Directors’ and officers’ liability insurance will become more relevant domestically over the next 12 months as directors’ responsibilities expand through increased legislation.

Directors’ and officers’ (D&O) liability insurance has become increasingly significant in the UAE in recent years. Substantial economic growth, combined with the influx of large multinational companies and the establishment of several key financial centres and regulatory authorities, has created the necessary framework by which D&O insurance can become an important and relevant part of a company’s risk mitigation activities.

Regulatory bodies such as the Dubai Financial Services Authority (DFSA) and the Emirates Securities and Commodities Authority (Esca) play an important role in ensuring transparency and accountability among all the listed companies in the UAE stock markets. They regulate respectively companies in the DIFC and companies listed on the Dubai Financial Market (DFM) and the Abu Dhabi Security Exchange (ADX) and have provided clear definitions of the duties directors owe to their company. Esca is currently in the process of finalising a new corporate governance code for joint public stock companies listed on DFM and ADX, which will regulate duties of directors of publicly listed companies.

Corruption crackdown
Continuing with the rise of corporate governance and transparency in the country, there has been a crackdown on corruption and fraud in the workplace. The financial crisis has exposed a large number of indebted local companies as well as illegal acts by directors, officers and employees of large firms. A draft of a new law on acquiring funds by illegal means has recently been negotiated by the ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, which has implications for directors’ liability in the event of fraudulent transactions by individuals, directors or companies in Dubai. Harsher penalties have been proposed for illegally obtaining money. These include:
● Five-year prison term if the illegal funds range from AED500,000 to AED1m.
● Ten-year prison term if the illegal funds range from AED1m to AED5m.
● Fifteen-year prison term if the illegal funds range from AED5m to AED10m.
● Twenty-year prison term if the illegal funds exceed AED10m.
The draft further states that if the debtor fails to present the court with the correct sum of money, he/she will be placed in a separate detention centre specifically for individuals convicted of financial crimes.

Out of bounds
Under UAE Federal Law No 8 of 1984 (the “Commercial Companies Law”), it is generally accepted that a director should not act outside the scope of his/her duties or commit the company to transactions which are illegal or outside the boundaries as set out in the company’s constitution. Although not defined, the general duties expected are:
● To abide by the company’s memorandum of association and articles of
association.
● Not to disclose confidential information about the company.
● Act with loyalty towards the company.
● Avoid any conflict of interest between a director’s personal interests and those
interests of the company.
Directors of Esca-regulated companies are bound by Decision No 32\R of 2007, which puts into place certain corporate governance requirements. Specifically, directors must:
● Adhere to loyal behaviour taking into consideration the company’s and shareholders’ interests.
● Take such due care, diligence and skill as taken by a normal person in similar
circumstances.
● Comply with the applicable laws, regulations and decisions as well as the company’s articles of association and bylaws.

DIFC-based companies are governed by DIFC Law No 2 of 2009 (“DIFC Companies Law”). Articles 53 and 54 set out the duties of a director or other officer of a company. These include to act honestly, in good faith and lawfully, with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Article 54(1) and article 54(2) refer to a director’s duty to disclose any interest in a transaction entered into by the company or by a subsidiary of the company, specifically that a director must disclose any interest in a transaction, direct or indirect, where there may be a conflict with the interests of the company and the disclosure referred to above shall be made as soon as reasonably practicable.

Although D&O insurance is not mandatory, it is only a matter of time before the legislative bodies of the UAE and the DIFC regulate the D&O market as similar steps have been taken in the personal indemnification and medical malpractice arenas. Company directors should negotiate a standard indemnification clause in the memorandum or articles of association as well as ensuring the company subscribes to a strong D&O insurance policy from a reputable broker or insurance provider.