Bahrain Amends Corporate Governance Code

The Corporate Governance Code (“Code”) issued by Ministerial Decree (19) of 2018, has been amended by HE Zayed Al Zayani, Minister of Industry and Commerce, through Ministerial Decree No (91) of 2022 (“Amendment”) which was published in the Official Gazette on 19 September 2022, taking effect the day following its publication.

1. To whom does the code apply?

According to Chapter 1, Section 2, Four, the Code is applicable to all public and closed joint stock companies incorporated in the Kingdom of Bahrain (“Bahrain”) and registered pursuant to the Commercial Companies Law (“CCL”). WLL companies in particular are not bound by the Code.

2. Is compliance with the code mandatory?

Compliance with the Code is based upon the “Comply or Explain” principle, meaning that the company is expected to either comply with the provisions of the Code or provide an explanation in the case of non-compliance. There is further guidance within the code on what could be considered an acceptable reason for non-compliance, and this includes but is not limited to the market size of the company or if the company is newly listed.

3. The Amendments

3.1 Record-Keeping
Chapter 1, Section 2 General Provisions, Paragraph (Ninth)
The company shall keep at its headquarters for not less than ten years:

• minutes of meetings;
• reports of the Board of Directors;
• reports of the Committees;
• governance reports records; and
• other paperwork required to be kept under the Code.
  The company shall also keep paperwork relating to lawsuits, claims or any existing investigative proceedings until such proceedings are completed.

3.2 Female Representation on the Board of Directors (“BoD”)

Chapter 2, Section One, Paragraph (First), (a)
Public joint-stock companies are now required to have women’s representation within the formation of the BoD. This means that such companies should appoint at least one female member to comply with this provision. To monitor compliance, the Code requires such companies to disclose the membership statistics of the BoD, categorised by gender, in the company’s annual Corporate Governance report. This obligation does not apply to closed joint stock companies.

3.3 Disclosure of Conflicts of Interest

Chapter 2, Section Two, Principle 2, Paragraph (Fourth), (a)
The Amendment prohibits officers or members of the BoD from attending the meeting, or participating in the deliberation, where a decision is to be taken regarding a transaction in which they have an interest. In terms of consequences, the Amendment states that failure to disclose in accordance with this provision would give the company and its shareholders the right to bring a claim against the person in violation of the Code for compensation as well as the right to invalidate a transaction. These restrictions already exist under Article 189 of the CCL, however, the Code is more explicit in extending this duty to officers such as company secretaries. The presence of this in the Code underlines the importance of this obligation and indicates that it would be closely monitored.

3.4 Composition of the Audit Committee

Chapter 2, Section Three, Principle 3, Paragraph (First)
There is now a distinction made between public and closed joint stock companies with respect to the composition of the Audit Committee. In all cases, the Audit Committee must:-
(a) have at least three members;
(b) the chairman of the Audit Committee must be an Independent Board Member (as defined in the Code).

For public joint stock companies, the Audit Committee must:-
(a) be fully composed of Board Members (they may not appoint from outside the company);
(b) have a majority of the Audit Committee must be Independent Board Members.

On the other hand, closed joint stock companies:-
(a) must have at least one or more Independent Board Member on its Audit Committee; and
(b) may appoint from outside the company in case of insufficient number of Independent Board Members.

3.5 BoD Nominations to Shareholders

Chapter 2, Section Three, Principle 3, Paragraph (First)
When nominations are proposed to the shareholders for the election or re-election of directors, the BoD must disclose to shareholders if the nominated director is directly or indirectly running any business which is competitive to the company’s business.
There is also a new reporting obligation: the information presented to the shareholders must be published in the company’s annual report.

3.6 Conduct of Shareholders’ Meetings

Chapter 2, Section Seven, Principle 7, Paragraph (Second), (c)
There is an explicit recognition of the right of shareholders to participate in their deliberations and vote on their decisions via electronic voting systems and modern means of technology.

3.7 External Auditors

Chapter 2, Section Ten, Principle 10, Paragraph (First), (e)
Both closed and public joint stock companies shall appoint an external auditor for a term of one financial year to be renewed for similar periods not exceeding five (5) years. Previously, this obligation was specific to public joint stock companies.

3.8 Corporate Governance Disclosure

Appendix 5, Paragraph (Second), (l)
There is more extensive disclosure obligations with respect to the benefits received by the chairman and the board members, as well as the six highest paid of the Executive Management Members, including the CFO and CEO in all cases, and such disclosure should be made in the forms designated by the Ministry of Industry and Commerce (“Ministry”).

3.9 Penalties for Violating the Code

Chapter 2, Section Seven, Principle 7, Paragraph (Fifth)
The Amendment has introduced penalties for violations to the Code. The penalties are set forth in Article 362-bis of the CCL. The Ministry can:

• order the company to cease the violation and eliminate its causes and effects immediately or within a period of time the Ministry may specify;
• suspend the commercial registration of the company for a period not exceeding six months.
• impose an administrative fine calculated on a daily basis, to compel the violator to cease the violation and eliminate its causes or effects;
• impose an administrative fine not exceeding one hundred thousand Bahraini Dinars; and
• strike off the commercial registration of the company from the Commercial Register.

4. What do you need to know?

The Ministry monitors compliance with the Code by reviewing the reports submitted during the annual general meeting, including the company’s annual report, corporate governance report, and agreed upon procedure (AUP) report. As the annual general meeting is held during the first 3 months after the end of the financial year for public joint stock companies or the first 6 months after the end of the financial year for closed joint stock companies, this means that the public joint stock companies will have to demonstrate compliance by March 2023, while closed joint stock companies will have until June 2023.

Despite the introduction of penalties for violations to the Code, the Ministry has verbally confirmed that penalties will not apply to sections of the Code which provide a mere guide for best practice, and that the Ministry is still honouring the “Comply or Explain” principle.

How can we help?

As the leading law firm in the Middle East & North Africa Region and with strong corporate structuring experience across all industry sectors in the region, Al Tamimi & Company is well-placed to assess the impact of these changes to the Code on your company.

If you would like to further discuss the contents of this update, please contact Al Tamimi & Company in Bahrain.