backIntroduction
Corporate governance in the United Arab Emirates (“UAE”) and the Kingdom of Saudi Arabia (“KSA”) has seen significant evolution in recent years, with a stronger focus on accountability, transparency, and the enforcement of directors’ and managers’ responsibilities. In the UAE, a recent ruling by the Dubai Court of Cassation has provided clearer guidance on the obligations of directors and managers, as well as the repercussions of failing to fulfil them. In the KSA, comprehensive legislative reforms have been introduced, which formally codify the duties of directors and managers. These changes reflect an effort in both jurisdictions to enhance governance standards, protect company interests, and foster ethical business practices.
Dubai Court of Cassation Holds Director and Manager Personally Liable in UAE
In a case decided earlier this year, the Dubai Court of Cassation offered valuable insight into the scope of the duties of directors and managers, as well as the extent to which the judiciary may hold such individuals accountable for misconduct.1Dubai Court of Cassation: Appeal No. 866 of 2024
The dispute arose from claims brought by a UAE-based company against its former Vice-Chairman and CEO, along with the manager and authorised signatory of its subsidiary. The executives were found to have approved major contracts and made substantial payments on behalf of the company, while withholding critical information from the board and failing to adhere to the board’s conditions for these transactions, including the requirement to conduct necessary due diligence. Their actions caused significant financial losses to the company, which claimed damages exceeding AED 470 million.
The Court of Cassation upheld the decision of the Court of Appeal, confirming that the former executives were jointly and severally liable to pay AED 151.97 million in compensation to the company for “material and moral damages”, together with interest. This decision highlights the UAE judiciary’s readiness to impose substantial personal liability on directors and managers who breach their duties, reinforcing the importance of robust corporate governance and compliance in the region.
Directors’ and Managers’ Duties and Personal Liability Codified in KSA
The KSA introduced significant corporate governance measures through the enactment of the Companies Law in 2022, followed by the Civil Transactions Law in 2023. The Companies Law codifies the duties and liabilities of directors and managers, while the Civil Transactions Law imposes obligations on individuals responsible for managing companies on behalf of its “partners”.
Under the KSA Companies Law, directors and managers owe duties of care and loyalty to the company.2Article 26, Companies Law They are required to act within the scope of their authority, promote the company’s success, and exercise independent judgment and reasonable due diligence, skill and care. They must also avoid conflicts of interest, disclose any direct or indirect interests in company transactions, and are prohibited from accepting benefits from third parties in connection with their role.
The law also imposes clear restrictions on self-dealing and competition. Directors and managers may not have an interest in company transactions or compete with the company without proper authorisation from shareholders or partners.3Article 27, Companies Law They are further prohibited from exploiting company assets, information, or investment opportunities for personal gain. Breaches of these duties by managers and board members can result in personal or joint liability for any damage caused to the company, its shareholders, or third parties.4Joint liability may occur where the offending decision is unanimously voted on. If passed by majority vote, objecting managers or board members shall not be held liable if their objections are explicitly recorded in the meeting minutes. The company may also seek to invalidate improper transactions.
The Civil Transactions Law imposes obligations on individuals managing a company or disposing of its assets on behalf of its “partners”. This law emphasises that such individuals must act with the same level of care as they would in managing their own business, or, where they receive remuneration, to the standard of a reasonable person. 5Article 539, Civil Transactions Law It also prohibits such individuals from taking actions that could harm the company, exceed their authority, or conflict with the company’s stated purpose. Additionally, such individuals are not permitted to gift or lend company assets without proper authorisation.6Article 540, Civil Transactions Law It is likely that such provisions shall not apply to companies established pursuant to the Companies Law, including LLCs and CJSC. However, the provisions under the Companies Law and Civil Transactions Law collectively serve to strengthen the expectation that company management will act responsibly and in the best interests of the company.
While it remains to be seen how the courts will interpret and apply these provisions, they provide a concrete framework for corporate management and the safeguarding of company assets.
Conclusion
Directors and managers operating in the UAE and Saudi Arabia must now be more vigilant than ever in fulfilling their duties. It is essential for boards and senior management to maintain transparent decision making and ensure ongoing compliance with their duties. However, where directors or managers exceed their authority or fail to act in accordance with their duties, companies in the UAE and KSA can rely on enhanced legal frameworks, which contain effective mechanisms to hold individuals personally liable for breaches of duty or misconduct.