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The role of the CEO.

Experts from Al Tamimi & Company shed some light on the source, nature and scope of powers that are typically delegated to the Chief Executive Officer by the board of directors of joint stock companies in the United Arab Emirates

Article 95 of the Federal Law No. 8 of 1984 concerning Commercial Companies and its amendments (the ?Companies Law?) provided that the company shall be managed by a board of directors whose method of composition, number and term of membership are to be specified in the company?s Articles of Association. The number of directors should not be less than three and not more than 15 directors and their term in office should not exceed three years.

Article 103 of the Companies Law provides that the board of directors shall assume all powers necessary to undertake the businesses required to realise the company?s objectives. Therefore, it is the directors? main responsibility to exercise their business judgment to act in what they reasonably believe is in the best interests of the company and its shareholders, except for acts which are reserved to the shareholders pursuant to the Companies Law.

Generally, the Chairperson of the board of directors is the company?s legal representative and has the signatory power on behalf the company. However, the board of directors may nominate one of its directors to undertake the role of a Chief Executive Officer (CEO) for the company, and set forth his/her responsibilities, delegate to him/her the powers and authorities, and determine his/her remunerations as they deem appropriate.

The functions of the CEO would normally be to supervise the overall management of the company and to report the same to the board. As such, the role of the CEO is vital and can affect a company?s performance. The board, in turn, conducts a regular review of the CEO?s performance in order to ensure that the CEO is providing the best leadership for the company in both the long and short terms.

It should be noted that the delegation of powers does not itself relieve the directors of their duty to the company. As such, the entire board shall remain responsible for the actions of the CEO. This is particularly true considering the provisions of Article 111 of the Companies Law which provides that the Chairperson of the board and board members are liable to the company, the shareholders and third parties for acts including fraud, violation of the law and the company?s articles of association, and management defaults. Further, Article 111 provides that any provisions restricting such liability would be void.

Bearing all this in mind it can be argued that the board members (including the CEO) have a fiduciary duty vis-?-vis the company and its shareholders.

It is worth noting that in practice the role of the CEO can be effectively undertaken by a non-board member. In many instances, companies and/or shareholders tend to appoint a general manager and grant him/her all powers required to manage the day-to-day operation of the company. Needless to say that the general manger will be expected to report to the board and will be responsible for his/her management acts.

Delegation of powers to the CEO

In many jurisdictions of the world it is argued that that the relation between directors of a joint stock company and its shareholders is an agency relationship. By this token the CEO (one of the directors of the company) can be viewed as an agent, who can bind the company only when he/she acts within the scope of his/ her authority given to him/her ultimately by the shareholders (the principal).

Article 104 of the Commercial Law permits the Chairperson of the board to delegate all authorities (i.e. being the legal representative of the company authorised to sign on its behalf). Nonetheless, the Companies Law did not specify the ways in which a director and/or the officer of the company may derive his/her powers and act accordingly on behalf of the company. The typical method is normally to issue a power of attorney to the pertinent director providing him/her with the necessary powers to manage the company?s business.

Based on the foregoing, one can categorise the authorities of a CEO under the following forms:

1) Express and implied powers In principle, the CEO may derive power in any of the following ways:

Articles of Association and Statutes of the company;

By a resolution from the board of directors or power of attorney, if the powers are subject to delegation by the board as there are certain matters that the shareholders have exclusive right to resolve upon pursuant to the Companies Law;

However, the CEO does not always need to rely on the express actual authority given by the board of directors (i.e. board resolution) or an express written authority such as power of attorney in order to be empowered to do a particular act on behalf of the company. Merely an informal permission given to the CEO is sufficient in this context, based on the wider scope of his/ her authority delegated by the board.

In addition, the CEO may obtain powers by way of an implied actual authority in terms of powers that are incidental to any of the aforementioned express powers. Incidental powers arise from the general rule of agency that every delegation of authority carries with it the power to do acts that are necessary to carry into effect the express powers conferred.?

2) Apparent powers

The CEO will often have fairly broad apparent authorities arising from the commercial fact that a person occupying that particular position in a company will usually have those authorities. In fact, the representation and appearance are two important players in defining the legal position of the CEO in the company.

Apparent powers that are vested in the CEO result from either of two situations:

Where a bona fide third party relies upon the appearance of an officer who possesses certain powers on behalf of the company and enters into a contract with such officer. In that case, the company is stopped from denying the officer?s authority unless clearly the CEO exceeded the authorities being delegated to him/her;

Where a company ratifies the unauthorised act of an officer by acquiescence, or knowingly permits him/ her to assume such powers, the acts of that officer are binding on the corporation vis-?-vis a bona fide third party.

In closing, it can be said that the role of the CEO has various sources from which the required authority stems. These sources need to be carefully considered by the incumbent board appointing the CEO. It is vital for the company to appoint a qualified CEO to undertake the respective management functions and properly define his/her duties. In addition, the mandate appointing the CEO should clearly identify the obligation of the CEO to undertake accurate reporting to the board. This would be in line with sound corporate governance practices and would restrict CEOs from misusing authorities delegated to them.

Finally, it is indeed worth pointing out that the new ESCA Regulation promulgated last year (R32/2007) has introduced, among other things, new concepts distinguishing between independent and non independent board members and requiring the establishment of different committees (e.g. audit, remuneration, etc.). These new provisions will indeed bolster the degree of supervision and reporting within joint stock companies and thus would ultimately affect the general duties of CEOs.

2008 CPI Financial. All rights reserved.

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Publication:SMB Advisor Middle East
Geographic Code:7UNIT
Date:Aug 2, 2010
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