Legal consequences of the Middle East conflict: Corporate

Conflict and political unrest across the Middle East are creating significant personal and commercial challenges for cross jurisdictional and UK domiciled businesses, with corporate law implications that demand close attention.

While much commentary has focused on individual tax residency, the corporate implications and consequences are at least as pressing. Three issues in particular stand out.

Directors’ duties during disruption in the Middle East

The statutory duties imposed by the Companies Act 2006 (the Act) don’t pause or provide for geopolitical disruption. The situation in the Middle East creates exposure across several of them.

Section 172 of the Act requires directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. While the test is subjective, it still requires the genuine exercise of judgment. A director who, under the pressure of personal/political circumstances, defers entirely to management or co-directors without properly applying their own mind to the company’s interests may struggle to show compliance, even where intentions are honest.

The duty to exercise reasonable care, skill and diligence under section 174 of the Act is equally engaged. Directors unable to conduct site visits, attend management meetings or review operational performance in the usual way must take positive steps to compensate. Passive reliance on others, without effective oversight, will not suffice therefore causing a breach of this section. The standard is that of a reasonably diligent person with the director’s actual knowledge and experience, and that standard doesn’t fall away because circumstances are difficult.

From a practical perspective, directors who can’t govern effectively should ensure robust delegation to the appropriate/equivalent level and that written resolutions and careful documentation are in place. Well-drafted articles of association typically give boards flexibility to delegate authority and pass written resolutions. These mechanisms exist for situations of this kind and should therefore be exercised.

Any delegation must be genuine. Appointing a local nominee while continuing to exercise control remotely will not discharge a director’s duties. Decisions taken, and the reasoning behind them, should be recorded contemporaneously to evidence compliance and guard against later challenge.

M&A activity

The most immediate corporate law impact may be felt in mergers and acquisitions (M&A) transactions, involving Middle East-based targets or counterparties that were already underway when disruption escalated.

Take a UK buyer that has signed heads of terms to acquire a UAE business, with a 90-day longstop. If travel is impossible, on-the-ground due diligence can’t be completed and regulatory approvals will inevitably be delayed; the buyer’s ability to pause, renegotiate or exit depends almost entirely on the offer documentation.

Force majeure and material adverse change clauses are often examined in these circumstances, but both offer limited protection under English law. Force majeure clauses are construed narrowly and will only assist where the relevant event falls within the clause and has rendered performance impossible, not merely more difficult or expensive. MAC clauses face a similarly high bar. Disruption that is market-wide or geopolitical, rather than specific and disproportionate to the target, will rarely be enough.

Parties should scrutinise their drafting carefully before assuming there’s a contractual route out.

Insurance cover

Companies should carefully review whether their existing business insurance policies include, or potentially exclude, political risk and war risk cover. Most commercial policies contain explicit war exclusions and as a result of this any loses arising directly or indirectly from conflict (which is likely to be widely defined) may not be covered unless specific endorsements or standalone political risk policies are in place. UK companies operating in, or transacting with businesses in, the Middle East should consider their policies for exclusions.

In addition, the geopolitical disruption has caused impact to business operations, including the inability to conduct site visits, attend management meetings, and the movement of goods. These realities may trigger business interruption insurance, and whilst a company may have such policies in place they are not always suited for geopolitical instances which create business destabilisation, rather physical damage to property. Considering whether non-damage business insurance or contingent business interruption cover is provided as part of a policy is therefore recommended.

Conclusion

The conflict in the Middle East has intersected with UK corporate in ways few businesses anticipated or could have predicted or been ready for. Directors may be exposed to breaches of statutory duty, transactions may unravel with limited legal remedies available and insurance cover in place may not stretch far enough to ensure business is recoverable.

Taking specialist advice before irreversible decisions are made is key.