Transparency vs Confidentiality Inspection Rights in UAE Corporate Law

1. Transparency vs Confidentiality: Inspection Rights in UAE Corporate Law blogs.lse.ac.uk/mec/2022/01/31/transparency-vs-confidentiality-inspection-rights-in-uae-corporate-law/ January 31, 2022 by Bashar Malkawi Dubai, where the headquarters of many of the UAE’s largest companies are located. Source: ZQ Lee/Unsplash Inspection rights constitute a core component of corporate law. These rights give shareholders the opportunity to examine a company’s books and records. The UAE Federal Commercial Companies Law No. 32 of 2021 included provisions that provide for shareholder’s inspection rights. The law provides for a wide variety of documents that a shareholder can access. Despite recent modifications of the law that enhance these rights, there is still room for improvement. 1/4

2. Shareholder inspection rights permit a shareholder to access the necessary documents of the company in which he/she owns shares or interests. These rights address the issues of information asymmetry and minimise agency costs prevalent in many corporate structures. In the UAE, the Commercial Companies Law No. 32 of 2021 codified shareholder inspection rights. The concept of shareholder inspection rights is not new in UAE corporate law. The right to inspect a company’s records is protected by court decisions taken a long time ago. However, the concept has been revised and improved in several revisions of the law, particularly in Federal Law No. 2 of 2015 on Commercial Companies. The purpose of shareholder inspection rights is to allow shareholders to obtain relevant documents so as to monitor a company’s financial performance. There are several types of companies allowed under the Commercial Companies Law No. 32 of 2021 and each has its own inspection provisions. For example, article 45.2 states that any partner in general partnership, even if not a manager, may request access to the business activities of the company and its books and records, and may give observations thereon to the manager of the company. In a limited partnership, article 68 of the Commercial Companies Law No. 32 of 2021 gives the limited partner the right to get access to and obtain copies or extracts of the books and records of the company at all times during the business hours of the company. In addition, the limited partner can obtain full and accurate information about the company’s activities and a formal statement in respect thereof. These rights can be either exercised by the limited partner him/herself or through other partners or third parties. The UAE legislator granted the right of inspection to shareholders in public joint stock companies, known in other jurisdictions like the U.S. as corporations. Based on article 192 of the Commercial Companies Law No. 32 of 2021, minutes of meetings of the General Assembly of shareholders shall be kept at the headquarters of the company. Any shareholder can review such minutes without consideration during ordinary working hours. The corporation cannot refuse this right given by law to shareholders. If the company rejects or fails to comply with this right, the Securities & Commodities Authority can issue an order to scrutinise the contents of the minutes of the deliberations of the General Assembly. The Securities & Commodities Authority can also issue an order instructing the company to deliver the required copies to the person or persons who request them. Article 223 of the Commercial Companies Law No. 32 of 2021 also gives the shareholder the right to access the books and records of the company and any documents pertaining to any of the company’s deals made with a related party with permission from the board of directors or pursuant to a resolution of the General Assembly or as provided by the article of association of the company. Furthermore, article 27 stipulates that every shareholder can, based upon a written request, obtain a free copy of the last audited accounts and of the last report of its auditor and a copy of the accounts of the group if it is a holding company. The company is required to respond to such a request within ten days of the date of submission. As a matter of transparency, article 140 requires a corporation to provide on its website a copy of its memorandum of association, article of association and any documents or other information as determined by the 2/4

3. Securities & Commodities Authority. The corporation is required to send a copy of its memorandum of association and article of association to any shareholder who so requests, at the latter’s expense. A quick reading of the UAE Commercial Companies Law No. 32 of 2021 clearly states the right to inspect books and records of a company. Inspection rights cannot be eliminated or limited by a provision in a corporation’s article of association. The law covers a wide variety of documents that a shareholder can have access to. These documents include accounting records, minutes of shareholders’ meetings, memoranda of association, articles of association and copies of resolutions. However, it is noticeable that the law that does not require the shareholder to provide the reason for seeking access to a company’s documents and records. An obvious example for inspecting a company’s records would be investigating corporate mismanagement. The relevant inspection provisions in the Commercial Companies Law No. 32 of 2021 are detailed leaving little room for courts to conduct a review of many issues. The law did not impose restrictions on the right of a shareholder or partner to use inspection rights such as maintaining a minimum level of shares. The types of documents to which a partner or shareholder has access to are different. In general and limited partnerships, these documents are the company’s books and records. In public joint stock companies, these documents are minutes of meetings, books and records of the company and any documents pertaining to any of the company’s deals made with a related party, a copy of the last audited accounts and of the last report of its auditor and a copy of the accounts of the group if it is a holding company, and memorandum of association and article of association. Moreover, access to a company’s books and records in general and limited partnerships do not mandate prerequisites. By comparison, access to minutes of meetings, books, records and other documents in public joint stock companies requires certain procedures. For instance, the shareholder is required to make a request to obtain a copy of the corporation’s memorandum of association and article of association. In another example, the shareholder shall seek the permission of the board of directors or pursuant to a resolution of the General Assembly to access books and records of the corporation. In yet another example, a shareholder must submit a written request to obtain a free copy of the last audited accounts and of the last report of its auditor. The differences in the nature of documents and procedures that can be accessed by a partner or shareholder in public joint stock companies and general and limited partnerships could be due to the sensitivities and capital involved in the former. The UAE Commercial Companies Law No. 32 of 2021 does not cover the instance whereby a shareholder can access certain documents in exercising his/her inspection right and then disclose the information in a manner that harms the interests of the company. It seems that the law was concerned with granting this right to the shareholder or partner without considering the consequences. We have to wait and see how UAE courts will interpret inspection rights. Inspection of books and documents can lead to information on company mismanagement and thus court cases brought by shareholders. Class action by shareholders, as known in the U.S for example, is non-existent in the UAE. In the UAE, only derivative actions can be brought by shareholders. However, 3/4

4. before filing a derivative lawsuit, the shareholder needs to demand that the company files a direct suit against the alleged wrongdoers. If this lawsuit is filed, then the shareholder can bring a derivative lawsuit if the demand is rejected or the demand is not acted upon. Finally, it remains to be seen how the company law would interact with disclosure requirements under the UAE securities law as shareholders can rely on the latter law with its strong disclosure mandates rather than inspection rights under the former. 4/4