Board seats and boundaries: What UAE nominee directors need to know

As foreign investment accelerates and family businesses evolve, nominee directors are becoming a fixture on UAE boards - but with that visibility comes responsibility. This bulletin explores the legal duties, governance risks, and practical safeguards every director and C-suite executive should understand when navigating board representation in today’s UAE corporate environment.

The UAE’s evolving corporate landscape has seen a rise in the appointment of nominee directors - individuals placed on boards to represent a shareholder’s interests. This trend is driven by:

• Foreign Investment Growth: The relaxation of foreign ownership rules has led to increased foreign direct investment. Foreign shareholders often appoint nominee directors to monitor local operations and safeguard their interests.
• Joint Ventures: JVs remain a common structure, particularly where foreign investors seek local expertise. Board representation is typically negotiated to ensure oversight and alignment.
• Family Businesses and Private Equity: Many UAE family businesses appoint family members as non-executive directors to represent collective interests. As these businesses attract external investment, private equity and strategic investors often insist on board seats to protect their positions.

Legal duties

Nominee directors are subject to the same legal obligations as any other director under UAE law. Their duties are owed to the company - not to the appointing shareholder - and include:

• Fiduciary Duties: Directors must act in the company’s best interests, exercising independent judgement and due care.
• Conflicts of Interest: Any personal or shareholder-related interest must be disclosed. Directors must abstain from voting on conflicted matters.
• Confidentiality: Directors must not share confidential company information with third parties, including the appointing shareholder, unless authorised.
• Related Party Transactions: Nominee directors must ensure proper governance procedures are followed, including board and shareholder approvals where required.
• Legal Privilege: Communications between nominee directors and their appointing shareholders are not automatically protected by legal privilege. Directors should avoid sharing legal advice received in their board capacity unless the company has expressly waived privilege or authorised disclosure.

Managing and mitigating risks

To ensure nominee directors contribute effectively and lawfully, companies should:

• Clarify Governance Structures: Define the division of powers between management, the board, and shareholders. Identify reserved matters requiring shareholder approval.
• Align on Strategy: Provide nominee directors with a clear business plan and strategic direction to guide decision-making.
• Implement Conflict Protocols: Establish procedures for declaring and managing conflicts of interest, including recusal from discussions and votes.
• Control Information Flow: Set policies on what information directors may share externally. Consider formalising reporting channels to avoid breaches of confidentiality or privilege.
• Induct and Educate: Ensure nominee directors understand their legal duties and the company’s governance framework from the outset.
• Consider Observer Roles: Where board representation is sought but voting rights are not essential, appointing a board observer may offer visibility without the fiduciary obligations of a director.
• Ensure D&O Cover and Indemnities: Companies should maintain robust directors’ and officers’ liability insurance and consider indemnity provisions to protect all directors, including nominees, from personal exposure when acting in good faith.

By implementing these measures, companies can reap the benefits of nominee directors  - specialised expertise, shareholder confidence, and insight into investor perspectives - while minimising potential downsides. The presence of nominee directors does introduce an added layer of complexity to board governance, but with a solid framework – clear strategy, defined authority limits, strict conflict management, and open communication – these complexities can be managed effectively. For nominee directors themselves, adherence to process and transparency is the best defence against any accusation that they acted improperly. In practice, many successful UAE companies navigate these nominee relationships well, especially where all parties recognise that the long-term success of the company will ultimately benefit every stakeholder, including the appointing shareholder.
 

📌 Hypothetical Case Study: Navigating Conflicts in a JV Boardroom

A European logistics company enters a UAE joint venture with a local partner and appoints a nominee director to the board. When the JV considers awarding a warehousing contract to a subsidiary of the European parent, the nominee director is expected to advocate for the deal. However, the board raises concerns about pricing and independence. The nominee director discloses their connection, recuses themselves from the vote, and ensures the transaction is reviewed by the audit committee and approved by disinterested shareholders. This approach preserves board integrity and avoids regulatory scrutiny—highlighting the importance of managing conflicts transparently.

For further infortmation or to discuss any of the points mentioned please contact Roshanak Bassiri Gharb or Rebecca Hilton.