I. NEW COMPANIES LAW: On November 29, 2012 Kuwait received welcome news through publication in the Kuwait Official Gazette that the highly anticipated New Companies Law (NCL) had been issued as Law No. 25 of 2012. Amendments to the NCL were also recently introduced as they were passed by Kuwait’s National Assembly. As it has been more than 50 years since the issuance of the previous Commercial Companies Law – promulgated by Law No. 15 of 1960 (the Old Law) – the NCL was long-awaited and well-received as a major piece of reform that will benefit Kuwait’s business environment.
While the Old Law was satisfactory in regulating companies in Kuwait, the NCL continues to modernise the economy by updating the law to address various issues relating to current economic and business concepts that have been introduced to the corporate world over the past decades.
To address past shortcomings and the need for further laws and reforms to assist the implementation and regulation of businesses, the Kuwaiti government recognised that the promulgation of the NCL was necessary to reform the outdated provisions of the Old Law, and introduce new concepts, updated policies and procedures.
In line with the reforms being implemented in various economies throughout the world, Kuwait, through the introduction of the NCL, is implementing reforms by introducing new provisions and amending previous ones to allow more flexibility in establishment and operations, facilitate the incorporation process, make it more efficient, and alleviate other hurdles placed by the Old Law on new and existing investors who are interested in establishing and operating companies in Kuwait.
For example, the NCL, unlike the Old Law, establishes a link between its regulations and those of the Capital Markets Authority (CMA, or “Authority”, as defined in the NCL), and other regulations related to public-private partnership. Also, many globally accepted standards related to corporate governance that have been developed over decades to achieve maximum protection for minority shareholders and other parties dealing with the company were either poorly addressed or entirely unmentioned.
The past decade has seen the continued growth of sharia-compliant companies in Kuwait and the expansion of the international Islamic finance market in general, which has increased the need for legislation specifically addressing and governing the establishment, operation and management of sharia-compliant companies in Kuwait. Recognising these needs, the NCL contains significant provisions relating to the operation and establishment of sharia-compliant companies in the country.
Executive Bylaws: Notwithstanding the addition of a number of new provisions and the forward-moving spirit of the new legislation, the NCL is dependent on the release of the executive regulations to the NCL (the Executive Bylaws) by the Ministry of Commerce and Industry (MOCI). Specifically, Article 3 of the NCL states that the MOCI will issue the Executive Bylaws to clarify and set forth certain requirements necessary for the enforcement of the NCL.
Recent amendments to the NCL add that the Executive Bylaws are to be issued within six months from the date of publication, and the other supervising bodies shall issue any required decisions to address certain matters, as long as it is in accordance with the provisions of the new law. The recent amendments also removed the requirement that existing companies must be in compliance with the provisions of the NCL within six months, commencing from its effective date (Article 2). The MOCI is expected to issue the Executive Bylaws in 2013.
Through an analysis of the NCL, this article gives an overview of some of the key concepts and themes that are derived from the law’s issuance, including:
• Structuring flexibility – new and retained forms of entities;
• New key share capital and voting issues;
• Corporate governance – shareholding companies;
• Corporate governance – companies with limited liability;
• Compatibility with the CMA; and
• Sharia compliance. Based upon the above concepts now codified into the NCL, along with the eager anticipation of the release of the Executive Bylaws, we are optimistic that the NCL will significantly reduce the obstacles facing businesses and investors in establishing and operating companies in Kuwait.
II. STRUCTURING FLEXIBILITY: Regarding new and retained forms of entities, the NCL sets forth regulations outlining the various forms a company may take in Kuwait. The NCL has retained many of the existing forms of entities, which include:
• Joint liability companies;
• Limited partnerships;
• Companies limited by shares;
• Contractual joint ventures;
• Shareholding companies (public or private); and
• Companies with limited liability. In addition to retaining the above company forms, the NCL has introduced new forms such as:
• Sole person companies;
• Professional companies;
• New forms of holding companies;
• Special purpose vehicles; and
• Non-profit companies. We briefly discuss each of the above company forms herein, including the major changes to the pre-existing company forms, as well as overviews of the newly introduced corporate vehicles.
Joint liability companies: A joint liability company consists of two or more partners formed under a specific name in order to carry on commercial business. The joint liability company has a separate legal personality, however its members are jointly and separately liable for its obligations to the extent of their entire personal property and any agreement to the contrary shall be invalid (Article 33).
Under the Old Law, a joint liability company was required to have at least one Kuwaiti partner holding a minimum of 51% of the company’s capital. The NCL, however, is silent on this, and the Executive Bylaws shall set forth such restriction, as well as the minimum capital for joint liability companies.
Article 36 of the NCL adds a restriction on a joint liability company issuing bonds for the purpose of borrowing or receiving funding by issuance of sukuk (Islamic bonds) through an initial public offering. Further to the NCL, joint liability companies may not be in the form of securities for the purpose of trading (Article 39).
A new provision was introduced whereby a partner is permitted to pledge his part in the joint liability company. The pledge must be concluded in writing and registered in the Commercial Register of the MOCI in order to be effective against the company and any third parties (Article 42).
Limited partnerships: Pursuant to Article 56 of the NCL, a limited partnership may be formed using two categories of partners:
• Joint partners: Partners are jointly and severally liable for the liabilities of a company, permitted to be sole managers, and all are of Kuwaiti nationality.
• Limited partners: Partners contribute to the company; however their liabilities are limited to their respective contributions and they are prohibited from participating in the management of the company even pursuant to obtaining authorisation or a power of attorney. In the event that a limited partner intervenes in the management of the company, the limited partner will be deemed a joint partner and become jointly and severally liable for the liabilities arising from the work undertaken on behalf of the company (Article 59). The NCL further includes that the percentage of ownership of Kuwaitis must be a minimum of 51% of the company capital (Article 57).
Partnerships limited by shares: A company limited by shares is fundamentally a limited partnership whereby its capital is divided into shares. It is a company formed by joint partners who are jointly and severally liable for the liabilities of the company and the shareholding partners, who are liable only to the extent of their respective contribution in the capital of the company (Article 60).
The joint partners are subject to the same rules as joint partners in a joint liability company. The shareholding partners are generally subject to the same rules as shareholders in a joint stock company (Article 61). A shareholding partner that intervenes in the management of the company will be jointly and severally liable for its liabilities.
The NCL requires that there be at least five partners, of which at least three must be shareholding partners. If there are more than seven shareholding partners, Article 70 of the NCL requires that a board of supervision must be formed with a minimum of three members elected from the existing shareholding partners at the company’s general assembly within 30 days of the company being registered in the Commercial Register of the MOCI.
Joint ventures: A joint venture is a company established between two or more persons that is confined to the relationship between the partners of the joint venture and is not effective against third parties (Article 76).
There are no formal establishment or registration procedures required to form a joint venture. Rather, the partners of the joint venture are to execute a contract outlining the rights and obligations of the partners, including how profits and losses will be apportioned between the partners, as well as any other conditions (Article 77).
Accordingly, a joint venture does not have a legal personality and therefore, third parties may only enforce their rights against the partners of the joint venture and not the joint venture itself (Article 78).
Shareholding companies (closed, public or pri- vate): A closed shareholding company is not listed on the Kuwait Stock Exchange (KSE) and is therefore deemed a private shareholding company. In accordance with the NCL, any closed shareholding company will be considered a public shareholding company from the date of listing on the KSE.
To allow more flexibility to shareholders in determining restrictions on share transfer, a closed joint stock company allows a company to include trade restrictions in its memorandum of association, by either stipulating the priority right of shareholders to purchase shares whose owners are contemplating selling, or by stipulating prior approval by the board of directors of the shares to be sold.
Under the NCL, a closed shareholding company becomes a public shareholding company when the period of the restriction to transfer shares has lapsed. This allows a company to increase its capital by a public invitation for subscription in the shares by virtue of a decree issued by the MOCI and CMA approval.
Companies with limited liability: Companies with limited liability are among the most common in Kuwait.
1. Nationality of partners and capital requirements. Under the Old Law, a company with limited liability was required to have a Kuwaiti partner(s) holding at least 51% of the parts or shares. The NCL, however, awaits the issuance of the Executive Bylaws to determine the foreign ownership restriction percentage and the minimum capital requirements for a company with limited liability. Typically, the minimum capital for a company with limited liability is based on the company objectives (Article 95).
2. Ease of procedures to transfer parts in a company with limited liability. The transfer of parts in a company with limited liability was an arduous process under the Old law and required a signed deed of amendment before the Notary Public of the Ministry of Justice. The company then had to file the signed deed of amendment by all partners at the MOCI to amend the memorandum and articles of association.
The NCL, however, has eased these requirements by only requiring the use of a written instrument to allow for the transfer of parts in a company with limited liability (Article 99). The NCL also introduced new provisions to remove barriers that previously hindered investors from freely transferring their legal ownership interests in a company with limited liability. The new provisions include the following:
•The consent of the existing partners must be obtained in order to sell parts to third parties.
• In the event unanimous consent from the partners is not obtained, the conditions of the transfer offer shall be published in the Official Gazette.
• If the existing partners do not exercise their right of redemption within 15 days of publication, then the partner is free to transfer any parts.
• The request to transfer parts must be attached with a certified check for the full value of the assigned parts in the assignor’s name.
• When amending the memorandum of association, only the signatures of the transferring partner and the transferee are required, eliminating the need to obtain the signatures of all the partners on the amendment of the memorandum of association (Article 100). III. PLEDGING PARTS IN A COMPANY WITH LIMITED LIABILITY: The NCL now formally allows partners to pledge their parts in a company with limited liability. There was no formal codification of this concept under the Old Law and any practices of pledging parts in companies with limited liability were left to the discretion of the MOCI.
Under the NCL, a pledge against parts is allowed and must be completed using an official notarised agreement, and will only be effective against the partners or third parties if the pledge agreement is recorded in the Commercial Register of the MOCI and the company is notified of the pledge (Article 102).
Sole person companies: Articles 85-91 set forth the details of a sole person company. According to the NCL, a single Kuwaiti individual or a Kuwaiti corporate entity can own a sole person company without any partners. The owner of a sole person company is liable only to the extent of the capital allocated in furtherance of establishing the company.
Pursuant to the recently issued amendments to the NCL, Article 85 automatically converts a sole person company into one with limited liability in a case where the capital shares of the sole person company are owned by more than one person.
Professional companies: Articles 80-84 establish another type of entity introduced under the NCL, which is the professional company. Two or more Kuwaitis may form a professional company for the purpose of conducting a professional business entity. The licence for the incorporation of a professional company must be obtained from the MOCI, and the legal personality shall take place after registering the professional company in a special register of professional companies at the MOCI.
The professional company may take the form of: closed shareholding company; limited liabilities companies; partnerships; or limited partnerships.
The Executive Bylaws are to specify the professions that may establish a professional company, as well as the details related to professional insurance.
New forms of holding companies: Under the Old Law, holding companies were restricted to Kuwait closed shareholding companies.
However, the NCL has now introduced other types of holding companies for the purposes of: (i) holding ownership in other Kuwaiti or foreign companies, such as the holding of shares, parts or investment units; or (ii) participating in the incorporation, management and lending of these companies and guaranteeing them before third parties (Article 274).
Holding companies may now take the form of a shareholding company, a company that has limited liability or a sole person company (Article 275). This expansion of the forms of holding companies by the NCL is a much-welcomed change as it allows for more flexibility in setting up such entities and relieves the necessity to have holding companies, which are often established for simplistic purposes, run by companies with a multiple shareholder structure.
A further and notable change to holding companies in the NCL is the introduction of new liability for the owners of a holding company. Under the NCL, a holding company will be deemed as a joint guarantor for the liabilities of any of its subsidiaries towards the subsidiaries’ creditors under any of the following circumstances:
• The subsidiary lacks sufficient funds to fulfil its liabilities;
• The holding company owns capital allowing it to have the power to appoint the majority of the board of directors, managers, or power to vote on any resolutions issued by the management of the subsidiary; and
• A resolution is passed by the subsidiary that targets the benefit of the holding company and causes damage to the benefit of the subsidiary or its creditors, and it becomes the main reason for the subsidiary’s inability to fulfil liabilities (Article 280).
Special purpose vehicles: With the goal of encouraging local and foreign investment and abating the need to seek the assistance of off-shore jurisdictions, the NCL introduced and codified the corporate concept of the special purpose vehicle company. The NCL contains provisions whereby individuals and businesses may establish companies having a specially designated objective, including, for example, the issuance of sukuk, securitisation or other relevant objectives (Article 14). The terms and conditions related to special purpose vehicle companies are expected with the release of the Executive Bylaws.
Non-profit companies: Non-profit companies have been introduced under the NCL and can be utilised to address various social interests. They allow for the establishment of companies whose main objectives are carried out on a non-profit basis. An advantage of non-profit companies under the NCL is that they may take any of the legal forms listed above.
III. NEW KEY SHARE CAPITAL AND VOTING ISSUES: undefined The NCL significantly improved upon the Old Law and modernised the same with the introduction of the concepts of authorised and issued capital, the splitting of shares, issuance of preferred shares, changes in connection with the appointment of representatives and updated shareholder voting options.
Authorised and issued capital: Articles 148-149 of the NCL outline specific provisions and obligations in relation to a company’s shares and share capital.
The share capital may be altered or increased, subject to a resolution by the board of directors. The specifics as to the required minimum capital for shareholding companies in accordance with their objectives is expected to be provided in the Executive Bylaws. Allowing greater flexibility and more efficient issuance of shares is the introduction of issued and authorised shares. The issued capital represents the number and value of subscribed shares, while now, pursuant to the NCL, companies may have an authorised capital amount exceeding the issued shares. However, the authorised capital is not to exceed 10 times the issued capital.
The addition of authorised capital is seen as a significant improvement on the Old Law, under which companies were restricted to increasing capital in order to issue new shares.
Splitting shares: Another new mechanism introduced by the NCL is share splitting. Common in most Western jurisdictions, the splitting of shares is a corporate action in which a company’s existing shares are divided into multiple shares for various financial and investment purposes. Subject to an extraordinary general assembly resolution, shareholding companies that have successfully distributed dividends for two consecutive years may, subject to the approval of the CMA, decide to split shares.
Privileged shares; convertibility: Under the NCL, the articles of association may include privileged or “preferred” shares, which aim to attract smaller investments to companies by the use of such shares. Generally, companies that desire to increase their capital do so by issuing privileged shares to new investors while obtaining such new capital infusions.
Another benefit of privileged shares under the NCL is that such shares are rendered certain advantages related to voting rights, dividends and the results of liquidation or other matters. Also, the NCL allows shares of the same kind to enjoy comparable equal rights and obligations.
Privileges given to certain shares may only be amended pursuant to an extraordinary general assembly resolution and must have the approval of two-thirds of the holders of the type of share to which the amendment is related. After such a resolution is passed, the CMA will then issue the conditions and rules for issuing premium shares and transforming premium shares into common shares, as well as the conditions and procedures for its consumption by the company. The CMA will also issue the conditions and rules for trading the premium shares. Article 153 of the NCL also allows shareholding companies to issue preferred shares and convert preferred shares into common shares.
Appointment of shareholder representatives: The NCL has maintained the concept of appointment of directors to the board by the shareholders of the company based on the total number of board members and the pro rata share owned by relevant shareholders. Every shareholder is eligible to appoint a member to the board assuming the relevant shareholder holds the requisite pro rata ownership in the company, which is based on the total number of directors that will sit on the board. The number of the board of directors’ members selected by this method will be deducted from the total number of the board of directors’ members who are elected.
The shareholders who have appointed a representative within the board of directors are not to participate with other shareholders while electing the remaining board of directors, unless it is within the limits that exceed the percentage used for appointing the shareholders representative within the board.
A new facet to the appointment of shareholder representatives to the board is that shareholders may now form alliances in order to reach the requisite pro rata ownership levels necessary for appointing a board member. The appointed representatives to the board of directors will have the rights and obligations of the elected members (Article 219).
Cumulative voting: The NCL has introduced the concept of the cumulative voting system with respect to the election of the board of directors of a Kuwait shareholding company.
Generally, cumulative voting is designed to enable minority stockholders of a corporation to cast their votes and gain representation on the board of directors in proportion to their total contribution. A shareholder is entitled to use their entire shares to elect one director or may distribute the shares among other candidates for the board of directors. The NCL continues to allow straight voting along with cumulative voting in connection with board of director elections, and the memorandum and articles of association of the company are to state which voting method is chosen by the company. IV. CORPORATE GOVERNANCE Shareholding companies: Corporate governance is a system by which companies are directed, controlled and regulated and defines the relationships among 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.
In the past, although generally present in the Old Law, corporate governance provisions, oversight and enforcement in Kuwait was often limited and may have led to feelings of insecurity or trepidation with respect to foreign investors who were considering whether to conduct business or invest in Kuwait. The NCL addresses and seeks to alleviate these former concerns by further integrating and codifying the concepts of corporate governance. In particular, Article 217 of the NCL states: “The concerned regulators shall lay down the corporate governance rules for the [shareholding] companies subject to their control, to ensure optimum protection and balance between the interests of the company’s management and shareholders, as well as the interests of the other stakeholders therein. They shall also specify the conditions that should be fulfilled by the independent members of the board of directors.” In addition, the NCL sets forth various corporate governance provisions that apply to all forms of companies contemplated therein.
Joint liability of company founders: To encourage a company’s founders or partners to comply with the procedures set forth in the NCL relating to the drafting of the company’s memorandum of association, the NCL provides that the founders or partners are jointly liable for compensating any damage incurred by the company, any partners or third parties as a result of the invalidity of the company memorandum of association (Article 8).
Manager and board of directors standard of care: 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, if 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. An exception to release the company from such acts may apply where the company proves that the contractual party was aware, or should have been aware, at the time of conducting the work or transaction of such limitations. Given the aforementioned liabilities affecting the company, the NCL requires the manager or its board of directors to apply due care in exercising their powers and competencies.
Transparency of the company memorandum: The NCL requires that the company memorandum be kept at its headquarters and on the company website, if any. It also permits any concerned person to obtain a true copy of the memorandum for a reasonable fee as determined by the company (Article 31).
Furthermore, and in the interest of transparency, the NCL provides that every concerned party may review at the MOCI the company memorandum, minutes of its general assembly meetings and other information or documents kept with MOCI concerning the company, and permits such parties to obtain true copies of the same for a reasonable fee as determined by the MOCI (Article 32).
Company incorporation carried under breach of the NCL: In connection with the incorporation process, if it is evident that the company’s incorporation was carried in breach of provisions of the law then the NCL permits any concerned party to notify the company within 30 days in order to remedy such breach. If the company does not initiate any procedures to correct such breach then the NCL further permits the concerned party to make a request to the Kuwaiti court to require the company to remedy the breach or rule for invalidity of the company if it is evident to it the impossibility of the correction of the violation procedure (Article 146).
In the event that the court rules that the company was invalidly established then such company will be liquidated as a de facto company. The NCL prohibits the shareholders of the same from challenging such invalidity towards third parties and permits such concerned parties with the right to file a joint liability case against the company’s founders, members of the first board of directors and the first appointed auditors.
Board of directors: The minimum number of board of directors for a shareholding company has increased from three under the Old Law to five under the NCL (Article 212). The board is required to elect a chairman and a deputy chairman for the board by means of secret ballot. Pursuant to the NCL, the chairman of the board represents the company in its relationship with third parties and in front of the court, as well as any other areas as permitted by the company’s memorandum.
Further, the chairman’s signature is considered the signature of the board in dealing with third parties, and the chairman is authorised to execute the board’s resolutions and adhere to its recommendations. The role of the deputy chairman is to replace the chairman during his absence or if there is any obstacle preventing him from practicing his duties.
A newly introduced concept in the management of Kuwaiti shareholding companies is the NCL requirement that the board appoint a board member or a non-board member (other than the chairman) as the company’s chief executive officer to manage the company, with the board specifying his remuneration and authorities to sign on behalf of the company (Article 214).
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 its purposes. Further, nothing shall restrict the board’s authority unless such restriction is set forth under the law, the company’s articles of association or by resolution of the general assembly.
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).
In defining the role of the board, the NCL allows the board to distribute work among 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 (Article 216).
As quoted above, the NCL has paved the way for corporate governance regulations to be issued by the concerned authorities to be applicable on companies operating in activities falling under their scope of supervision. The purpose of this is to ensure the best protection and balance between the management, the shareholders and other interested parties (Article 217).
To ensure that the company’s management is being conducted in a proper manner, the NCL provides that the regulators 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 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).
Similar to the Old Law, 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. 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 resolutions must be passed with unanimous approval of all board members (Article 221).
In addressing the previous limitations of corporate governance concerns, the NCL requires that board of directors’ minutes of meetings be in writing and signed by all members present at the meeting and the secretary of the board. Members who do not approve a board resolution are required to confirm their objections in the minutes (Article 222).
In regulating the eligibility for membership on a board, the NCL requires that those nominated for such membership must meet all of the following conditions:
• Competent to act;
• Not have been sentenced in a crime with a freedom-restricting punishment, or a crime of moral turpitude; and
• With the exception of independent board members, be an owner of a number of the company shares. Under the NCL a director cannot be a board member of more than five Kuwaiti shareholding companies or a chairman of more than one Kuwaiti company. Under the Old Law such restriction was limited to three shareholding companies (Article 225).
Further, board members are restricted from being a member of the board of directors of two competitive companies, or to undertake any acts that may compete with the companies’ objectives or otherwise self deal, unless with the approval of the ordinary general assembly. In line with this, members of the board, any members of executive management, their spouses and relatives up to the second degree are prohibited from having an interest, direct or indirect, in contracts or transactions concluded with the company or for its account, unless by approval of the ordinary general assembly (Article 228).
The board of directors of a shareholding company are under obligation to refrain from disclosing company information that they obtained in connection with their management of the company to shareholders other than in general assembly meetings and to third parties entirely. Failure to comply with the aforementioned restriction could cause a member to be removed and to be held liable for any damages resulting from such violation.
Moreover, board members are prohibited from using insider information for their own benefit or for the benefit of others, and from disposing or transferring the shares owned thereby (unless approved by the CMA, Article 226), and a company may not extend any loans or facilities to any of its board members or chief executive officer, their spouses or relatives up to the second degree, unless there is special authorisation thereto by the ordinary general assembly of the company (Article 231).
Board of director liability: To ensure that board members comply with the NCL and the company memorandum, and act in the best interest of the company, the NCL states that the board members are liable, either personally or jointly, towards the company, shareholders and third parties for all acts of cheating, abuse of power, mismanagement and each violation of the law or company memorandum.
Furthermore, 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 there are new provisions in the NCL which provide 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 may do so.
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 either discharging the liability of the board or confirming its error. Notwithstanding the above, if the acts of the board represent a criminal offence, the statute of limitation to file the case shall only abate with the lapse of the statute of limitation to file a criminal case (Article 236).
Nullification of board resolutions: The NCL permits shareholders to file a lawsuit requesting the courts to annul decisions taken by the board of directors or general assembly, ordinary or extraordinary, which violate any provision of the law or the company’s memorandum. The statute of limitation for filing the lawsuit is two months from the date of passing the general assembly resolution or the shareholders’ consent of a board resolution (Article 251).
Further, shareholders owning at least 15% of the company’s shares may file a lawsuit to challenge any ordinary and extraordinary general assembly’s resolutions prejudicing the rights of the minority shareholders. 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 suitable settlement through the purchase of shares owned by the opponents, provided that such purchase is not carried from the company capital.
Supervision, inspection & penalties: The NCL introduced new provisions entitling the MOCI to examine any complaint submitted by any party having an interest in implementation of the NCL (Article 327).
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, it may request the company’s general assembly 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 on the company’s website at the expense of the applicants to confirm such inaccuracy ( Article 330).
However, 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 them access to any requested documents or records (Article 333).
The NCL has introduced new penalties for various violations related to corporate governance concepts. Penalties with a maximum imprisonment of three years and a fine ranging from a minimum of KD10,000 ($35,700) and a maximum of KD100,000 ($357,000) are imposed on any violations, including but not limited to:
• The intentional distribution of inaccurate information or the failure to include material information in the company’s articles of incorporation, public or private placement memorandums, financial or management reports or any other documentation addressed to the public;
• The disclosure of confidential information related to the company;
• The wrongful distribution of profits; and
• Any other acts of fraud and moral turpitude relating to the company, its management or affecting third parties (Article 334). Also, a penalty with a maximum imprisonment of one year and a fine ranging from a minimum of KD5000 ($17,900) and maximum of KD10,000 ($35,700) is in place for violations by board members or managers willfully preventing any shareholders from attending the general assemblies; refraining from calling the general assembly to convene in cases where holding the same is required according to applicable laws; preventing any person appointed in accordance with the applicable laws ( including auditors, liquidators and receivers) from accessing records or failing to submit requested documents or information, or the misuse of information related to the liquidation of the company by the liquidator, board members or managers (Article 335).
If the company fails to remedy any violations included in the MOCI’s report to the general assembly within the period specified by the MOCI, the company will receive a fine of at least KD5000 ($17,900) and not more than KD20,000 ($71,400) (Article 336).
Jurisdiction over investigation and prosecution of the crimes set forth under the NCL is limited to the public prosecution (Article 337). V. CORPORATE GOVERNANCE Companies with limited liability: As mentioned, given that companies with limited liability are one of the most common in Kuwait, an important new provision in the NCL, Article 104, expresses the method by which a manager of a company with limited liability may be removed through a court order based on the request of a partner holding not less than 25% of the parts of a company with limited liability for the following reasons:
• The manager commits an act of fraud;
• The manager commits an error causing gross damage to the company; or
• The manager breaches the statutory restriction relating to non-competition/conflict of interest. Where there are more than seven partners in a company with limited liability, the NCL, in line with the Old Law, requires that a board of supervisors must be established consisting of non-managers, of which at least three are partners. Members of the board of supervisors shall carry their work for free unless the company memorandum of association stipulates otherwise or a resolution is passed to this effect by the general assembly. The general assembly may remove the board of supervisors at any time.
Similar to the Old Law, the NCL states that the board of supervisors is not liable for the actions of the managers, unless it was informed of the errors committed by the managers and failed to report these to the general assembly of the partners ( Article 107). Another new provision introduced by the NCL permits each partner to access the company accounts, all its records and documents at the company head office (Article 110).
VI. COMPATIBILITY WITH THE CMA: When the Capital Markets Law (CML) was introduced in Kuwait in 2010, compatibility issues between the CML and the Old Law began to arise. With the introduction of the NCL, the important and much-needed interaction between the NCL and the CMA is clearly evident through numerous provisions referencing the role and authority of the CMA in relation to Kuwait companies and corporate action.
Approval of regulators required: In general, the NCL provides that the approval of the various regulators, which includes but is not limited to the CMA, must be obtained in connection with the incorporation of companies subject to their supervision, as well as in connection to such companies’ memorandum and articles of association (Article 6).
Prospectus & invitation for public to subscribe: With respect to an invitation to the public for a subscription in the shares of a newly incorporated shareholding company, in the shares issued pursuant to a capital increase, or in issuance of bonds or sukuk, the NCL defers to the CMA, requiring that a prospectus comply with the requirements and procedures set forth under the CML and the CMA Bylaws and initiation of such procedures may be begun only on permits a closed shareholding company to go public by virtue of a decree issued by the MOCI subject to the CMA’s approval (Article 273).
CMA rules for preferred shares: As previously mentioned, the NCL provides for the issuance of preferred shares. However, the NCL appoints the CMA as the relevant regulator to issue any conditions and rules for the issuance of such preferred shares.
In addition, the CMA will issue the conditions and rules in connection with the conversion of preferred shares into common shares and the trading of such preferred shares (Article 153).
While the NCL provides for the issuance of bonds and sukuk, it requires the CMA to pass a decree approving such issuance or provide justification upon rejection. The new law also authorises the CMA or the Central Bank of Kuwait to determine the amount of bonds or sukuk that may be issued by a certain company (Article 180). Furthermore, the trading of bonds or sukuk is subject to the provisions of the CML and the CMA Bylaws, with this including the prospectus that has to be approved and in accordance with the CMA regulations, in addition to any trading in the issued bonds or sukuk.
Increase in shares require prospectus: Under Article 161 of the NCL, the increase of a company’s capital through issuing new shares for public subscription also requires the prior approval of the CMA and of the prospectus, and requires complying with regulations specified by the CMA. As previously outlined, the NCL – for the purpose of encouraging and expanding the stock exchange market – allows closed shareholding companies, after acquiring the CMA’s approval, to be listed on the KSE.
VII. SHARIA COMPLIANCE: An important inclusion within the NCL, which reflects the immense growth of business governed by the principles of Islamic sharia, are the regulations related to companies that operate under such principles.
The NCL requires that companies that operate pursuant to Islamic sharia principles establish an independent committee for sharia supervision over company operations (the Sharia Supervisory Panel).
The Sharia Supervisory Panel must comprise at least three members, and such members must be appointed by the company’s or the partners’ general assembly. The company’s memorandum must specify the existence of the Sharia Supervisory Panel, its formation method, authorities and method of practicing its work (Article 15).
The NCL has considered the possibility of disagreements between members of the Sharia Supervisory Panel in connection with sharia provisions, and permits the company to refer such a disagreement to the Legal Opinion and Legislation Authority at the Ministry of Awqaf and Islamic Affairs for final ruling. The Sharia Supervisory Panel is required to submit an annual report to the general assembly of shareholders or partners providing its opinion on the compliance of the company operations with the provisions of Islamic sharia.
The NCL provides for the issuance of sukuk according to the company’s objectives, and such issuance must comply with the contract forms which conform to the provisions of Islamic sharia. Furthermore, the NCL permits companies to issue sukuks with a return of a portion of the annual profits realised by the company. However, such issuance must be in a manner which does not contradict the provisions of Islamic sharia. All types of sukuk shall be issued according to the provisions of Islamic sharia and must be approved by the Sharia Supervisory Panel.
Lastly, the NCL provides that certain provisions in some laws may not be applicable to sharia-compliant companies due to the act that such provisions may be contradictory to sharia principles.
VIII. CONCLUSION: As evidenced in the above overview of some of its key concepts and themes, the NCL is both progressive and flexible. The new law demonstrates Kuwait’s dedication “to transform Kuwait into a world-class financial and commercial centre, with the private sector leading economic activities, fostering competitiveness, increasing productivity, supported by viable public institutions, while maintaining the deep-rooted values and national identity, towards achieving balanced economic and human development, supported by adequate infrastructure, legal framework, and enabling business environment,” according to the Kuwait Foreign Investment Bureau and Sheikh Sabah Al Ahmed Al Jaber Al Sabah.
These aforementioned factors are likely to attract more investments into Kuwait – and help to further develop those businesses already existing in the country – by significantly reducing the obstacles that have historically faced investors interested in establishing and operating companies in Kuwait.
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