Upholding Corporate Integrity: Recent Enhancements to Bahrain’s Corporate Governance Code

Overview of Corporate Governance Code

Corporate governance ensures transparency, accountability, and sustainable growth in
business organizations. Acknowledging the significance of effective corporate governance,
Bahrain has recently implemented amendments to the Corporate Governance Code (the
“Code”), initially established through Ministerial Decree No. 19 of 2018, which has
undergone significant amendments through Resolution No. 91 of 2022. Published in the
Official Gazette on 19 September 2022, these amendments (the “Amendments“) became
effective immediately after publication. The amendments enhance corporate practices,
encourage investor confidence, and promote long-term value creation. In this article, we
will explore the Amendments made to the Code.

Application of the Code

The Code, as amended, shall only apply to public and closed joint stock companies
incorporated in the Kingdom of Bahrain in accordance with Legislative Decree No. 21 of
2001 promulgating the Commercial Companies Law, as amended (the “CCL”).

Record and Book-keeping

Companies operating in Bahrain must retain all relevant records, including documents,
minutes of meetings, reports of the Board of Directors (“BoD”), committee reports and
governance reports. These records must be stored at the company’s head office for at least
ten years, as outlined in paragraph 9 of Section 2, Chapter 1 of the Code. Additionally, the
Code explicitly incorporates the shareholder’s right to inspect the company’s records, books
and documents as part of Principle 7 in paragraph 5, Section 7.

Composition of the Board of Directors

To promote gender equality, per the updated regulations, public joint stock companies
operating in Bahrain must now ensure the appointment of at least one female board
member. This requirement specifically focuses on promoting the representation of women
in the composition of the BoD. To monitor compliance, the Code mandates the disclosure of
gender membership statistics in the annual corporate governance report.

Conflicts of Interest and Required Disclosures

Per Principle 2 of paragraph 5, Section 2 of the Code, any director, or officer of the BoD is
prohibited from participating in meetings or voting on transactions in which they have a
personal interest. Failure to disclose such conflicts of interest can result in directors and
officers being held liable to compensate the company. In addition, shareholders can bring a
claim to the court to invalidate the transaction. While Article 189 of the CCL already covers
this restriction for directors, the Code extends this responsibility to officers within the
company. The Ministry of Industry and Commerce (“MOIC”) is likely to monitor compliance
with this disclosure requirement closely.

The MOIC has introduced an additional disclosure obligation for companies. They are now
required to complete designated forms provided by the MOIC, which include disclosing the
total remuneration and benefits paid to the Chairman, BoD members, Chief Executive
Officers, and Chief Financial Officer annually. The annual corporate governance reports of
the company should also contain details of any benefits, share in profits and allowances
received by the BoD members in their capacity as employees or administrators, as per
Appendix 5 of the Code.
Furthermore, the BoD must disclose to shareholders if any nominated directors are involved
in running a business that competes with the company. The details of any other companies
on the BoD of which the appointed directors serve should also be included. The Code
introduces a new reporting obligation, where the BoD nominations to shareholders should
be accompanied by a summary of the Nomination Committee’s report on the proposed
nominations, which must be disclosed in the company’s annual report.

Audit Committees and External Auditors

Under Principle 3 of Paragraph 1, Section 3 of the Code, companies must have at least three
members in their Audit Committees, with the chairperson being an Independent Board
Member. However, closed joint stock companies can appoint external auditors to their
Audit Committees. Public joint stock companies must have the majority of their Audit
Committee comprise BoD members.
Under Principle 10 of paragraph 1, Section 10, closed joint stock companies are now
obligated to appoint at least one external auditor for one fiscal year, renewable for a
maximum of five (5) years. This requirement previously applied only to public joint stock
companies.

Shareholders and their Voting Rights

Shareholders now have the option to participate in deliberations and exercise their voting
rights using electronic voting systems and modern technology. This provision explicitly
recognizes the rights of shareholders under the recent changes to the CCL, as stated in
Principle 7 of paragraph 2, Section 7.

Penalties

Significantly, the Code introduces penalties in line with Article 362(bis) of the CCL for
violations committed by public and closed joint stock companies. The MOIC has the
authority to order the company to cease the violation and impose various penalties,
including the suspension of the company’s commercial registration for up to six months,
administrative fines calculated daily (not exceeding BHD 1,000 for the first violation and
BHD 2,000 for subsequent violations), administrative fines not exceeding BHD 100,000, and
the striking of the company’s commercial registration from the Commercial Register.

Conclusion

The Amendments to the Code demonstrate Bahrain’s commendable efforts to enhance
corporate governance practices in line with international standards and the CCL. By
imposing more significant obligations regarding transparency, disclosure, diversity and

consequences on joint stock companies, Bahrain aims to promote best practices in
corporate governance. These Amendments pave the way for improved corporate
governance standards and contribute to the overall development of the business
environment in Bahrain.

The Responsibility of Joint Stock Companies’ Board Members

مسؤولية أعضاء مجلس الإدارة في الشركات المساهمة
نظراً لتزايد انتشار الشركات المساهمة واهميتها كونها تلعب دوراً رئيسياًفي إنعاش الحركة الاقتصادية في المملكة حيث نرى بأن أكثر المشاريع التجارية الضخمة قد أنشأت في صورة شركات مساهمة، لذا فقد أصبح من الضروري مراقبة وضبط أجهزة إدارة هذه الشركات إذ إن أي تجاوز يصدر من الرئيس او أعضاء مجلس الإدارة قد ينتج عنه أضرار للمساهمين او الغير او أصول الشركة ذاتها مما يعرقل معه سير هذه الشركات وانحرافها عن الهدف الذي أنشأت من اجله.

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