Article 118 of the CML). Although the laws may deter illegal insider trading, the most effective way of preventing illegal insider trading is through self regulation by instituting a sound corporate governance system. As such, specific disclosure rules and the internal instructions create the effective means to ensure that companies can institute best practices to prevent illegal insider trading, as a result gaining the confidence of investors to invest their securities.
The broad provision prohibiting illegal insider trading can be found under Article 334 of the NCL which states that “every member of the board of directors, manager, member of a control board, auditor or any employee in the company or any person entrusted with inspection of the same, who disclosed in conditions other than the circumstances in which the law obliges him with for the secrets he is informed of by virtue of his job, or exploiting such secrets to achieve personal benefits for him or for third parties or to the detriment of the company[…].” Read together, the internal instructions under the Insider Trading Regulations define and provide the disclosure requirements regulating illegal insider trading. Pursuant to the Insider Trading Regulations, members of the board of directors, and members of the executive staff, and other informed persons cannot or are limited in trading in securities. Specifically, under the Insider Trading Regulations, an informed person is defined as those individuals, such as directors, officers, managers, and other informed parties such as, auditors and lawyers who have access to material inside information about the company, which is not available to the general public, and defines material inside information as “any data and information available to the issuer in connection with its activity, its person, financial position, management and clients which are not accessible to the public and has an impact on the assets, liabilities, financial status or the general course of the issuer or its client’s business, which may lead to change in the price or volume of trading, or in attracting or the abstention of transfers of the issuer’s securities or other securities in which the issuer or its clients has an interest or which may affect the ability of the issuer or its client to fulfill its liabilities.”
With respect to regulating the transactions of members of the board of directors, members of the board of executives or other informed persons, a company shall take a number of measures to limit the possibility of any person misusing material inside information without prejudice to the disclosure requirements set forth under the NCL and the Instructions on Disclosure by the CMA. Specifically, the company is responsible for taking all of the required measures that will maintain the confidentiality of material inside information, and included in the Insider Trading Regulations are the trading prohibition periods for members of the board of directors, company executives and other informed persons. The purpose of the prohibition periods is to avoid suspicious misuse of substantial inside information and data that may lead to a change in the price or volume of trades in the company’s securities. In this regard, it is strictly prohibited for members of the board of directors to trade in the company’s securities, whether by selling or buying, during the period they are serving as director in the company, unless the person who is the director is transferring the ownership of shares by inheritance and will; transferring the ownership of shares as a result of a court judgment; transferring the ownership of shares from, and to or between portfolios managed by licenses companies, provided the transfer is for the benefit of the original shareholder; or completing the minimum limit for the directorship For members of the board of directors of the issuing company’s parent, subsidiary or affiliates the trading prohibition period is described below:
• 10 working days before the end of the fiscal year quarter pending disclosure of the financial results for such period;
• 10 working days before the end of the fiscal year pending the disclosure of the financial results for such period. With respect to the executives and other informed persons, they shall not trade securities in the issuing company’s stocks and securities, as well as its parent, affiliate or subsidiaries unless during the following periter pending disclosure of the financial results for such period;
• 10 working days before the end of the fiscal year pending the disclosure of the financial results for said period. To facilitate compliance with the reporting of a securities transaction, issuers must prepare a list of informed persons including the members of the board of directors; members of the executive board; and taking into consideration members who may have access to material inside information and submit the list to the CMA and the Kuwait Stock Exchange. Finally, disclosure of the securities transaction must be reported to the CMA and the Kuwait Stock Exchange five business days before the date of trading in the security.
Although this section only briefly touched on laws concerning illegal insider trading and the disclosure requirements in a securities transaction, the core of the applicable laws and the Instructions on Regulating Insider Trading is to implement ethical practices so that all investors have equal access and rewards in the participation in securities transactions.
The salient objective of the very substantive laws and regulations that are outlined in this article is to build the confidence of investors, both domestically and internationally, through the enforcement of a sound and reliable corporate governance system. Therefore, the CMA announced that all companies registered in Kuwait must be in compliance with the rules set forth in the CMA Decree by June 30, 2016. It should also be noted that all companies are expected to comply with the NCL by September 12, 2014.
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