ARTICLES & UPDATES

The Capital Markets Authority, pursuant to the law establishing it, the Executive Regulations, and the implementation of the corporate governance system, is concerned with protecting minority shareholders from the dominance of majority shareholders and company boards of directors.

Since the Disciplinary Board has the authority to impose the penalties prescribed under Article (146) of the Law, which consist of fifteen sanctions ranging from a warning as the first penalty to the imposition of financial penalties as the last, and since, in most cases, the decisions of the Disciplinary Board are issued by imposing financial penalties, and these violations are often of such seriousness that they cause damage to the company and its shareholders and involve suspicions of illicit gain and obtaining benefits that warrant the imposition of substantial financial penalties on board members, amounting to up to (KD 50,000) for each member, and may also extend to the company itself, the Authority collects these fines.

The Authority collects these fines, but what about the company and the rights of small shareholders?! What about compensating the company and shareholders for these losses and damages?!

Although the concluding part of paragraph (15) referred to above states: “In all cases, the Disciplinary Board may order the cancellation of transactions related to the violation and the consequences arising therefrom, or obligate the violator to pay financial amounts equal to the value of the benefit obtained or the value of the loss avoided as a result of committing the violation, and the amount may be doubled in the event of repeated violations,” which means that if the violator obtained a benefit worth, for example, one million dinars, it may be fined an amount equal to that value or doubled in the case of repetition.

Here, the question arises: due to the ambiguity of the text, if the violator is obligated to pay an amount equal to or double the benefit obtained, in whose favor is this obligation imposed?! Does the term “obligation” refer to payment to the Authority or to the company?! This necessitates an amendment and an explicit provision stating that such obligation shall be in favor of the company.

Between the first paragraph, which provides for the imposition of financial penalties on the violator, and the last paragraph, which provides for obligating the violator to pay an amount equal to or double the benefit obtained, we see that the obligation should be in favor of the company, not the Authority. Furthermore, the text is ambiguous in that it does not expressly clarify whether the Disciplinary Board has the authority to apply both penalties together or to impose one of them without the other. Therefore, in most cases, the first paragraph is applied by imposing a financial penalty in favor of the Authority.

In one case, there was a listed company whose board of directors committed serious violations that resulted in losses exceeding two-thirds of the company’s capital, which warranted the application of the final paragraph by obligating the board to pay at least an equivalent amount in favor of the company so as to avoid protracted litigation. However, the Disciplinary Board imposed large fines, and the Authority filed a lawsuit to collect those amounts. The said company was delisted due to its financial inability and was subjected to numerous violations (as a result of the former board’s misconduct), which led to the imposition of substantial fines in favor of the Authority. Consequently, its listing was cancelled, even though the penalties were issued against it after the delisting. The company was unable to afford the litigation costs to pursue claims against the former board for compensation for the massive losses, which led to the complete collapse of the company and the loss of the rights and interests of the shareholders, especially minority shareholders, who will not benefit from the fines in any way. Had those amounts been allocated in favor of the company, it would have been able to pursue the former board and recover its rights and the rights of minority shareholders. It would have been more appropriate to prioritize the interests of the company and shareholders before collecting fines that do not benefit the company.

Accordingly, we believe it is necessary to amend paragraph (15) of Article (146) of the Law and to expressly provide for obligating the violator to pay an amount equal to or double the benefit obtained in the second case, so that harmed companies are not dragged into lengthy litigation and expert proceedings that may last for many years in order to recover their funds, and to ensure the swift recovery of such amounts to prevent company collapse. Furthermore, the Authority should refrain from imposing fines on companies and should instead act in the interest of companies and minority shareholders.

This article was recently published in Arabic in Al-Jarida newspaper. You can view the original newspaper clipping here-https://share.google/SFJjAa2idyk8iCr1S

Attorney Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com