Appointment of Members of Board of Directors of Joint Stock Companies & Their Powers

Joint stock companies have spread widely, and their importance and impact have grown significantly. Given the critical, influential, and effective role they play in the national economy of modern states, we find that major projects have been established in the form of joint stock companies, such as banks and insurance companies. States have even relied on them in issuing paper currency. This activity reached its peak when such companies undertook functions and tasks that influence various economic, commercial, social, and political aspects of states, to the extent that the economies of some of these companies have come to resemble the economy of a state itself (1).

 

Since joint stock companies include large numbers of shareholders, it is impractical and in most cases impossible for all of them to directly manage the company’s affairs. Therefore, the legal framework distributes management responsibilities among three bodies: the Board of Directors, the General Assembly, and the Auditors.

 

The Board of Directors of a joint stock company is considered the primary and most effective management instrument; it is the company’s “thinking head,” the implementing authority for all its activities, and the entity that oversees its entire operation. In practice and under the law, the Board enjoys broad powers in managing the company, whether in internal management through decision-making or in external management vis-à-vis third parties through executing those decisions all within the limits set by the Companies Law (2).

 

Appointment of Members of the Board of Directors

To begin with, under the Companies Law, a joint stock company is managed by a board of directors consisting of not fewer than three members (3). In forming the board, the following considerations must be observed:

1. The number of members must be proportionate to the size of the company and the nature of its activities.
2. A majority of the members must be non-executive directors.
3. The number of independent directors must not be fewer than two or one-third of the board members, whichever is greater (4).

As for the appointment of board members, it takes place in two stages:

– Nomination

   Article 67/2 of the Companies Law provides: “Every shareholder has the right to nominate himself or one or more persons—whether shareholders or non-shareholders—for membership on the board of directors of a joint stock company.”

This means that the right to stand for board membership extends not only to the shareholder himself but also to any other person he chooses, whether from among the shareholders or from outside them.

 

– Election

The Ordinary General Assembly shall elect the members of the company’s Board of Directors from among the candidates who meet the requirements for board membership, for the term specified in the company’s Articles of Association, provided that it does not exceed four years. Members may be re-elected unless the Articles of Association provide otherwise (5).

 

The Ordinary General Assembly shall elect the members of the company’s Board of Directors by cumulative voting (6). However, they may be elected by ordinary voting if the Articles of Association so provide.

 

The Articles of Association may also provide for the right of a shareholder whose ownership percentage of the company’s voting shares reaches the threshold determined in the Articles of Association, to reserve board seats in order to appoint his nominees. Such a shareholder may not participate with other shareholders in the election of the remaining members of the Board of Directors (7).

 

Conditions for Board Membership

The requirements for membership in the Board of Directors are as follows:

1. A board member may not simultaneously hold board membership in more than five listed joint stock companies (8).
2. A board member must possess the professional competence, experience, knowledge, skills, and independence necessary to enable him to perform his duties efficiently and effectively, and in particular should have:
3. a) Leadership ability.
4. b) Competence.
5. c) Ability to provide guidance.
6. d) Financial literacy.
7. e) Physical fitness (9).
8. In all cases, board members must be natural persons(10).

Termination or Ending of Board Membership, Expiry of Board Term, or Resignation

1. Termination and Ending of Membership

Board membership shall terminate either upon expiry of the board’s term or upon a request for termination by the board. The Articles of Association shall specify how board membership ends or may be terminated at the request of the board (11). However, if it is not possible to elect a new board upon expiry of the current board’s term, the existing members shall continue to perform their duties until a new board is elected, provided that the continuation period does not exceed ninety (90) days from the expiry date. The Board must take the necessary measures to elect a successor board before the end of this continuation period(12).

 

The Ordinary General Assembly may based on a recommendation from the Board—terminate the membership of any member who is absent from (three) consecutive meetings or (five) separate meetings during his term of office without a valid excuse acceptable to the Board (13).

 

2. Resignation and Removal from Membership or Chairmanship

In the event of the resignation of the Chairman or members of the Board of Directors, the Ordinary General Assembly must be convened to elect a new Board of Directors. The resignation shall not become effective until the new board is elected, provided that the continuation period of the resigning board does not exceed one hundred and twenty (120) days from the date of resignation (14).

The Ordinary General Assembly may dismiss all or some of the board members, even if the Articles of Association provide otherwise. The competent authority may set rules governing the dismissal of board members by the Ordinary General Assembly (15).

 

Fourth: Powers and Duties of Board Members

Each member of the Board of Directors, by virtue of his membership, shall perform the following duties and responsibilities:

1. Propose initiatives to develop the company’s strategy.
2. Monitor the performance of the executive management and the extent to which it achieves the company’s objectives and purposes.
3. Review reports relating to the company’s performance.
4. Verify the soundness and integrity of the company’s financial statements and information.
5. Ensure that the company’s financial controls and risk management systems are robust.
6. Determine appropriate levels of remuneration for members of the executive management.
7. Express an opinion regarding the appointment and removal of executive management members.
8. Participate in establishing the succession and replacement plan for the company’s executive positions.
9. Fully comply with the provisions of the Companies Law, the Capital Market Law and its implementing regulations, relevant laws, and the company’s Articles of Association when performing board duties, and refrain from engaging in or participating in any act that constitutes mismanagement of the company’s affairs.
10. Attend meetings of the Board of Directors and the General Assembly and not be absent unless for a legitimate excuse notified in advance to the Chairman, or for urgent reasons.
11. Allocate sufficient time to fulfill his responsibilities, prepare for board and committee meetings, and participate effectively, including asking relevant questions and engaging in discussions with the company’s senior executives.
12. Study and analyze information relevant to matters under review by the Board before expressing an opinion on them.
13. Enable other board members to freely express their views, encourage deliberation of matters by the Board, and seek the opinions of specialists from among the company’s executive management or others when necessary.
14. Fully and immediately disclose to the Board any direct or indirect interest he has in business or contracts carried out for the company’s account, including the nature and extent of that interest, the names of any related persons, and the expected benefit, whether financial or non-financial. Such member shall refrain from voting on any resolution related thereto, in accordance with the Companies Law, the Capital Market Law, and their implementing regulations.
15. Fully and immediately disclose to the Board his direct or indirect participation in any business that may compete with the company, or his direct or indirect competition with the company in any of its activities, in accordance with the Companies Law, the Capital Market Law, and their implementing regulations.
16. Refrain from disclosing or revealing any confidential information obtained by virtue of his membership to any shareholder outside the General Assembly meetings or to third parties, except as required under the Companies Law, the Capital Market Law, and their implementing regulations.
17. Act on the basis of complete information, in good faith, and with due diligence and care, in the interest of the company and all shareholders.
18. Be fully aware of his duties, roles, and responsibilities arising from board membership.
19. Continuously develop his knowledge of the company’s business and activities as well as related financial, commercial, and industrial fields.
20. Resign from the Board of director if unable to adequately fulfill his duties (16).

 

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Sources:

1. Hassan Ahmed Ibrahim Harak: Liability of Board Members in the Joint Stock Company*, *Damietta Journal of Legal and Economic Studies, Faculty of Law, Damietta University, Issue No. 7, January 2023, p. 265.
2. Hamdi Mahmoud Baroud: Membership in the Board of Directors of the Joint Stock Company, Al-Azhar University Journal, Series of Humanities, 2010, Vol. 12, No. 2, pp. 449–450.
3. Article (67/1) of the Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443 AH.
4. Article (16) of the Corporate Governance Regulations issued by the Board of the Capital Market Authority pursuant to Resolution No. 8-16-2017 dated 16/5/1438 AH (corresponding to 13/2/2017), based on the Companies Law issued by Royal Decree No. M/3 dated 28/1/1437 AH, as amended by the Capital Market Authority Board Resolution No. 5-8-2023 dated 25/6/1444 AH (corresponding to 18/1/2023), based on the Companies Law issued by Royal Decree No. M/132 dated 1/12/1443 AH.
5. Article (17/b) of the same Regulations.
6. *Cumulative Voting*: A voting method for electing board members that grants a shareholder who owns shares with voting rights a voting power equivalent to the number of such shares; enabling the shareholder to cast all votes for a single candidate or distribute them among chosen candidates without repetition. Article (1) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
7. Article (14) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
8. Article (17/c) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
9. Article (18) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
10. Article (68/1) of the Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443 AH.
11. Article (68/5) of the same Law.
12. Article (15/1) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
13. Article (70) of the Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443 AH.
14. Article (15/2) of the Implementing Regulations of the Companies Law issued by Minister of Commerce Resolution No. 284 dated 23/06/1444 AH.
15. Article (68/5) of the Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443 AH.
16. Article (28) of the Corporate Governance Regulations issued by the Board of the Capital Market Authority pursuant to Resolution No. 16-8-2017 dated 16/5/1438 AH (corresponding to 13/2/2017), based on the Companies Law issued by Royal Decree No. M/3 dated 28/1/1437 AH, as amended by the Capital Market Authority Board Resolution No. 8-5-2023 dated 25/6/1444 AH (corresponding to 18/1/2023), based on the Companies Law issued by Royal Decree No. M/132 dated 12/01/1443 AH.