Some boards of directors find a way to earn bonuses through back door

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MoI, CMA said tightened screws on loss making companies

KUWAIT CITY, Sept 28: With the regulatory authorities tightening their grip on the entities subject to their oversight, some loss-making companies, which do not distribute profits, have begun to circumvent the ban that has been imposed not to grant bonuses to the board of directors, through the back door in a fictitious manner, reports Al-Qabas daily.

In recent years, the Ministry of Commerce and Industry and the Capital Markets Authority have tightened the screws on loss making companies that distribute bonuses to the board of directors, while not distributing profits to shareholders by forcing these companies to abide by the contents of Article 198 of the Companies Law, and not to exceed the permissible percentages of bonuses.

Article 198 of the Companies Law states that “the company’s contract sets forth the method for determining the remunerations of the chairman and members of the board of directors, and the total of these remunerations may not be estimated at more than 10% of the net profit after deducting depreciation and reserves, and distributing a profit of no less than 5% of the capital to shareholders or any higher percentage stipulated in the company’s contract.

The Fatwa and Legislation Department confirmed that it is not permissible to disburse rewards to the chairman and members of the board of directors of the joint-stock company before the actual distribution of the shareholders’ profits, in the proportions and controls established by law in implementation of the text of Article 198 of the Companies Law No. 1 of 2016, as the Fatwa Department said that it is necessary to observe the controls contained in the text of Article 198.

The amount of the reward, regardless of its form, in cash or in kind, must not exceed the maximum limit, which is 10% of the company’s net profit after deducting depreciation and reserves, whether compulsory or voluntary, and distributing dividends to shareholders at a rate of no less than 5% of the capital, unless the company’s system requires a higher percentage.

The text of the fatwa also stated that the legislator was clear in his intention to set a ceiling for the remuneration of members of the board of directors and link it to the issue of distributing profits to shareholders, which means there is no room for jurisprudence on the source of the text, and the texts of the law that regulate the work of companies and clarify the rights and duties of all related parties. Since that time, the Ministry of Commerce and Industry has been scrutinizing the schedule of companies’ general assemblies, especially the item related to the distribution of a bonus to members of the board of directors, and it does not allow companies to grant bonuses to the board of directors if they do not distribute profits to their shareholders

Violating
The Ministry of Commerce also obliged the violating companies to read the report of that violation before its shareholders, and to deal with it in the future, so as not to register a fine on the company of not less than 5,000 dinars, and not more than 50,000 dinars, for the company that refrains from correcting the violations mentioned in the Ministry’s report. Article 198 states that the company’s contract sets out the method for determining the remunerations of the chairman and members of the board of directors, and the total of these remunerations may not be estimated at more than 10% of the net profit after deducting depreciation and reserves, and distributing a profit of no less than 5% of the capital to shareholders, or any percentage as stipulated in the company’s contract.

However, an annual bonus of not more than 6000 dinars may be distributed to the chairman of the board of directors, and to each member of this board from the date of the company’s incorporation until the profits are achieved that allow it to distribute the rewards, as stipulated in the previous paragraph. It is permissible, by a decision issued by the company’s ordinary general assembly, to exempt an independent member of the board of directors from the upper limit of the mentioned remuneration.

The Board of Directors is obligated to submit an annual report to the Company’s Ordinary General Assembly for approval, provided that it accurately includes a detailed monetary statement, benefits, and privileges obtained by the Board of Directors, whatever their nature and name. In the midst of this regulatory tightening, some companies resorted to a crooked method to pay bonuses to the board of directors, which is through the board of directors’ committees, which are sometimes considered fictitious, as their committees are held on paper only, and then the board member signs the minutes of the meeting he did not attend.

Distribute
In a related development, investment sources warned against the expansion of this phenomenon during the recent period in some listed and unlisted companies, which recorded losses and were unable to distribute profits to shareholders, bypassing the law, especially the text of Article 198 of the Companies Law, which deprived them of obtaining bonuses.

The sources revealed that these councils fortify their practice legally, by registering the formal attendance at committee meetings, and obtaining the approval of the general assemblies on all their practices annually through the discharge of liability, by providing a sufficient quorum to hold the assembly, and approving all its provisions through the Investor Relations Department that brings them together through the power of attorney, which often makes the minority control the fate of the company and its shareholders.

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