The process and requirements for establishing a joint stock company under the Commercial Companies Law promulgated earlier this year by Sultani Decree 18/2019 (New CCL) are, on the whole, the same as under Sultani Decree 4/1974 (Old CCL), which it replaced. There are, however, a raft of provisions relating to promoters of joint stock companies that were not included in the Old CCL, most significantly relating to the duty of care and potential liability of promoters. In this article Nick Simpson and Justine Harding highlight some of the key provisions of the New CCL impacting promoters establishing joint stock companies. 

Role of promoter 

The New CCL defines a promoter as anyone who participates in the incorporation process with the intention of assuming the responsibility arising from doing so. In particular, a promoter includes anyone who signs the memorandum or articles of association or who provides a contribution to the capital of the company, either in cash or in kind, upon incorporation. By way of clarification, anyone, other than a shareholder, who reviews or drafts the memorandum or articles of association is expressly excluded from the ambit of the definition of promoter. For example, a legal adviser who drafted the constitutional documents is not considered a promoter of the company. 

The New CCL provides that promoters are to select from among themselves at least three people to form a committee to take the process of establishing the company forward.

Ratification of action taken by the promoters

Like the Old CCL, the New CCL provides for the ratification at the constitutive general meeting of action undertaken by the promoters on behalf of the company in relation to its formation. A report containing full information about the process and expenses incurred in respect of the incorporation of the company, together with details of actions taken on behalf of the company under formation, is to be submitted to the constitutive general meeting by the committee formed by the promoters. 

The New CCL introduces a lower quorum for a constitutive general meeting with only shareholders or their proxies representing 65 per cent or more of the capital of the company required in contrast to the Old CCL, which required at least 75 per cent. Pursuant to the New CCL, resolutions at a constitutive general meeting are adopted by absolute majority of the votes cast. Again, this is a lower threshold than that required under the Old CCL, which required a majority of three-quarters of the votes cast, provided that shareholders representing more than half of all the shares in the company voted.

Duty of care and potential liability of promoters

Under the New CCL, the promoters will be jointly liable (as opposed to jointly and severally liable, as was the case under the Old CCL) for any consequences or liability arising from any action taken that is not ratified by the constitutive general meeting. Furthermore, if a promoter fails to brief the constitutive general meeting of the facts relating to any action taken by that promoter then that promoter will be personally liable to the company for any damage arising from such action, even if it was approved by the constitutive general meeting.

In a change from the position in the Old CCL, only the promoters of a company are jointly liable (rather than jointly and severally, as was the case under the Old CCL) for any damage caused by any fault in the incorporation process of the company. The first board of directors and the first auditors of the company are no longer subject to liability if there is an issue with the incorporation of the company. This position better reflects the role of promoters in establishing the company and the responsibilities of the directors and auditors coming to the fore once the company has been established. However, it is worth noting that the members of the board of directors of the company are liable (on a joint basis rather than joint and several, as was the case under the Old CCL) for any damages arising from the failure to register the company on the commercial register (the time frame for doing so having been reduced from 30 days to 15 days in the New CCL).

The potential liability of promoters is expanded upon in the New CCL by the introduction of the concept of a duty of care. This appears to establish a relationship between the promoters and the company under formation akin to a fiduciary relationship. Specifically, Article 93 of the New CCL provides that promoters shall, in respect of all their transactions with the company under formation, extend such care as a diligent person. The promoters are jointly liable to both the company and third parties for any damages arising from their failure to meet the standard of a diligent person. There is no detail as to what "the standard of a diligent person" entails and it will remain to be seen how this is interpreted by the courts. 

The New CCL further expands on the fiduciary nature of the relationship between the promoters and the company under formation by providing that the promoters are liable to account to the company under formation in respect of any funds or information received by them along with any gains, thereby essentially prohibiting promoters from making a profit out of promotion of the company. This appears to be wider than simply a restriction on making a secret profit as there is no express carve-out for retaining profit made out of promotion if disclosed and consented to by the company. 

There are some increased penalties under the New CCL that promoters should also note. In particular, anyone who deliberately includes incorrect information or omits material information (which would have the effect of deceiving or causing harm) in the constitutional documents or any document required to establish the company, who uses fraudulent methods to induce others to participate in a company or who deliberately issues an invitation to subscribe for the company's shares in violation of the New CCL shall be punished by imprisonment for a period of between one and three years and/or a fine of between OMR10,000 and OMR50,000.  

Please do not hesitate to get in touch with a member of the team should you have any queries relating to the New CCL or how it might affect your business.

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