LEGAL VIEWPOINT: Loyalty of Directors and Officials to the Company – By Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

One of the main pillars of corporate governance is the “loyalty” of the Members of the Board of Directors and all officers working in the company. Each member of the Board of Directors and each officer working in the company should understand that under the provisions of the Company Law he \ she is personally accountable, to the company and likewise to the shareholders, if he \ she violates his \ her legal “duty of loyalty” to the company or the shareholders, for such violations, if any? Moreover, corporate governance rules envisage the duty of loyalty which should be maintained during the span of the service in the company.

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Loyalty, represents and denotes “honesty & faithfulness”.  All must be loyal, honest and faithful all through. This is a golden rule in Quran (QUOTE: “…. O my father! employ him, surely the best of those that you can employ is the strong man, the faithful one…. (UNQUOTE). This Quranic rule, I believe, is the basis for modern sophisticated corporate governance.

To maintain the duty of “loyalty” to the company, each member of the Board of Directors and each officer should make every practicable and possible effort to arrange his \ her personal and business affairs to avoid any conflict(s) of interest with the company. No one, to allow his \ her personal interest to overcome the interest of others or the group…

In connection to this, each member of the Board of Directors and each officer in the company shall inform the entire Board of Directors of the company of any conflict of interest as and when they arise and shall abstain from voting on that matter in accordance with the relevant provisions of the Company Law.

The disclosure, required to achieve this purpose, shall include all material facts in relation or that relates to any contract or transaction involving that member of the Board of Directors or the officers working in the company.

The member of the Board of Directors and the officers working in the company must understand that any approval of a conflict transaction is effective only if all material facts are well known to the authorizing persons in the Board and the company and, at the same time, the concerned person of the conflict issue did not participate in the decision by any means or way.

To achieve best results in this connection, the Board of Directors of the company is required to establish certain formal procedure to regulate or to achieve certain issues that include, among others, a periodic disclosure by all members of Board of Directors and all officers working in the company and a regular updating of information by each member of the Board of Directors and each officer on his \ her actual and potential conflicts of interest.

Moreover, an advance approval by disinterested members of the Board of Directors or the shareholders of the company in accordance with the relevant provisions of the Company Law. However, the Board of Directors of the company shall require such advance approval in each and every case.

The company shall disclose to its shareholders any abstention from voting motivated by or due to a conflict of interest and shall also disclose to its shareholders any authorization given or taken in relation to any conflict of interest related to a contract or a transaction in accordance with the provisions of the Company Law.

Those points or issues constitute the minimum requirements that are required to maintain the necessary “duty of loyalty” of the members of the Board of Directors and the officers working in the company.  This is required so as to be in compliance with the corporate governance rules and other applicable legislative provisions provided for in the company law or otherwise.