There are many euphemisms to describe a CEO’s importance in a business. Leading is a test of abilities; it is no easy feat and means abundant responsibility. In most cases, such responsibility also brings liability. It is human to make a mistake, but as the age-old adage goes, prevention is better than cure. Here are some easily avoidable legal mistakes.
Not documenting authority
CEO positions are not wells of infinite power. They have permutations and limitations. What a CEO can and cannot do is quite critical to know in order to avoid legal complications. CEOs are expected to understand and record a document that actually provides such power and authority to act as CEO. If no document recording is practiced, this can lead to personal liability on the CEO and could also debilitate a company’s business.
To add to the mix, general managers named on trade licenses are automatically (by law) conferred with legal authority to act on behalf of the company. General managers may or may not be named as CEOs, however, not all CEOs are named on trade licenses as general managers of companies. The roles of general manager and CEO in a company can be clearly delineated if the stakeholders wish to, which still means a special paper should be issued providing a CEO with the relevant authority.
Not recording personal liability
If named as general manager on a company’s trade license and under the UAE Companies’ law, all general managers hold personal liability for their individual actions. This makes the general manager answerable not just to stakeholders but to legal authorities as well. If the general manager and CEO are imbued into one individual, this only creates a further mix of liabilities.
To limit liabilities, it is prudent for CEOs to maintain copies of all documents signed to create a paper trail and record authority. Most companies in the Middle East have cleverly developed “charts of authority” that lists responsible managers within the organization that would have reviewed documents before any official signatory documents have been approved. This is a dexterous way of ensuring there is minimal oversight of content being approved or signed off by a CEO. CEOs can also limit personal liability by opting for Director’s and Officer’s Liability Insurance.
Not paying attention to restrictive covenants
Most CEO employment contracts are goaded with restrictive covenants including non-compete and confidentiality obligations obscured amidst the bountiful benefits and roseate bonus figures. While organizations pretend it’s only a formality at the signing stage, these should not be taken lightly, and should properly be reviewed and agreed to. The intention of restrictive covenants is always to preserve company secrets, but not take away livelihood. It is therefore advisable for CEOs to preserve employer secrets and not engage in any activity that may “intentionally” adversely affect a business. Actions to the contrary could easily attract personal liability as well as incline employers to sue for breach.
Conversely, as CEO of an organization, it would be prudent to create confidentiality and non-compete obligations on employees through a separate agreement. This creates a separate relationship with the employees and prompts employees to understand the value of why proprietary information cannot simply be downloaded and used in the event of a change or openly discussed with family and friends at a dinner party.
Not addressing conflicts of interest
Companies in the Middle East, especially family businesses, are known to employ family members. Being CEO, it is critical to remind oneself that individual favoritism, personal loans or pet projects being run through the company could attract unpleasant legal repercussions.
It is advisable for a CEO to not transact with or favor other businesses managed by family members or friends. Conflicts of interest could lead to losses, or in some circumstances be seen to violate certain legal provisions. These situations are best avoided if possible, or it is critical to have arms-length agreements drawn up that clearly set out the transaction rules.
Not being aware of regulations
It is increasingly becoming critical for CEOs to understand whether certain legal regulations apply to their business, such as anti-bribery, anti-money laundering, anti-corruption, and data protection. Adding layers of “know-your-client’ and staying aware and constantly educated on rules, is of benefit, especially to CEOs.
If not the actual segregated policies, it is recommended that the company generally imbues the essence of such regulations and acts in a compliant and ethical manner.
Some CEOs appoint officers with a separate chain of command to keep business processes uninfluenced and legally compliant, while others appoint experienced boards of advisors. It is also advisable to have a general power issued in a CEO’s personal capacity and on behalf of a company to lawyers that can represent before civil and police authorities in case of those “what-if” scenarios where time isn’t favorable.
Partner, Head of Department – Startups & SMEs