The International Comparative Legal Guide to Corporate Governance 2009 (The International...

Corporate Governance 2009

Published by Global Legal Group with contributions from:

A practical insight to cross-border corporate governance

www.ICLG.co.uk

The International Comparative Legal Guide to:

Advokatfirmaet Haavind AS

Al Tamimi & Company

ALRUD Law Firm

Anderson Mori & Tomotsune

Arnold Bloch Leibler

Ashurst LLP

Bae, Kim & Lee LLC

Basham, Ringe y Correa S.C.

BCM Hanby Wallace

Bernotas & Dominas Glimstedt

Cechová & Partners

Deneys Reitz Inc

Elvinger Hoss & Prussen

EMD Advocates

Garrigues

Gleiss Lutz

Kunz Schima Wallentin Rechtsanwälte OG

Law firm Miro Senica and attorneys

Lenz & Staehelin

Liepa, Skopina/ BORENIUS

Luiga Mody Hääl Borenius

Michael Shine, Tamir & Co.

Osler, Hoskin & Harcourt LLP

Pachiu & Associates

Rønne & Lundgren

Roschier, Attorneys Ltd.

Santa Maria Studio Legale Associato

Schulte Roth & Zabel LLP

Siemiatkowski & Davies

Spasov & Bratanov Lawyers' Partnership

Vasil Kisil & Partners

Vieira de Almeida & Associados

Weinhold Legal, v.o.s.

Zhong Lun Law Firmv

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DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified profes-sional when dealing with specific situations.

Further copies of this book and others in the series can be ordered from the publisher at a price of £200. Please call +44 20 7367 0720

Contributing EditorsAndrew Edge & VanessaMarrison, Ashurst LLP

Brand ManagerOliver Smith

Marketing ManagerMatthew Hill

Cover DesignF&F Studio Design

EditorCaroline Blad

Senior EditorPenny Smale

Managing EditorAlan Falach

PublisherRichard Firth

Published byGlobal Legal Group Ltd.59 Tanner StreetLondon SE1 3PL, UKTel: +44 20 7367 0720Fax: +44 20 7407 5255Email: [email protected]: www.glgroup.co.uk

Printed byAshford Colour Press Ltd.June 2009

Copyright © 2009Global Legal Group Ltd.All rights reservedNo photocopying

ISBN 978-1-904654-63-6ISSN 1756-1035

The International Comparative Legal Guide to: Corporate Governance 2009

General Chapters:1 Directors’ Duties in the “Zone of Insolvency” - Andrew Edge & Rachel Mulligan,

Ashurst LLP 1

Country Question and Answer Chapters:2 Australia Arnold Bloch Leibler: Jonathan Wenig 6

3 Austria Kunz Schima Wallentin Rechtsanwälte OG: Georg Schima & Natalie Seitz 12

4 Bulgaria Spasov & Bratanov Lawyers’ Partnership: Vassil Hadjov & Alexander Angelov 19

5 Canada Osler, Hoskin & Harcourt LLP: Mark A. Trachuk & Andrew J. MacDougall 24

6 China Zhong Lun Law Firm: Shirley Xu & Simon Kai-Tse Cheong 30

7 Czech Republic Weinhold Legal, v.o.s.: Daniel Weinhold & Dan Loukota 36

8 Denmark Rønne & Lundgren: Morten Jensen & Dorthe Rosenkilde Saunders 42

9 Estonia Luiga Mody Hääl Borenius: Heili Haabu & Karina Paatsi 48

10 Finland Roschier, Attorneys Ltd.: Manne Airaksinen & Mia Hukkinen 54

11 Germany Gleiss Lutz: Dr. Ralf Thaeter & Dr. Cornelia Topf 60

12 Ireland BCM Hanby Wallace: Dennis Agnew & Fiona Mahon 65

13 Israel Michael Shine, Tamir & Co.: Joseph Tamir & Shira Shine Fried 71

14 Italy Santa Maria Studio Legale Associato: Romina Guglielmetti & Francesco Paolo Scebba 78

15 Japan Anderson Mori & Tomotsune: Yoshimasa Dan & Hitoshi Ishihara 84

16 Korea Bae, Kim & Lee LLC: Joonki Yi & Jun Kul Yoo 89

17 Latvia Liepa, Skopina/ BORENIUS: Laine Skopina & Zane Dzule 95

18 Lithuania Bernotas & Dominas Glimstedt: Gediminas Dominas & Andrius Ivanauskas 100

19 Luxembourg Elvinger Hoss & Prussen: Pit Reckinger & Philippe Prussen 106

20 Malta EMD Advocates: Tonio Ellul & Pierre Mifsud 113

21 Mexico Basham, Ringe y Correa S.C.: Juan José López-de-Silanes Molina & Alejandro Escobar Bribiesca 119

22 Norway Advokatfirmaet Haavind AS: Amund Fougner Bugge & Kjetil Hardeng 126

23 Poland Siemiatkowski & Davies: Marcin Wróbel & Katarzyna Stanczyk- Bracka 132

24 Portugal Vieira de Almeida & Associados: Paulo Olavo Cunha & Sofia Barata 137

25 Romania Pachiu & Associates: Magda Munteanu & Florina Pop 143

26 Russia ALRUD Law Firm: Vassily Rudomino 148

27 Slovakia Cechová & Partners: Katarína Cechová & Peter Mateja 153

28 Slovenia Law firm Miro Senica and attorneys: Melita Trop & Iztok Milac 158

29 South Africa Deneys Reitz Inc: Kevin Cron & Christine Rodrigues 163

30 Spain Garrigues: Fernando Vives 169

31 Switzerland Lenz & Staehelin: Patrick Schleiffer & Andreas von Planta 175

32 Ukraine Vasil Kisil & Partners: Denis Y. Lysenko & Ivan Y. Yurchenko 181

33 UAE Al Tamimi & Company: Gary Watts & Mohamed Khodeir 187

34 United Kingdom Ashurst LLP: Andrew Edge & Vanessa Marrison 191

35 USA Schulte Roth & Zabel LLP: David E. Rosewater & Marc Weingarten 198

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EDITORIAL

Welcome to the second edition of The International Comparative Legal Guideto: Corporate Governance.

This guide provides corporate counsel and international practitioners with acomprehensive worldwide legal analysis of the laws and regulations ofcorporate governance.

It is divided into two main sections:

One general chapter. This chapter outlines the directors’ duties in the “Zone ofInsolvency”.

Country question and answer chapters. These provide a broad overview ofcommon issues in corporate governance laws and regulations in 34jurisdictions.

All chapters are written by leading corporate governance lawyers and we areextremely grateful for their excellent contributions.

Special thanks are reserved for the contributing editors, Andrew Edge andVanessa Marrison of Ashurst LLP, for their invaluable assistance.

Global Legal Group hopes that you find this guide practical and interesting.

The International Comparative Legal Guide series is also available online atwww.iclg.co.uk

Alan Falach LL.MManaging EditorGlobal Legal [email protected]

1WWW.ICLG.CO.UKICLG TO: CORPORATE GOVERNANCE 2009

© Published and reproduced with kind permission by Global Legal Group Ltd, London

Chapter 1

Ashurst LLP

Directors’ Duties in the“Zone of Insolvency”

Introduction

Corporate governance is concerned with supervision of themanagement of a company and managing the risk, so that businessis carried out competently and with due care for the interests of allstakeholders concerned. In the UK this regulation is undertakenthrough various statutory provisions and the Financial ReportingCouncil’s Combined Code on Corporate Governance (“CombinedCode”) which relates to best practice.Given the current unstable financial climate, corporate governanceissues will be particularly prominent in directors’ minds as theybalance the competing interests of their stakeholders. There is asignificant shift in directors’ duties when a company is faced withthe risk of insolvency. Directors need to be aware of these dutiesand the related issues before the company becomes insolvent, as:

their responsibilities are very different from and moreextensive than those which apply to solvent companies;many of them apply when a company is in financial troublebut before it is insolvent in the technical sense;directors who have not been faced with companies infinancial difficulties previously are likely to be unfamiliarwith them; andfailure to comply with them can lead to personal liabilityand/or disqualification.

Who Do the Duties Apply to?

The duties apply to all directors. Section 250 of the Companies Act2006 (“2006 Act”) defines a director as “a person occupying theposition of a director by whatever name called”. The common lawhas imposed fiduciary duties on all directors, whatever their role,and a duty of care and skill. Many of those duties have beencodified by the 2006 Act. Other statutes and regulations createadditional offences and many of them impose strict liability.The common law fiduciary duty of the directors towards thecompany was a duty to act honestly and in good faith in the bestinterests of the company, and to use the powers granted to them forthe purposes for which they were conferred. Chapter 2 of Part 10of the 2006 Act has codified certain of these duties. Further, directors of listed companies must have regard to inter aliathe Listing Rules, Prospectus Rules, Disclosure and TransparencyRules (“DTRs”) and the Combined Code. The Listing Rules,Prospectus Rules, and the DTRs are regulated by the FinancialServices Authority (“FSA”) and create additional burdens whichare not faced by private companies. Although compliance with theCombined Code is not mandatory, the Listing Rules prescribe thatofficially listed companies must comply or explain how and why

they do not comply in their annual report. The Turnbull Guidance,Smith Guidance and Higgs Report further supplement theCombined Code with suggestions for good practice.

Codification of Directors’ Duties

The seven general duties of directors as codified by and set out insections 171 to 177 of the 2006 Act are:

to act within the powers conferred by the company’sconstitution;to promote the success of the company;to exercise independent judgment;to exercise reasonable care and skill;to avoid conflicts of interest;not to accept benefits from third parties; andto declare interests in proposed transactions or arrangements.

These duties apply at all times and not just when the company facesfinancial difficulty. The new statutory statement of duties does notcover all duties that directors might owe - other duties, such as theimportant duty to consider creditors’ interests in times of threatenedinsolvency, remain uncodified. The codified duties apply to all directors, including shadowdirectors and nominee directors. This in itself can cause difficultiesas obviously the possibility for conflict between a shareholder’srequirements and the company’s best interests can arise and may beeven more pronounced if the company is facing financialdifficulties.

Directors’ Duties in the “Twilight Zone”

In the insolvency world the “twilight zone” refers to the periodwhich starts when a solvent company becomes an insolvent one andends on the commencement of a formal insolvency process.In normal circumstances, where the company is in good financialhealth, the 2006 Act provides that the primary duty of directors is toact in a way which would be most likely to promote the success ofthe company with reference to the interests of its shareholders as awhole. However, as previously referred to, this duty is qualified bysection 172(3) of the 2006 Act, which provides that it is subject to“any enactment or rule of law requiring directors, in certaincircumstances, to consider or act in the interests of creditors of thecompany”. When a company is insolvent the interests of theshareholders are less important and the directors need to dischargetheir duties by reference to the creditors of the company. There is a significant shift in a director’s responsibilities whichoccurs when a company is in the “zone of insolvency” and before it

Rachel Mulligan

Andrew Edge

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Ashurst LLP Directors’ Duties in the “Zone of Insolvency”

ICLG TO: CORPORATE GOVERNANCE 2009WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London

is actually technically insolvent. This is a phrase which has notbeen defined but that has been used by the courts. It is advisablethat directors regard the shift as occurring when it appears (orshould be apparent to them) that there is a greater than ordinarybusiness risk of their company failing.The main problem is that it is not always clear for a director whenthis switch or shift occurs. When the company is solvent there is noreason for directors to consider the interests of creditors. However,when insolvent, the directors must consider creditors in priority toshareholders (West Mercia Safetywear Ltd [in Liquidation] vDodd [1988] BCLC 250). It is the period in between which causesmost difficulties - the so-called “twilight zone”. The reference in section 172(3) is probably reference to theconcepts of wrongful trading and fraudulent trading pursuant to theprovisions of the Insolvency Act 1986 (“IA 1986”). Whenapplicable they qualify a director’s duty to promote the success ofthe company for the benefit of the members as the directors (as adefence to wrongful trading claims) must show that they have takenall steps to minimise loss to creditors and failing which may incurpersonal liability.Much is made of the personal liability of directors in the event thatthey continue to permit a company in financial difficulties to trade.However, provided that it can be shown that the director has takenevery reasonable or proper step which he ought to have taken, witha view to minimising the potential loss to the company’s creditors,that personal liability ought not to be triggered.Questions arise when a company is in trouble as to whether thedirectors, in considering the interests of creditors, should also continueto have regard to the various factors set out in section 172(1), orwhether they are only relevant when the directors are looking topromote the success of the company for the benefit of its members.For example, the directors of a company may decide to continuetrading for a period so as to improve returns for creditors but withthe ultimate aim of filing for insolvency. Although they would beminimising the potential loss to creditors and possibly reducing thelikelihood of a wrongful trading action, there is always thepossibility that in continuing to trade they have made it harder forthe employees to find alternative work when the companyeventually enters insolvency. There has been no express guidanceon how directors should exercise their duties when approachinginsolvency so it has been assumed that the factors which need to beconsidered when a company is trading solvently are not relevant.However, as mentioned already, it is difficult for directors to knowexactly when creditors’ interests are to be preferred over theinterests of shareholders as there is no concrete timeline. This initself is a further potential conflict area for directors not reallyaddressed by the courts or legislation - but which more than likelywill be in the not so distant future.

Wrongful Trading (Section 214 IA 1986)

This is probably the most difficult legal problem which a director ofa company in financial difficulties might face. Fear of this liabilitymay often lead directors to put a company into formal insolvencyproceedings before strictly necessary. The case law relating to wrongful trading demonstrates that thecourts will typically find directors liable for wrongful trading where“the directors closed their eyes to the reality of the company’sposition, and carried on trading long after it should have beenobvious to them that the company was insolvent and that there wasno way out for it” (Re Continental Assurance Limited [2001]BPIR 733).

What is the Standard Required of a Director?

The court will ask the following questions:(a) during the time that person was a director and before the

commencement of the winding up of the company, did heknow or ought he to have known that there was noreasonable prospect of the company avoiding an insolventliquidation (section 214(2) IA 1986)? If not, then there is nowrongful trading by that person;

(b) if yes, following the time he did become aware (or ought tohave become aware) that there was no reasonable prospectthat the company would avoid going into an insolventliquidation, did he take all reasonable and proper steps witha view to minimising the potential loss to the company’screditors? If yes, then the court will not make an orderagainst that person (section 214(3) IA 1986).

Objective and Subjective Tests

Section 214(4) of the IA 1986 states that the facts which a directorof a company ought to know or ascertain, the conclusions he oughtto reach and the steps which he ought to take are those which wouldhave been known, ascertained, reached or taken by a reasonablydiligent person having both:a) the general knowledge, skill and experience that may

reasonably be expected of a person carrying out the samefunctions as are carried out by that director in relation to thecompany (i.e., an objective test); and

b) the general knowledge, skill and experience that that directorhas (i.e., a subjective test).

The court will look at the function carried out by the director inquestion when deciding these questions.

What Order Can the Court Make?

The court’s discretion in relation to section 214 is very wide. Themain consequence of a finding of wrongful trading is that thedirector may be required to make a personal contribution to theassets of the insolvent company. In addition to personal liabilitywhere a director engages in wrongful trading, he may bedisqualified by a court order for a period between two and fifteenyears (see below).

Fraudulent Trading (Section 213 IA 1986)

Under the IA 1986 a liquidator can apply to court to obtain acontribution from any person (including, but not limited to adirector) who knowingly continues to carry on the company’sbusiness with the intention of defrauding creditors with theknowledge that there is no reasonable prospect of the companybeing able to pay its creditors (fraudulent trading). Fraudulenttrading is also a criminal offence pursuant to the CA 2006.Whilst the use of the word “fraud” suggests a high level ofmisconduct, in Re Powdrill & anor v Watson & anor (1995 2WLR 312) it was suggested that fraudulent trading wouldencompass trading either knowing or being reckless as to whethercreditors would be paid. As fraudulent trading will almost certainly be wrongful trading aswell, it is unlikely that claims will be made for fraudulent tradingwhen a claim for wrongful trading can be made more easily. Theprimary advantage of section 213 is that it can be used against non-directors.Recent case law suggests that fraudulent trading claims could become

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ICLG TO: CORPORATE GOVERNANCE 2009© Published and reproduced with kind permission by Global Legal Group Ltd, London

increasingly important and of wider application. These indicate that aparticipant need only know the elements of a transaction which“transgress the ordinary standards of behaviour” (Barlow ClowesInternational Ltd [in liquidation] and anor - v - EurotrustInternational Limited and anor [2006] 1 All ER 333).

Preferences (Section 239 IA 1986)

Where a company has at a “relevant time” given a preference to aperson (being a creditor, surety or guarantor for any of thecompany’s debts or liabilities), a liquidator (or an administrator)may apply to the court for an order restoring the position to what itwould have been had the preference not occurred.A preference takes place if the company does something to put asurety, creditor or guarantor in a better position than it would havebeen in the event of the company entering insolvent liquidation.The company must be influenced by the desire to achieve this result(there can be no preference without their desire and, in practice, thisis difficult to show).The transaction must have taken place within six months (or twoyears in the case of connected persons) before the onset ofinsolvency and the company must be insolvent at the time or as aresult of the preference. The desire element is presumed if thepreference is given to a connected person.A director who authorises a preference may be subject todisqualification under the Company Directors Disqualification Act1986 (“CDDA”) and/or may be required to contribute to any shortfall.

Transactions at an Undervalue (Section 238IA 1986)

A transaction at an undervalue occurs where a company has “at arelevant time” (being two years ending with the “onset ofinsolvency”) made a gift to a person or entered into a transactionwhere the company receives no consideration or the considerationreceived is significantly less in money or moneys worth than theconsideration given by the company.The company must be insolvent at the time or become insolvent asa result of the transaction. The court may order that the company be put in the position that itwould have been in had the transaction not taken place. Often adirector will be joined to the proceedings if he was guilty ofmisfeasance in permitting the company to enter into the transaction.Furthermore, a director who authorises a transaction at anundervalue may be subject to disqualification under the CDDA inaddition to personal liability.

Disqualification

The CDDA was brought into force with a view to raising standards.Pursuant to the CDDA, a director may be disqualified from actingas a director of a company whether directly or indirectly or in anyway being concerned or taking part in the promotion, formation ormanagement of a company unless he has the leave of the court.Where a person has been a director of a company which has becomeinsolvent (either whilst he was a director or subsequently) and thecourt finds that his conduct as a director makes him unfit to beconcerned in the management of a company, the court is obliged tomake a disqualification order for between two and 15 years.A director’s conduct will make him or her unfit to be concerned inthe management of a company if the court is satisfied that the

director has been guilty of a serious failure, whether deliberately ordue to incompetence, to perform his or her duties. The court willhave regard to:

any misfeasance or breach of duty by the director;non-payment of crown debts such as PAYE, NationalInsurance contributions and VAT;the extent of the director’s responsibility for the failure bythe company to supply goods or services which have beenpaid for;failure to keep proper books of account and/or to makestatutory returns;misapplication of the company’s funds or property;trading with a succession of “phoenix” companies and/orusing a prohibited name;drawing excessive remuneration; andthe director’s responsibility for the company entering intoany preferences or transactions at an undervalue.

It is worth noting that over the years, and possibly as a result of thegrowing body of corporate governance guidelines, the number ofdisqualification cases before the court has increased dramatically.On average, for every 10 companies that end up in a formalinsolvency, one director is disqualified.

Announcement Obligations for Directors ofPublic Companies

Where a company’s shares are listed on the UK Listing Authority’sOfficial List, directors additionally have to consider the impact ofthe DTRs and the Financial Services and Markets Act 2000(“FSMA”) - particularly with reference to those provisions onmisleading the market.Pursuant to the DTRs, companies which issue securities are underan obligation to provide to the FSA inter alia any informationwhich the FSA considers appropriate to protect investors or toensure smooth operation of the market.Directors of such companies are required to notify a RegulatoryInformation Service (“RIS”) as soon as possible where there is achange in the company’s financial condition and when a substantialmovement in the price of its listed securities is likely. This clearlyapplies to the situation where directors of listed companies areaware of a high risk of insolvency. Directors face difficulties in such circumstances. This obligationwill more than likely cause conflicts with directors’ first instincts toprotect the company’s financial position until a decision has beenreached whether or not to trade on or to implement some form ofrescue. They have information which may cause the share price toplunge, thus possibly inflicting substantial losses on shareholders.Making a disclosure may seem inconsistent with a director’s duty totake “every step” to minimise potential losses to creditors within thewrongful trading test.DTR 2 (Disclosure and control of inside information by issuers)requires an issuer admitted to trading on a regulated market (whichincludes the main market of the London Stock Exchange, but notAIM) to disclose via a RIS any inside information relating to it assoon as possible (AIM has a separate disclosure regime which isoutside the scope of this paper ). However, DTR 2.5 (Delayingdisclosure of inside information) permits an issuer to delay thedisclosure of inside information in certain limited circumstances.A recent amendment to DTR 2 recognises that an issuer whichreceives liquidity support from the Bank of England or anothercentral bank may have a legitimate interest in delaying the publicdisclosure of this fact.

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If a company does fail to comply with the disclosure requirementsthe UKLA may suspend the trading of its shares. Directors also need to have regard to FSMA provisions relating tomisleading statements and practices which impose criminalpenalties. Under section 397(2) of FSMA any person (not only adirector) who:(a) makes a statement, promise or forecast which he knows to be

misleading, false or deceptive in a material particular;(b) dishonestly conceals any material facts whether in

connection with a statement, promise or forecast made byhim or otherwise; or

(c) recklessly makes (dishonestly or otherwise) a statement,promise or forecast which is misleading, false or deceptive ina material particular,

is guilty of an offence if he makes the statement, promise or forecastor conceals the facts for the purpose of inducing, or is reckless as towhether it may induce another person (whether or not the person towhom the statement, promise or forecast is made):(a) to enter or offer to enter into, or to refrain from entering or

offering to enter into a relevant agreement; or(b) to exercise, or refrain from exercising, any rights conferred

by a relevant investment.Under section 397, an offence can be committed if a person makesa false or misleading statement “recklessly”, even though they donot realise that it is false or misleading. However, the omission ofa material fact can involve an offence only if the fact was concealed“dishonestly”. Under section 397(3) of FSMA, it is also an offenceto act or engage in conduct which creates a false or misleadingimpression as to the market in, or price or value of, any relevantinvestments if the act or conduct is carried out for the purpose ofcreating that impression and thereby inducing another person toacquire, dispose of, subscribe or underwrite those investments or torefrain from doing so.A person guilty of an offence under section 397 is liable to a fineand/or imprisonment for up to seven years.It can be seen that directors of listed companies have a moredifficult time in relation to their responsibilities, having to balancethe timing of any necessary announcements against the need toprotect the business of the company, creditors and the share valueof the company.

Serious Loss of Capital

Section 142 of the Companies Act 1985 (to become section 656 CA2006 with effect from 1 October 2009) provides that directors ofpublic companies should convene a general meeting where the netassets of the company are half or less of its “called up sharecapital”, within 28 days of one of them becoming aware of theposition. A failure to convene such a meeting, where necessary, canleave directors open to a fine of up to £5,000 each.

How Can Directors Protect Themselves?

It is not possible to exempt a director from liability for negligence,default, breach of duty or breach of trust, but shareholders can ratifyconduct by a director amounting to any of these by ordinaryresolution (unless otherwise stated in the company’s articles). Thevotes of the director (if he is also a shareholder) and his connectedpersons are disregarded in such a resolution. A company can include, and normally does include, an indemnity infavour of directors within its articles in respect of any liabilities,costs, charges and expenses incurred in the execution and discharge

of their duties. This includes liability incurred in defending anycivil or criminal proceedings relating to anything done, omitted oralleged to be done or omitted by a director as an officer or employeeof the company.Section 232 of the 2006 Act prevents a director from obtaining anindemnity from the company against wrongful trading liability,although a third party could give an indemnity. Whether liability iscovered by insurance cover will depend upon the terms of thepolicy.A company can purchase D&O insurance or a qualifying third partyindemnity provision (“QTPIP”) for its directors against any suchliability. However, the director cannot be covered by an indemnityor a QTPIP in respect of:

fines imposed in criminal proceedings;penalties imposed in respect of non-compliance withregulatory requirements;the defence costs of criminal proceedings where the directoris convicted;the defence costs of civil proceedings successfully broughtagainst the director by the company or an associatedcompany; andthe costs of any unsuccessful applications brought by thedirector for relief.

With ever-increasing standards being required to ensure compliancewith corporate governance guidelines, it seems that professionallyqualified directors may be more regularly in the firing line fromoffice-holders and the Secretary of State particularly if they have therequisite “deep pockets” and/or are backed by D&O insurancepolicies.The decision to indemnify a director may be taken by the company’sboard and shareholder approval is not required, although wherethere is a potential conflict of interests, it may be prudent forshareholder approval to be obtained.No indemnity or insurance is available in respect of fraudulenttrading.As far as directors of listed companies are concerned, they shouldfurther ensure that they make the appropriate disclosures regardinggoing concern status and liquidity risk. The difficult economicconditions will mean that directors have to consider seriouslywhether using the going concern basis of accounting is reasonable.

Conclusion

It is critical that directors still have regard to corporate governanceprinciples and their duties in times of financial difficulty. Regularboard meetings should be held so that commercial decisions arerecorded in company minutes. It is also important that directorshave up to date financial and legal information available to them atboard meetings to enable them to make informed decisions.Particular attention should be paid to monitoring compliance withfinancial covenants in any arrangements with lenders.In order to satisfy their legal obligations, directors should keep thecompany’s position under constant review when in the zone ofinsolvency (in most cases on a day-to-day basis) to ensure that thereremains a reasonable prospect of the company avoiding an insolventliquidation and that action taken in relation to the company is notcontrary to the best interests of the creditors. Directors should,therefore, follow the guidelines below:

hold regular board meetings as soon as possible upon thembecoming aware that the company may be in financialdifficulties (and at least every week thereafter). Ideally noother business would be tabled at the meeting, to permitcomplete focus on the issue of whether the business is viable

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and to keep under review the prospect of avoiding insolventliquidation. Note that for a group of companies, the directorsshould hold separate board meetings for each affectedcompany and must be careful only to consider the interests ofthe relevant company (not its parent or sister companies) atthe relevant meeting;carefully minute their discussions and conclusions as to whythere is a reasonable prospect of the company avoiding aninsolvent liquidation and, in particular, as to why thecompany should continue to trade;hold early discussions with auditors as regards potentialdisclosures;make sure that they have available all information necessaryto enable them to take an accurate and informed view as tothe financial position (including cashflows) and prospects ofthe company. This information should cover not just theimmediate future but also as far into the future as is requiredto enable an informed assessment of whether or not thecompany will ultimately survive;in particular the company will need accurate information asto the make-up of its present (and future) creditors;

the minutes will assist as evidence of whether or not thedirectors have taken steps to minimise potential loss tocreditors for the purpose of avoiding wrongful tradingliability;ensure that there is a proper distribution of responsibility anddelegation within the company;keep any new commitments to a minimum and consider waysin which exposure can be reduced;pay cash wherever possible;take appropriate professional advice on remedial measuresincluding taking specialist insolvency advice as soon aspracticable;consider whether it is possible to inform potential newcreditors of the company’s financial difficulties so that theycan make an informed decision whether or not to trade withthe company; andconsider trading through an administration or requesting thebank to appoint an administrative receiver (if it is able to doso).

Andrew Edge

Ashurst LLPBroadwalk House5 Appold StreetLondon EC2A 2HAUnited Kingdom

Tel: +44 20 7638 1111Fax: +44 20 7638 1112Email: [email protected]: www.ashurst.com

Andrew Edge is a partner in the corporate department in London,specialising in mergers and acquisitions and corporate finance. Hehas particular expertise in the healthcare sector. Andrew wasseconded to Ashurst’s Frankfurt office, from January 2002 to May2005. In the past year he has acted for United Company Rusal, theworld’s largest aluminium company, on its acquisition of a 25 percent. state in Norilsk Nickel, and for Protherics plc, on its acquisitionby BTG plc, to form the UK’s largest quoted biopharmaceuticalcompany.

Rachel Mulligan

Ashurst LLPBroadwalk House5 Appold StreetLondon EC2A 2HAUnited Kingdom


Rachel Mulligan is a professional development lawyer in thecorporate department in London, specialising in restructuring andinsolvency. Rachel is a member of the professional developmentteam and, as such, her role is supporting and developing technicalexcellence within the firm. Rachel works on internal and client-facing documents, is involved in training and also helps generally ontechnical legal matters, all across a wide-range of restructuringrelated areas. Rachel is also a regular contributor to CorporateRescue and Recovery journal.

With over 200 partners and 800 lawyers in 12 countries, Ashurst LLP is an elite law firm advising corporates andfinancial institutions. Our core business is built around our finance and corporate capabilities, combined with strongcommercial, competition, employment, litigation, real estate, regulatory and tax practices.

We have designed and built our business to meet our clients’ needs around the world, where the changing corporateand regulatory environment is increasing the complexity of the business landscape and the need for timely and well-judged responses. We deliver the innovative, commercially-driven advice that ambitious organisations need to succeed.

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Chapter 2

Arnold Bloch Leibler

Australia

1 Setting the Scene - Sources and Overview

1.1 What are the main corporate entities to be discussed?

The corporate entities to which this chapter will refer are publiccompanies admitted to the Official List of ASX Limited (“ASX”),which is Australia’s principal public securities market.There are other forms of corporate entity that may be publicly owned,including ‘managed investment schemes’. This is a generic termunder Australia’s corporate law that covers a range of corporate andother structures, which may involve public ownership. Examples ofmanaged investment schemes include cash management trusts,property trusts and many agricultural schemes. Many of the corporategovernance rules and principles applicable to companies applysimilarly to managed investment schemes, although the focus of thischapter is on public, listed companies.

1.2 What are the main legislative, regulatory and othercorporate governance sources?

The Corporations Act 2001 (Cth) (“Corporations Act” or the“Act”) is the principal legislation regulating companies inAustralia. It is an Act of the Commonwealth of Australia that setsout the laws dealing with business entities in Australia. Theconstitutional history of Australia’s corporate law is somewhatcomplex and tortuous. In summary however, publicly listedcompanies are now federally regulated under the Corporations Act.The Australian Securities and Investments Commission (“ASIC”)is the principal corporate regulatory agency. ASIC is aCommonwealth Statutory corporation created by the AustralianSecurities and Investments Commission Act 1989 (Cth) (“ASICA”).ASIC’s functions include: registering companies; receiving,processing and making available to the public information aboutcompanies; investigating suspected contraventions of, andenforcing compliance with, the Act; and exercising discretion torelieve from compliance with regard to particular provisions of theAct. To this end, ASIC publishes regulatory guides that explain andarticulate its policies in undertaking its role and exercising thediscretion and responsibilities granted to it under the Act.The Takeovers Panel (“Panel”) is the primary forum for resolvingdisputes regarding a takeover bid until the bid period has ended.The Panel is a peer review body, with part-time members drawnpredominantly from Australia’s takeovers and businesscommunities. There have been several significant constitutionalchallenges to the role and authority of the Panel in recent times. Adecision by the High Court of Australia in 2008 has put many of

those challenges to rest, and the role and powers of the Panel havebeen confirmed (at least for the foreseeable future).ASX was created when the Australian Stock Exchange and theSydney Futures Exchange merged in July 2006. As at 31 December2008, there were 2,223 companies listed on ASX, with a domesticmarket capitalisation of $969 billion.For publicly listed companies, ASX is a co-regulator with ASIC inthat it prescribes standards for companies admitted to its OfficialList and reserves power to police those standards. The standardsare set out in the ASX Listing Rules, the ASX Business Rules andthe business rules of its securities clearing house. In addition to the ASX Listing Rules, the ASX CorporateGovernance Council has produced a guide titled “Principles ofGood Corporate Governance and Best Practice Recommendations”(“Principles”). The Principles are guidelines and are notprescriptive; however, the ASX Listing Rules require thatcompanies disclose in their annual report the extent to which theyhave followed these Principles. Where companies have notfollowed these Principles, reasons must be provided for not havingfollowed them.The Australian Competition and Consumer Commission(“ACCC”) was established in 1995 to administer the TradePractices Act 1974 (Cth). Its primary responsibility is to ensure thatindividuals and businesses comply with Commonwealthcompetition, fair trading and consumer protection laws. While theACCC is not a corporate regulator per se, it would be remiss todescribe the Australian regulatory landscape without a reference tothe ACCC.

1.3 What are the current topical issues, developments andtrends in corporate governance?

At the beginning of 2009, the key corporate governance issuesincluded: the regulation of short selling; a director’s duty to preventinsolvent trading; and the ability of a company to pay dividends incircumstances where accounting profits are affected by assetrevaluations.Several high-profile listed companies have recently been subjectedto significant downward pressure on their share prices by hedgefunds short-selling their stock, in some instances because they wereaware that key shareholders and/or directors had significant marginloans. In 2008, ASIC placed a total ban on all naked short-sellingand disclosure requirements for covered short-selling. This ban hassince been eased, and the only ban now in place is that relating tocovered short-selling of financial securities. However, disclosureand reporting requirements imposed by ASIC on all short salesremain in place.


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In light of recent economic conditions, particular attention has beendrawn to a director’s duty to prevent insolvent trading. This dutyunder the Act arises in situations in which a company incurs a debtwhen it is insolvent, or incurs a debt that results in the companybecoming insolvent. To be found guilty of such an offence, thedirector must have had reasonable grounds for suspecting that thecompany was insolvent, or would become insolvent as a result ofincurring a debt. Despite the positive duty placed on directors tocontinually monitor the financial status of the company, a director’sconduct may be excused if they can establish any of the defencesavailable under the Act. If a breach of the duty has occurred, thereare a range of civil and criminal penalties that may be enforced byASIC, including disqualification, financial penalties, fines andimprisonment of up to five years.The Corporations Act provides that a dividend may only be paid outof profits of a company. Recent financial and economiccircumstances have resulted in numerous stable and successfulcompanies having accounting profits eroded by mark to marketaccounting under Australian Equivalents to International FinancialReporting Standards (“AIFRS”). The consequence of that erosionis that irrespective of the strength of corporate cashflows, somecompanies that incur large asset write-downs may be prevented bylaw from paying dividends to shareholders. There have been callsfor changes to the law to link the ability to pay dividends tosolvency and cashflow rather than accounting profits.

2 Shareholders

2.1 What rights and powers do shareholders have in theoperation and management of the corporate entity/entities?

Shareholders have a number of rights under the Act. Keyshareholder rights include: the right to regular corporate andfinancial information; the right to vote at general meetings; the rightto requisition and call general meetings and to propose resolutions;and the right to appoint and remove company officers.Beyond this, the Act requires that certain matters be decided by thegeneral meeting of members, including: altering the corporateconstitution; consolidating or subdividing the company’s shares;reducing the company’s issued share capital; altering rights attachedto shares; altering the company’s status; selective buy-backs or a buy-back exceeding certain limits; and conditions prescribed by the Act. Certain “Related Party Transactions” require shareholder approvalunder the Act, the ASX Listing Rules, or both.The ASX Listing Rules also require that particular transactions besanctioned by shareholders at a general meeting. For example, ASXmay require shareholder approval if a listed company proposes tomake a significant change to the nature or scale of its activities.Further, shareholder approval is required if the significant changeinvolves the company disposing of its main undertaking.In addition, shareholders have statutory minority shareholderremedies under the Act, including: remedies for unfairly prejudicialconduct and oppression; derivative actions; class rights; and theremedy of inspection of books. Shareholders are the final claimants after creditors and employeeshave been paid. Ordinary shareholders are the ultimate remainingclaimants after preference shareholders have received their due.

2.2 Can shareholders be liable for acts or omissions of thecorporate entity/entities?

Most companies are limited by shares. Limited liability means that

a shareholder’s exposure to vicarious liability for torts committedby employees in the course of their employment is reduced.Directors and members whose conduct amounts to a tort on theirpart will ordinarily be liable without limit, regardless of whether atthe time of the conduct they were engaged in activity on behalf ofthe company. However, if the conduct was an honest attempt atperforming a contract that the company made with the victim, theywill not be liable if the victim agreed to look only to the companyfor redress for conduct amounting to a breach of the contract.Members will always be liable for fraudulent conduct.Directors occupy a fiduciary position in relation to the company andcourts will prevent directors from using their powers for improperpurposes. In contrast, shareholders holding majority control do notstand in a fiduciary position to the company or to the minorityshareholders, and they do not exercise any of their powers in afiduciary capacity. There is, however, a line of authority that imposes certainlimitations on the rights of majority shareholders to exercise freelythe voting power attached to their shares.In the High Court decision of Gambotto v WPC Ltd (1995), thecourt articulated two principles that restrict the voting power ofmajority shareholders relating to their voting power in the contextof altering the company’s constitution. The principles highlightedin the decision were that power must be exercised for a properpurpose, and that exercise must not operate oppressively in relationto minority shareholders.

2.3 Can shareholders be disenfranchised?

ASX Listing Rule 6.9 currently states that on a resolution to bedecided on a poll, ordinary security holders must be entitled to onevote for each fully paid security. The principle that has historicallyunderpinned Listing Rule 6.9 is described as the ‘proportionalityprinciple’, meaning voting power should be proportionate toeconomic interest. It is likely that any initiative by majority shareholders to use theirvoting power in a general meeting to disenfranchise the minoritywould constitute an “abuse of power” and would offend theGambotto principles described above.

2.4 Can shareholders seek enforcement action againstmembers of the management body?

The Act provides shareholders with broad rights to claim“oppression”, which is conduct that is commercially unfair and whichis undertaken by the company or those who manage the company. Thetest under the Act is whether the offensive conduct is either contraryto the interests of the members as a whole, or is “oppressive to,unfairly prejudicial to, or unfairly discriminatory against, a member ormembers whether in that capacity or in any other capacity”.Company law confers rights on members to protect them from abuseat the hands of the controllers of the company. In this context,‘controllers’ include both directors, who are subject to fiduciary duties,and (in certain circumstances) the controlling shareholders, who donot occupy a fiduciary position. Shareholder class actions against companies and their directorshave been increasing in frequency and prominence in Australia inrecent years.

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2.5 Are there any limitations on, and disclosures required, inrelation to interests in securities by shareholders?

The takeovers provisions of the Act prohibit acquisitions of relevantinterests in voting shares in publicly listed companies where theacquisition would cause someone’s voting power to increase above 20percent, or, where the acquisition would cause someone’s votingpower to increase from a position above 20 percent. There are certainexceptions to this prohibition including: shareholder approval; anability to ‘creep’ (small and limited increases spread over a period oftime); and acquisitions that result from a takeover offer made availableto all shareholders. Voting power is broadly defined and captures‘power’ held through associates and parties acting in concert. The takeovers provisions apply in a similar way to listed managedinvestment schemes. They also apply to unlisted companies withmore than 50 members.Substantial shareholdings in publicly listed companies must bedisclosed to the company(ies) in which they are held and to themarket. A substantial shareholding is defined as five percent ormore, and the definition captures holdings of associates. Eachchange of one percent thereafter must also be disclosed in a similarmanner. When the shareholding falls below five percent, thatchange must also be disclosed.All shareholding interests, and all changes in those interests,associated with directors of publicly listed companies requiredisclosure with no threshold applying.

2.6 What shareholder meetings are commonly held and whatrights do shareholders have as regards them?

The calling and conducting of shareholders’ meetings is governedby the Act as well as by the individual company’s constitution (ifany) and any applicable replaceable rules. The ASX Listing Rulesimpose additional requirements on companies with regard toshareholders’ meetings. While companies are required to hold an annual general meeting, itmay also hold other general meetings of shareholders throughoutthe year. Such meetings are often referred to as “extraordinarygeneral meetings”.There are two types of resolutions that may be passed at ashareholders’ meeting:(a) an ordinary resolution; and(b) a special resolution.An ordinary resolution is passed by a simple majority vote of theshareholders. The Act requires certain types of decisions to be passed by a specialresolution. A special resolution must be passed by at least 75percent of the votes cast by shareholders entitled to vote on thatresolution. Depending on the nature of the resolution, certainvoting exclusions may apply under the Act or the Listing Rules.The Act allows for a general meeting to be called at the request ofshareholders: a) where the members hold at least five percent of the votes that

may be cast at the general meeting; orb) where it is requested by at least 100 members who are

entitled to vote at the general meeting.Members may also give notice to the company of a resolution thatthey propose to move at a general meeting. The membersproposing the resolution must hold at least five percent of the votesthat may be cast on the resolution or the notice of the resolutionmust be given by at least 100 members who are entitled to vote at ageneral meeting.

The rights of indirect shareholders will depend on the terms of thenominee/trustee arrangement. As the registered holder of theshares, the trustee or nominee will have the power to exercise theright to vote and to dispose of the shares (notwithstanding that thetrustee may be subject to the beneficiary’s directions with respect tothe exercise of those powers). There are, however, numerouscontexts in which the law looks beyond the nominee arrangement toconsider the position of the underlying beneficial holder.

3 Management Body and Management

3.1 Who manages the corporate entity/entities and how?

A Company is managed by a single board of directors (“Board”).The Board is comprised of directors, both executive and non-executive. The duties of directors are the same, whether they areexecutive or non-executive. In some circumstances however,courts may hold executive directors to a higher standard than non-executive directors. Within the Board, there are a number of other company officerroles, including the company secretary, CEO and chairperson.Public companies must have at least three directors and onesecretary. The Principles recommend that a majority of the Boardshould be independent.The Board may appoint various committees to manage particularissues if its company constitution allows it. The Principlesrecommend the establishment of committees such as a nominationcommittee and an audit committee. For companies in the top 300of the ASX All Ordinaries Index, the ASX Listing Rules require thatthey comply with the Principles in relation to composition,operation and responsibility of the audit committee. Notably, thePrinciples require that the audit committee be comprised of amajority of independent directors, and that the chair of the auditcommittee be an independent director.There are also a number of provisions that ASX requires companiesto include in their constitutions, including:(a) ensuring consistency with ASX Listing Rules;(b) information about meetings to be provided to ASX; and(c) payments to directors and increases in fees subject to

member approval.

3.2 How are members of the management body appointed andremoved?

At incorporation, members appoint directors to the Board.Subsequent appointments may occur at Board level (if theindividual company constitution allows), but members mustapprove the appointment at the next general meeting of members.The Board may not remove a director of a public company. Atgeneral meetings, members may vote to appoint and removedirectors and other company officers.The ASX Listing Rules require that directors be re-elected at leastevery three years; however, this Rule does not apply to the electionof a managing director.Only natural persons (not companies) of 18 years or over, who havenot been disqualified from holding office, may serve as directors.Public companies must ensure that at least two of their directorsordinarily reside in Australia, as must a company secretary.

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3.3 What are the main legislative, regulatory and othersources impacting on contracts and remuneration ofmembers of the management body?

The Act allows for the Board to decide on remuneration packagesfor directors. The Act (and the accompanying AccountingStandards) requires the annual directors’ report prepared formembers to include details of the nature and amount ofremuneration given to key executives. There are disclosurerequirements under the ASX Listing Rules that require companiesto provide summaries of key executive contracts, such as that of theCEO. Reporting requirements also necessitate that theremuneration amounts be publicly available. Non-executivedirectors’ fees are also decided by the Board, however thecumulative amount of non-executive directors fees paid must beapproved at a general meeting of members.Recently (in March 2009), Federal Treasurer Wayne Swanannounced that the Commonwealth Government will examineAustralia’s framework in relation to the remuneration of directorsand executives. In addition, the Commonwealth Governmentproposed reforms to the regulation of termination payments to giveshareholders a greater say in either approving or rejecting payouts,by lowering the threshold at which termination payments requireshareholder approval.

3.4 What are the limitations on, and what disclosure isrequired in relation to, interests in securities held bymembers of the management body?

There are no limitations on interests in securities held by directors.Directors may hold securities in the company of which they manageand no limitation exists on the quantity of securities they may hold.Very strict disclosure obligations exist however for all publiccompany directors. Directors must disclose any and all intereststhey hold in such securities. Any changes in directors’ interestsmust be announced to the market within five business days of thatchange having taken place. Directors must also be aware of theirobligations not to undertake insider trading, therefore manycompanies impose restrictions on directors dealing in securitiesother than during certain trading windows when the market is fullyinformed.

3.5 What is the process for meetings of members of themanagement body?

Board meetings are called as and when needed, with nospecification at law as to the number of meetings required to be heldin a calendar year. The directors’ report in the company’s annualreport must, however, indicate how many meetings were held andhow many meetings each director attended. There is norequirement as to what business is to be conducted at Boardmeetings.Unless individual constitutions specify otherwise, any director maycall a Board meeting at any time. A period of reasonable noticemust be given so that each director has the opportunity to attend. The quorum for a Board meeting is usually two directors who mustbe present at all times during that meeting. However, if a directorhas a material interest in a particular matter, and so is unable to voteon a particular resolution, the Board must ensure that two directorsare still present in order for that meeting to be valid.Unless a constitution otherwise indicates, voting at Board meetingsis conducted by a simple majority, with each director entitled to onevote.

3.6 What are the principal general legal duties and liabilitiesof members of the management body?

Directors’ duties are owed to the company and its members.Directors’ duties are derived from three sources: common law;statute law; and particular company duties specified in companyconstitutions or other contracts.Common Law Fiduciary Duties include the:(a) duty to act in good faith and in the best interests of the

company;(b) duty to avoid actual and potential conflicts of interest;(c) duty not to fetter discretions; and(d) duty to exercise powers and discharge duties for a proper

purpose.Statutory Duties include the:(a) duty to exercise powers and discharge duties with a degree of

care and diligence;(b) duty to act in good faith in the best interests of the company

and for a proper purpose;(c) duty not to improperly use their position to gain an advantage

or cause detriment to the company;(d) duty not to improperly use information to gain an advantage

or cause detriment to the company;(e) duty to disclose all material personal interests in matters that

relate to the affairs of the company (exceptions apply); and(f) duty to prevent the company from trading when insolvent.A breach of directors’ duties may result in a number of civil and/orcriminal penalties. Some of these sanctions may include ASICimposing fines or disqualifying that director from being a companyofficer for a period of time. Affected parties (members, ASIC, theBoard) may seek injunctions from the court to stop a director acting inbreach of his duties. A director may also be ordered to pay damages.Criminal sanctions may include fines and/or imprisonment.

3.7 What are the main specific corporate governanceresponsibilities/functions of members of the managementbody?

Directors are responsible for the management of the company.Executive directors are responsible for the day-to-day managementof the entity, whereas duties of non-executive directors includereview, oversight and strategic direction. The secretary hasresponsibility for ensuring compliance with corporate governanceand accounting requirements. The CEO manages the everydayoperations of the company. The Chairman is traditionallyindependent (recommended in the Principles) and is responsible forstrategic leadership of the Board. The Principles recommend thatthe roles of CEO and Chairman should not be exercised by the sameperson. The Principles also recommend that a code of conduct forkey executives be established.

3.8 What public disclosures concerning management bodypractices are required?

Companies disclose their Board practices in the annual report,which is lodged with ASX and made publicly available. Any Boardappointments, resignations or removals must be continuously andimmediately disclosed to the market. The ASX Listing Rules also require that companies disclose in theirannual report the extent to which they have complied with therecommendations of the Principles and provide reasons for anyinstances of non-compliance.

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3.9 Are indemnities, or insurance, permitted in relation tomembers of the management body and others?

Yes, directors may be indemnified by the company (approved bymembers) in respect of dealings with third parties. Directors maynot however be indemnified for breaches of their duties asDirectors. Directors may take out directors’ insurance. TheCompany may take out such insurance on behalf of Directors,though the insurance may not provide protection in those instanceswhere an indemnity from the Company would not be allowed.

4 Corporate Social Responsibility

4.1 What, if any, is the law, regulation and practiceconcerning corporate social responsibility?

Australia’s corporate law defines corporate responsibility in termsof a company’s best interests, namely the interests of itsshareholders, and in some circumstances and contexts the interestsof the company’s creditors and possibly employees. The coresections of the Act do not make explicit reference to notions ofcorporate social responsibility.However, there are various ways in which corporate socialresponsibility has registered on the legal road map for Australiancompanies.Shareholders are able to use the general meeting to seek to have thecompany adopt various environmental or social policy goals. Forinstance, they may propose resolutions to include a ‘socialresponsibility’ charter in the company’s constitution, requiring theboard to take into account various social factors. The ASX Corporate Governance Council has stated that companydirectors have the power to take broader community factors intoaccount in decision making. Companies are subject to a range of Commonwealth, State andTerritory laws of general application that are designed to protectvarious interest groups or public values. Directors cannot ignore orsubordinate these public obligations because of any notion thatinterests of shareholders are paramount to compliance with theselaws. While companies are subject to a range of reporting requirements,there is no provision in the Act, or under the ASX Listing Rules thatspecifically refers to reporting on the social and environmentalimpact of corporate activities. However, companies may, and manydo, choose to report voluntarily on these matters in their variouspublic and shareholder reports.

4.2 What, if any, is the role of employees in corporategovernance?

The board of directors is the central organ of corporate governance,charged with the functions of leading and controlling the enterprise.However, in Australia there has long been interest in the potentialof institutionalised employee representation on boards. There is anincreasing trend of Australian unions exercising a voice atshareholder level on behalf of the employees that they represent.In this context, it is also noteworthy that Australia has, for sometime, had a system of compulsory superannuation. This hasresulted in superannuation funds having a prominent role and voiceon the share registers of Australian companies on behalf ofAustralia’s workforce. Industry superannuation funds withsignificant employee representation play a significant role incorporate Australia.

5 Transparency

5.1 Who is responsible for disclosure and transparency?

It is the collective and individual responsibility of all directors toensure that the company is meeting its disclosure and transparencyobligations as required by law and by ASX. In practice, particularofficers (such as a company secretary or general counsel) may haveroles as compliance officers in a company’s disclosure protocol.Legal responsibility however, rests with the directors.

5.2 What corporate governance related disclosures arerequired?

All public companies must release annual and half-yearly financialreports. Some public companies are also required to releasequarterly reports to the market. There are Australian AccountingStandards Board (“AASB”) requirements regarding the content thatshould be included in such reports. The ASX Listing Rules alsorequire that listed public companies immediately disclose to themarket any information that would be reasonably likely to have amaterial effect on the price or value of the company’s securities. As noted earlier, companies are required to report regarding theircompliance with the Principles in their annual reports.

5.3 What is the role of audit and auditors in such disclosures?

All public companies must have their annual financial reportsaudited, as well as having their half-yearly reports either reviewedor audited. Companies must also obtain an auditor’s report, whichis attached to the Company’s reports. Individual companies appointtheir auditors at a general meeting of members. Auditors must be independent so as to avoid any actual or potentialconflicts of interest with their role as the company’s auditor.Despite recommendations that auditors rotate after a period of timehas elapsed, no such requirement currently exists.The auditor’s report to members must indicate whether the auditorbelieves the company has complied with all relevant laws andaccounting standards, as well as whether, in the auditor’s opinion,the financial reports prepared by the Board give a “true and fair”view of the company’s finances.

5.4 What corporate governance information should bepublished on websites?

There are no requirements at law for companies to publishcorporate governance information on company websites. Inpractice, many companies publish their company details online,including directors’ details, recent public announcements andfinancial reports.

AcknowledgmentThis chapter was prepared with substantial assistance from JeremyLanzer, Lawyer, and Jason van Grieken, Law Graduate, ArnoldBloch Leibler.

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Jonathan Wenig

Arnold Bloch Leibler Level 21, 333 Collins Street Melbourne Victoria 3000 Australia

Tel: +61 3 9229 9999 Fax: +61 3 9916 9585Email: [email protected]: www.abl.com.au

Jonathan practises in commercial and corporate law and has broadexperience in many aspects of commercial practice, includingmergers and acquisitions, public listings, capital raisings,infrastructure privatisation, major projects and financing. He hasprovided strategic commercial advice to major Australian andoverseas corporations across a range of industry sectors, includingbanking, technology, health, manufacturing and retail.His major clients include: Nufarm Limited; SEEK Limited, for whomhe has acted in a range of strategic investments and in its listing onthe ASX; and Slater & Gordon, which Jonathan acted for in relationto its landmark listing on the ASX - the first law firm in the world tolist on a recognised exchange. Jonathan has an honours law degree from The University ofMelbourne and was admitted to the partnership of Arnold BlochLeibler in July 2001.

Established in 1953, Arnold Bloch Leibler is a leading Australian commercial law firm with offices in Melbourne andSydney. The firm has developed a reputation for results-oriented, commercially focused service, advising clientsthroughout Australia and international clients dealing in Australia. The firm is regularly involved in some of the mostimportant transactions in the country and is committed to providing innovative solutions by identifying novel ways towork within or through the law to achieve clients’ objectives.

Arnold Bloch Leibler’s clients are some of Australia’s largest, privately-owned and publicly-listed blue-chip companies,as well as many high-net worth individuals and family businesses. Arnold Bloch Leibler also has numerous clients thatare based overseas. For these clients, the firm assists in entering and competing in the Australian market, and inmaking business investments in Australia.


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Chapter 3

Kunz Schima Wallentin Rechtsanwälte OG

Austria



The main corporate entities in Austria are the:Limited liability company (Gesellschaft mit beschränkterHaftung). These are private companies and are mainly smalland medium-sized companies because it allows shareholdersmore influence. Stock corporation (Aktiengesellschaft) (AG). These aremainly large companies with a large capital requirement.Societas Europaea (SE).

Only stock corporations and SEs can be listed on the stockexchange (listed companies). The Corporate Governance Codeapplies primarily to Austrian stock listed companies and stock listedSEs registered in Austria. Unlisted companies also follow theCode. Austrian companies must commit to the Code to enter thePrime Market at the Viennese Stock Exchange.Unless otherwise stated, the term company refers to privatecompanies, stock corporations, and SEs (which are likely to play amore important role in the future), as these are most relevant tocorporate governance and directors’ duties.


Corporate governance is regulated by: Statute. Regulations on corporate structure, internalorganisation, duties and liabilities of the management andsupervisory boards and their directors, accountingresponsibility, and corporate restructuring are governed, inparticular, by the:

Stock Corporation Act 1965 (Aktiengesetz);Limited Liability Company Act 1906 (GmbH-Gesetz);SE Directive 2001 (SE-Verordnung); andSE Act 2004 (SE-Gesetz).

Other relevant legislation includes the:General Civil Code 1811 (Allgemeines BürgerlichesGesetzbuch) which deals with general regulations onliability;Business Code (Unternehmensgesetzbuch) (UGB)(former Commercial Code 1979 (Handelsgesetz-buch)), which sets out substantive accountingprovisions; andLabour Constitution Act 1974 (Arbeitsverfassungs-gesetz), which provides for employee representativeson the supervisory board.

Regulation of listed companies includes the:Stock Exchange Act 1989 (Börsegesetz);Takeover Act 1998 (Übernahmegesetz);Issuer Compliance Regulation 2002 (Emittenten-Compliance-Verordnung); andCapital Market Act 1991 (Kapitalmarktgesetz).

A company’s constitution. The articles of association(articles) and procedural rules for the management andsupervisory boards. The Austrian Code of Corporate Governance 2002(Code). Revised in January 2009, this provides companieswith a framework for corporate management and control.The Code applies primarily to Austrian stock listedcompanies. However, it covers the general standards of goodcorporate management in international business practice aswell as most of the important provisions of Austriancompany, securities and capital markets law, EUrecommendations and the OECD Principles of CorporateGovernance.

The Code is only mandatory for listed stock corporations and listedSEs that have committed themselves to complying with it (Codecompanies), although unlisted companies are also advised tocomply with it. It contains three types of provisions:

L-provisions, which are mandatory provisions of law;C-provisions, which are comply - or explain - provisions; andR-provisions, which are recommendations of best practicethat are not subject to comply - or explain - requirements.Relevant case law.


Commercial Law Amendment Act (Unternehmensrecht-sänderungsgesetz 2008 [URÄG]) The URÄG became effective on 1 June 2008 and realised twomajor EU directives: Directive 2006/43/EC on statutory audits ofannual accounts and consolidated accounts; and Directive2006/46/EC on company reporting - amending the AccountingDirectives. It introduces, for company accounting:

Changes to size criteria regarding annexes and financialreports effecting several reporting commitments as well asauditing duties. A corporate governance report for key capital marketcompanies.

More companies will profit from the size-dependant aid. The aimof these wide amendments is to provide for more transparency andsecurity:


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Corporations whose listed securities are to be traded on aregulated market or with issued securities traded through amultilateral trading system, must prepare a corporategovernance report in addition to a financial report.The report must name a Corporate Governance Code that isgenerally accepted either in Austria or at the respective stockexchange, including where the code is publicly available. Ifthe corporation’s accounting system differs from the chosencode, it must make a statement in which areas and for whichreasons these deviations were made. However, this onlyconcerns the C-Provisions. If the corporation resolves not tocorrespond to a code, this must be accounted for.

The amendments also changed the Corporate GovernmentCode (effective since 1 January 2009.Act on Amendment of the Austrian Stock Corporation Act 2009(“Aktienrechts-Änderungsgesetz 2009” [ARÄG]) The EC formally adopted Directive 2007/36/EC on the exercise ofcertain rights ofshareholders in listed companies on 11 July 2007.It assists shareholders of listed companies throughout the EU toexercise their rights.The Directive:

Introduces minimum standards to ensure that shareholders ofcompanies whose shares are traded on a regulated markethave a timely access to relevant information ahead of thegeneral meeting.Introduces simple means to vote at a distance. Abolishes share blocking.Introduces minimum standards for the rights to askquestions, put items on the general meeting agenda and tableresolutions. Allows member states to take additional measures to furtherease the exercise of the rights referred to in the Directive.

EU Member States must implement the Directive 2007/36/EC intheir national laws by 3 August 2009 at the latest. Theimplementation will take place with the Act on Amendment of theAustrian Stock Corporation Act 2009, which will become effectiveon 1 August 2009. The Act on Amendment of the Austrian Stock Corporation Act2009:

Minimum notice period of 30 days for annual generalmeetings, whereby shareholders can vote by electronicmeans.Internet publication of the convocation and of the documentsto be submitted to the general meeting.Abolition of share blocking and introduction of a record dateaccording to which the shareholder of an Austrian companyhas to certify the ownership of shares not later than ten daysbefore the general meeting.Abolition of obstacles on electronic participation to thegeneral meeting, including electronic voting. Mitigation of the minority shareholders´ risk to bear the costsof the exercise of shareholders’ rights.The companies obligation to answer questions ofshareholders in the course of the annual general meetingshall be subject to a court decision in case the answer to suchquestions are denied. Abolition of existing constraints on the eligibility of peopleto act as proxy holder and of excessive formal requirementsfor the appointment of the proxy holder. Disclosure of the voting results on the company’s website.

2 Shareholders


Stock corporations and SEsOne or more shareholders holding at least 5% of the issued sharecapital can require the calling of a shareholders’ meeting or theplacing of additional items on a shareholders’ meeting agenda (seequestion 2.6).One or more shareholders holding at least 10% of the issued sharecapital can:

Require a special external auditor to be appointed. Require the company to assert damages claims againstdirectors or other shareholders.Require the appointment of a different auditor.Require a shareholders’ meeting to be postponed if they donot agree with some or all of the annual report.Apply to a court to remove a supervisory director.

Private companiesOne or more shareholders holding at least 10% of the issued sharecapital can:

Require a special external auditor to be appointed to audit theannual report.Require the company to assert damages claims againstdirectors or other shareholders.Require the convening of a shareholders’ meeting.Place additional items on the agenda of a shareholders’meeting.Apply to a court to remove a supervisory director.

In any company, one or more shareholders holding at least 25% plusone share of the issued share capital can block a decision requiringa 75% majority of shareholders’ votes (for example, changes to thearticles and decisions to merge).See question 2.6.


No they cannot.


Austrian law is aware of so-called “non-voting preference shares”.Often the “non-voting preference shares” of family businesses areissued upon founding of the company. These facilitate the company’sentrance to the organised capital market without removing ordiminishing the founder family’s influence. Also for obtainingshareholder’s equity at a later period in the company development theissuance of preference shares is often helpful. Should the majorshareholders of an almost publicly owned company not be able to ornot want to back a necessary increase of capital and, thus, the majoritythreatens to slip away, the issuance of such shares can legally stipulatea virtual non-interference of the diversified holdings and the danger ofundesirable acquisition of shares can be diminished. The purchasers of non-voting preference shares’ motive is usuallydue to the higher and more secured return in comparison tocommon shares. For this reason, the circle of purchasers isespecially aimed at minor shareholders, investment funds, and otherinstitutional investors.

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See question 2.1.


See question 2.1.


Stock corporations and SEs Stock corporations and SEs must hold an annual shareholders’meeting within eight months after the end of the company’s fiscalyear. The annual accounts must be presented and discussed (afterthey have been approved by the supervisory board). Shareholder resolutions must be passed on:

Distribution of profits and discharge of the board (if any). Approval of the managing and supervisory directors’business activities.Appointment of auditors. Appointment of supervisory directors (if necessary). Issues requiring shareholder approval (if any).

One or more shareholders holding at least 5% (or less if providedby the articles) of the issued share capital can require additionalitems to be added to a shareholders’ meeting agenda or require ashareholders’ meeting to be called. If the management board doesnot convene the meeting, the shareholders can apply to a court forauthority to convene it. Private companiesPrivate companies must hold an annual shareholders’ meeting to:

Approve the annual accounts and financial statements.Decide on the distribution of profits and discharge of theboard (if any).Approve management board’s and supervisory board’sbusiness activities.Vote on issues requiring shareholder approval (if any).

One or more shareholders holding at least 10% of the issued sharecapital can require additional items to be added to an annualshareholders’ meeting agenda or require a shareholders’ meeting tobe called. If the management board does not convene the meeting,the shareholders can convene it themselves (without courtauthorisation).



Structure. All companies must have a management board(Vorstand for stock corporations and two-tiered SEs,Verwaltungsrat for unitary SEs and Geschäftsführung forprivate companies).Stock corporations must have a two-tiered structureconsisting of a management board and a supervisory board(Aufsichtsrat) with supervisory directors. The supervisoryboard:

appoints and dismisses the managing directors;supervises the management board; and

approves important transactions. A SE formed in Austria can have a one or two-tiered boardstructure.Private companies typically have a unitary board structure,but must establish a supervisory board if they reach a certainsize. Private companies sometimes have an advisory board(Beirat), the responsibilities of which are set out in thearticles. Supervisory boards of companies governed by the Code withmore than five shareholder-appointed or elected membersmust establish:

a nomination committee to nominate new members ofthe management and supervisory board, and to form asuccession plan; anda compensation committee to make proposalsregarding compensation for managing directors.

Management. Companies are managed by the managementboard (see above: Structure). The company’s board hasultimate responsibility for the management of the company.The management board is responsible for managing thecompany on a day-to-day basis. The scope of themanagement board’s power of attorney cannot be limited.Board members. Managing directors are known asGeschäftsführer for private companies orVorstandsmitglieder for stock corporations and two-tieredEuropean companies. Employees’ representation. Employees are entitled torepresentation on the supervisory board of companies with aworks council. A works council is mandatory in companieswith at least five employees. For every two supervisory directors elected or appointed bythe shareholders, the works council can appoint one of itsmembers. If the number elected or appointed by theshareholders is uneven, the works council can appoint anadditional member.Number of directors or members. The number ofmanaging directors is stated in the articles. The minimum isusually one. Banks and other related businesses must have atleast two directors. There is no maximum number ofdirectors.The number of members of the supervisory board is definedin the articles of incorporation. The minimum is three(exclusive of employees’ representatives). For stockcorporations, the maximum number of supervisory directorsthat can be elected or appointed by the shareholders is 20(excluding employee representatives appointed by the workscouncil (see above, Employees’ representation)).For private companies, there is no maximum number ofsupervisory directors.For companies governed by the Code, the maximum numberof supervisory board members (excluding the employee’srepresentatives) is ten (C-Provision 52, Code).


Appointment of directorsStock corporations and SEsManaging directors of stock corporations and SEs are appointed bya simple majority of the votes cast by both (double majority):

All the supervisory directors (including employeerepresentatives (see question 3.1, Employees’representation)).All the supervisory directors elected or appointed by theshareholders (that is, excluding employee representatives).

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Supervisory directors of stock corporations and Europeancompanies are either:

Elected by shareholders at a shareholders’ meeting (by asimple majority vote).Appointed by individual shareholders, holding registeredshares with limited transferability, who have the right toappoint supervisory directors. The number of supervisorydirectors to be appointed cannot exceed one-third (listedcompanies) or one-half (non-listed companies) of the totalnumber of all supervisory directors (excluding employeerepresentatives).

Private companiesIn private companies, managing directors and supervisory directorsare elected by a simple majority vote at a shareholders’ meeting. Inaddition, a shareholder can be appointed as a managing director bythe articles (shareholding managing director).Removal of directorsStock corporationsA managing director can only be removed during his term ofappointment, if the supervisory board calls for the early resignationof the chairperson for material reasons (such as violation of duties,inability to perform their duties, vote of no confidence by thegeneral meeting).A managing director can challenge his removal in court, claiminglack of cause. His removal remains valid until a decision in hisfavour is final and incontestable. A managing director’s service contract must be terminatedseparately from his removal.Supervisory directors can be removed without cause at any time bya shareholders’ resolution, with a 75% majority of the votes cast(unless the articles state otherwise).SEsA managing director can be removed during his term ofappointment without cause by a 75% majority of shareholders’votes.Private companies Directors can be removed without cause at any time by ashareholders’ resolution passed by (unless otherwise stated in thearticles) a:

Simple majority, for managing directors.75% majority of votes cast, for supervisory directors.

The articles can state that shareholding managing directorsappointed by the articles can only be removed with cause.


Determination of directors’ remunerationIn stock corporations and two-tiered SEs, managing directors’remuneration (salary, profit sharing, travel allowances, insurancepremiums and other benefits) is determined by the supervisoryboard and must be reasonable in relation to the directors’ duties andthe company’s financial situation. In private companies and unitary SEs, the managing directors’remuneration is determined by the shareholders at a shareholders’meeting. Supervisory directors’ remuneration can be determined by thearticles or by shareholder resolution. Remuneration must bereasonable in relation to the supervisory directors’ duties and thefinancial situation of the company.

DisclosureIn Code companies, the total remuneration of the managementboard for a business year must be reported in the notes to thefinancial statements (L-Provision 29, Code). The annual reportshall contain the principles applied by the company for granting themanagement board performance-linked payments and any changesto them (C-Provision 30, Code). Code companies also mustdisclose each director’s remuneration separately in the annualCorporate Governance Report (C-Provision 31, Code).Shareholder approvalThe approval of shareholders in stock corporations is not requiredfor the managing directors’ remuneration.


Directors are allowed but not required to own shares in thecompany. In listed stock corporations and SEs, share option plans arecommon. The procedure for implementing a share option plan isregulated by law and requires supervisory board approval.Shareholders’ approval is required for the company to obtain shares(for example, by a share capital increase or repurchasing shares inthe market) for a share option plan.Transactions by directors involving the company’s shares aresubject to restrictions and reporting requirements (see question 3.8).If a stock option scheme is proposed in Code companies, theperformance criteria must be set in advance and may include theperformance of stock indices, share price targets or other suitablebenchmarks. Retroactively changing performance goals (re-pricing) is to be avoided (C-Provision 28, Code). The number anddistribution of the options granted, the exercise prices and therespective estimated values at the time of issue and upon exercisemust be reported in the annual report (L-Provision 29, Code).


Management boardThe management board is a collective body, meaning that legalresponsibility for governing the business of the company is borneequally by all members of the management board. Different areasof responsibility can be assigned and this is common practice.Unless the articles state otherwise, decisions are made by simplemajority vote. If a chairperson is appointed to the managementboard, the chairperson shall have the casting vote in the event of atie, unless a different procedure is set out in the articles. Themanagement board is not legally required to hold formal boardmeetings and management issues are often dealt with informally. The procedural rules for the management board are set out in thearticles. Supervisory boardThe supervisory board must meet on a regular basis; at least fourtimes a year. The materials and documents required for asupervisory board meeting are to be made available generally atleast one week in advance. Decisions of the supervisory board arereached by a simple majority, unless the articles provide otherwise.Minutes must be taken of supervisory board meetings. Writtenresolutions passed by postal votes without a board meeting are onlyvalid if no board member objects to the procedure. Further details for the quorum and board meeting conduct can be set

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out in the rules of procedure for the supervisory board.In addition to quarterly meetings, Code companies should holdadditional meetings whenever necessary. The number of meetingsmust be published in the Corporate Governance Report (C-Provision 36, Code).


General duties. A director must perform his duties with thediligence of a prudent businessperson. A managing directoris liable for losses resulting from his failure to fulfil hisduties, unless he can prove that he was sufficiently diligent.Examples of breaches of duties are:

repayment of share capital; delayed application for starting insolvencyproceedings; severe breach of the articles; andfailure to obtain supervisory board approval.

There is no statutory limitation of liability. Private companies canrestrict managing director’s liability to a certain extent.Supervisory board approval does not release a managing directorfrom liability.

Theft and fraud. Theft and fraud are criminal offences andresult in a director’s personal liability. Securities law. Securities legislation provides numerousdisclosure and insider trading provisions. If breached, adirector can be personally liable (criminally and civilly).Insolvency law. Managing directors must file a petition ofinsolvency no later than 60 days from the companybecoming insolvent (as defined in the Insolvency Act 1914).A managing director is personally liable to third partycreditors for losses arising from late filing.Health and safety. A managing director is responsible andliable for the company’s compliance with health and safety,and environmental, laws. He can delegate this responsibility,and liability, to an employee with sufficient authority. Environment. See above, Health and safety.Anti-trust. A managing director can be liable to thecompany or third parties for losses (such as fines imposed onthe company by the authorities) caused by his breaches ofanti-trust law.Other. A managing director is personally liable for tax andsocial security contributions that cannot be collected by thetax authorities or social security agency due to hisnegligence.


Transactions between a company and its managing directors mustbe at arm’s length. Loans to managing directors require supervisoryboard approval. When dealing with a managing director, thesupervisory board represents the company. Contracts between the company and members of its supervisoryboard entitling them to more than minor consideration are subject tosupervisory board approval. This also counts for contracts withcompanies in which a supervisory board member has a considerableinterest (L-Provision, 48, Code). These contracts must be publishedin the Corporate Governance Report (C-Provision 49, Code). Theannual remuneration of the supervisory board directors must bepublished for each member separately in the Corporate GovernanceReport (C-Provision 51, Code).

A shareholding management board director in a single sharecompany must record in writing all transactions between thecompany and himself.


Certain events (such as a change of directors or share capital, andcorporate restructurings) must be published. Certain documents(such as the articles and annual reports) must be filed with thecompany register.A listed company must promptly publish details of events occurringin its field of activity or business environment if they are likely toaffect share prices significantly, unless non-publication can bejustified in the interest of the company. Disclosure requirements also apply for the repurchase of shares,takeovers and changes of voting interests. Stock corporation shareholders can only request information aboutissues listed on the managing directors’ agenda for a shareholders’meeting, and can inspect the annual report 14 days before an annualshareholders’ meeting. One or more private company shareholders can request informationfrom the managing directors in a shareholders’ meeting and caninspect the annual report 14 days before an annual shareholders’meeting. The articles can limit the right to request information ifthe company has a supervisory board.


Insurance against personal liability is permitted (but not forintentionally-caused losses) and is increasingly common. Thecompany can and usually does pay the insurance premium, which isconsidered to be a fringe benefit.



Expenditures relating to social, environmental and ethical issuesmust be explained in the notes to the annual accounts.


See question 3.1.

5 Transparency


Stock corporations and SEsThe management board must prepare annual accounts incompliance with bookkeeping standards, standards for valuingassets and accounting rules. The annual accounts consist of:

A balance sheet. A profit and loss statement. A management report on the financial situation of thecompany.

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Notes to the accounts.The annual accounts must be published and filed with the companyregister.The supervisory board - in listed Code companies also the auditcommittee - (or in one-tier European companies, the administrativeboard) is responsible for the accuracy of the annual accounts andmust review and approve them. It must propose a candidate to bethe company’s auditor, who is elected by the annual shareholders’meeting. An audit committee, if mandatory, must review any groupaccounts.Private companiesSmall private companies only need to file a shortened version of theannual accounts containing balance sheet details with the companyregister. A private company is small if it meets two of the followingcriteria:

Its annual balance sheet total is no more than EUR 4.84million (about US$ 6.2 million). Its annual revenue is no more than EUR 9.68 million (aboutUS$ 12.4 million).It has a maximum of 50 employees on an annual average.

Other private companies must publish full annual accounts (seeabove, Stock corporations and SEs).The annual accounts must be prepared by the management board,reviewed by the supervisory board (if any) and approved at anannual shareholders’ meeting.


Since 2004 the listed companies in the Prime Market of the WienerBörse (Viennese Stock Exchange) must issue an annual declarationin their annual accounts (from now on in the Corporate Governancereport) regarding the compliance or non-compliance with theAustrian Corporate Governance Code.Starting with the Comercial Law Amendment Act 2008 (URÄG),all listed companies pursuant to Sec 243b Business Code(Unternehmensgesetzbuch - UBG) are obliged to compile a so-called Corporate Governance Report (L-Provision 61, Code), whichprovides for a declaration regarding any possible deviations of arecognised Corporate Governance Code.


Role of auditors Stock corporations and SEsThe company’s annual accounts must be audited and approved bythe auditor.Private companies The company’s annual accounts must be audited, unless thecompany is small and not required to establish a supervisory board(see question 3.1).

Role of auditors in disclosuresThe company must let an external institution regularly evaluate thecompliance with the C- and L-Provisions of the Code and publiclygive an account of this. As an assistance for the voluntary externalevaluation, the Austrian Working Committee for CorporateGovernance has developed a questionnaire, which is available atwww.corporate-governance.at.


The following information should be published on the website ofthe company:

The invitation to the annual general meeting, theannouncement of the agenda, the applications and documentsto be exhibited to the shareholders and upon convening of thegeneral meeting displayed for inspection by the shareholdersas well as shareholders’ motions and counter motions, in asfar as the company was made aware of these on time (C-Provision 4, Code).The company must be notified of candidates for thesupervisory board election so far on time that they can beintroduced on the company’s website one week prior to thegeneral meeting (C-Provision 5, Code).The general meeting’s vote results as well as any amendedcompany bylaws (C-Provision 6, Code).The Corporate Governance Report (C-Provision 61, Code). The current shareholders structure, current voting rightchanges, the company’s bylaws are published on thecompany’s website (C-Provision 64, Code).An external communication that exceeds the legal minimumdemands and, in particular, by using the company’s websitecan cover the information requirements promptly andadequately. With this the company makes all new facts,which it financial analysts and comparable, available to allshareholders at the same time (C-Provision 67, Code).Annual financial reports, semi-annual financial reports, andall other interim reports (C-Provision 68, Code).Insider information (L-Provision 71, Code).Contact for investor relations (name and contactpossibilities) (C-Provision 72, Code).A fiscal calendar with all relevant dates for investors andother stakeholders, e.g., publication of business reports andquarterly statements, general meetings, ex-dividend days,dividends pay days, and investor relations activities (C-Provision 74, Code).Informational documents (presentations) concerningconference calls or similar informational meetings foranalysts and investors and capital market relevant events,like general meetings are, as far as economically reasonable,and to be made available on the company’s website as audioand/or video transmission (R-Provision 75, Code).Financial information regarding the company, which hadbeen published in a different form (R-Provision 76, Code).

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Georg Schima

Kunz Schima Wallentin Rechtsanwälte OG Porzellangasse 4 A-1090 WienAustria

Tel: +43 1 313 74 0Fax: +43 1 313 74 80Email: [email protected]: www.ksw.at

Georg Schima specialises in employment and labour law, banking,finance & capital markets, employment law aspects of corporaterestructuring, privatisations, management employment contracts,directors’ and officers’ liability, acquisition and disposition ofcompanies, commercial and corporate law, arbitration and corporatelitigation.In 1983, Georg Schima graduated from the University of Vienna(Doctor juris). In 1990 he passed the bar examination withdistinction. Since 1993 he has been a partner at the Vienna lawfirm Kunz Schima Wallentin and heads the firm’s Labour andEmployment Law Practice which is one of the top employment lawpractices in Austria. Georg Schima has written numerous well-known and respectedpublications. He is also in frequent demand as a speaker atprofessional training seminars on employment, labour, andcorporate law and honorary professor for corporate law and labourand employment law at the Vienna University of Economics andBusiness Administration.Georg Schima is a member of the executive committee of the ViennaBar Association, Vienna Law Society, the Austrian Society for Labourand Social Security Law, the Working Group for Austrian CorporateGovernance, and the European Employment Lawyers Association(EELA). He is also a supervisory board member at variouscompanies.

Natalie Seitz

Kunz Schima Wallentin Rechtsanwälte OG Porzellangasse 4 A-1090 WienAustria

Tel: +43 1 313 74 0Fax: +43 1 313 74 80Email: [email protected]: www.ksw.at

Natalie Seitz specialises in employment and labour law,employment law aspects of corporate restructuring, managementemployment contracts, trusts and foundations and internet law.In 2003, Natalie Seitz graduated from the University of Vienna(Doctor juris). In 2005 she passed the bar examination. She joinedVienna law firm Kunz Schima Wallentin in 2004, since 2007 shehas been a junior partner. Natalie Seitz has written publications on the subjects of employmentand labour law and corporate law. She is also a lecturer atFachhochschule Wiener Neustadt (“labour and social law”, CourseProgramme).Natalie Seitz is a member of Vienna Bar Association, Vienna LawSociety and Austrian Lawyers’ Association.

Founded in 1990, Kunz Schima Wallentin today has an expert team of more than 50 people dedicated to offering thebest in legal advice and representation. Serving the business community is KSW’s main focus. In addition to nationaland international companies, we also advise private clients.

KSW lawyers are specialists in their fields, together making KSW excellently prepared to work on any business issuethat you might face - with both juristic exactitude and practical understanding for the realities of international business.KSW also cooperates in global networks such as the global human resources lawyers alliance Ius Laboris, and worksclosely with a number of select external legal and financial consultants on relevant special matters, and our uniqueadvisory board adds yet more depth to the quality of our legal advice.

For a number of our focal expertises, we have established dedicated practice groups:

Labour & employment Mergers & acquisitions

Banking, finance & capital markets Corporate & commercial

Real estate Intellectual property

IT Law Entertainment, sports & gaming

Antitrust & competition law Insolvency

Estate & succession planning Healthcare, medical & pharma

Arbitration Italian clients

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Chapter 4

Spasov & Bratanov Lawyers’ Partnership

Bulgaria



The companies covered in the below answers are: (i) publicly listedcompanies on the Bulgarian Stock Exchange - Sofia (Bulgaria’sonly stock market); and (ii) privately held joint stock companies.


The law is stated as at 14 April 2009.The primary corporate legislation covering all companies is set outin the Commerce Act 1991 (the “Commerce Act”).All companies have articles of association (“articles”), which mustbe consulted, reflecting the contract and relationship between theshareholders and containing the overarching rules for the companyincluding shareholder and board meetings and authority, powersand duties of directors and many other aspects relating to thegeneral governance of the company. In addition, publicly listed companies are principally regulated bythe Public Offering of Securities Act 1999 (“POSA”) and thestatutory instruments issued thereunder, as well as to applicablestock exchange listing rules and rulings.

1.3 What are the current topical issues and trends incorporate governance?

Corporate governance is not well entrenched in Bulgaria. It is still aconcept largely thought of in terms of legal procedures to be followedas opposed to ensuring that a business is run professionally andtransparently. For example, no rules on executive compensation exist(neither do executive compensation committees).Recently, corporate governance issues have been mostly concernedwith ensuring better disclosure by publicly listed companies post-EU accession.

2 Shareholders


Whilst shareholders are the owners of companies, and control thecomposition of the boards (see question 3.2 below), generallyshareholders, through the articles of association, delegate the

operation and management of their companies to the board ofdirectors (in a one-tier system) or, through the supervisory board, tothe managing board (in a two-tier system). However, law andregulation reserves certain powers to shareholders through the passingof shareholders resolutions. For example, the Commerce Act requiresshareholder approval for material transactions involving directors andtheir connected persons, material asset dispositions and borrowings.Several other issues cannot be dealt with other than by appropriateshareholder resolution, for example, changing a company’s name,changing provisions in its articles of association, or increasing ordecreasing the company’s capital or effecting a business combination(i.e. merger, demerger) to which the company is a party.Additionally, for listed companies, examples of where shareholdersmust approve specific transactions are set out in POSA and includetransactions with related parties, including directors and theirassociates.


The basic premise of limited liability companies is that the liabilityof shareholders is limited to the amount of their capital contributionon the shares for which they have subscribed. This, allied with theprinciple of corporate personality, are firmly ensconced principlesof Bulgarian law reflected in mandatory statutory provisions. It istherefore not possible to look behind the separate personality of acompany and as a result no ‘piercing the corporate veil’ would bepossible as a matter of Bulgarian law.


Shareholders of listed companies can be disenfranchised in case ofinterested shareholder transactions. In addition, shareholders of allcompanies cannot vote on the company deciding to sue ashareholder for damages caused to the company or enforcing theshareholder’s liability for said damages.


The Commerce Act contains a derivative claim procedure whichconfers on shareholders holding at least 10 per cent of a company’scapital (or five per cent of a listed company’s capital) the right tobring an action on behalf of the company (so that any damages arepayable to the company) against directors for breach of duty(including negligence). Prior to suing such shareholders need notmake a demand to the company to sue nor is there any requirement

Alexander Angelov

Vassil Hadjov

20ICLG TO: CORPORATE GOVERNANCE 2009WWW.ICLG.CO.UK


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Spasov & Bratanov Lawyers’ Partnership Bulgaria

for the shareholders to have held their shares for a minimum periodof time. If the claim is successful damages are paid to the companyand not to the suing shareholders. The damages claim must be proven in accordance with general tortrules. To facilitate collection of damages against a breachingdirector, the Commerce Act requires directors to post security in theamount set by the general meeting but not less than the equivalentof their three-month gross remuneration. Such security cancomprise company’s shares and/or debentures or bonds.


There are no statutory limitations on the number of securities ashareholder can hold, or the speed with which he can build a stakein a company. However, takeover rules, which are beyond thescope of this publication, must be considered and have crucialrepercussions if certain thresholds or rules are breached.As regards disclosure, briefly, a shareholder in a listed companymust notify the company and the Financial SupervisionCommission (Bulgaria’s securities regulator) of the percentage ofvoting rights held (either directly or indirectly) if that percentagereaches, exceeds or falls below, five per cent and each five per centthereafter, and must do so immediately but not later than fourtrading days of the event or knowledge of it.


Shareholder meetings are known as general meetings, and subject toprovisions in articles, all shareholders are entitled to be given notice ofgeneral meetings. Companies need to hold a specified annual generalmeeting, and may hold other general meetings as and when they needto (e.g. to approve specific corporate actions). The Commerce Actprovides that companies must hold the specified annual generalmeetings by 30 June. AGMs commonly include the followingbusiness to be voted on by shareholders - laying and receiving ofaccounts, declaring of dividends or allocating the profit in anothermanner, and appointing/reappointing of auditors and directors.Voting at general meetings requires the passing of a resolution.Generally, a simple majority of those voting in person or by proxyis required. Certain material corporate action (e.g. amendment toarticles, capital increase, termination) requires a 67 per cent (orhigher if provided for by the articles) majority.Although the default position is for the board of directors or managingboard to call shareholder meetings, the supervisory board may alsocall a shareholders’ meeting, as well as shareholders who have held atleast five per cent of the company’s capital for three months.Yes, electronic communication to or by shareholders of allcompanies is allowed. Broadly, it is now possible for companies, ifthey formally ask shareholders about the method by which theywish to receive communications, to use electronic communicationsfor all shareholders who either agree to receipt of communicationsin this way. Electronic communications could also be explicitlyprovided for in the articles.



All companies are managed by a one-tier board of directors or atwo-tier managing board (the “board”). Within the board are two

categorisations of director - executive directors performingexecutive functions concerned with the day to day running andoperation of the company, and, as a key part of the checks andbalances designed to ensure boards operate well, non-executivedirectors performing more of a scrutinising, monitoring andstrategy role. Whilst executive and non-executive directorsperform different functions within the board, the law does notdistinguish between their level of responsibility depending uponwhether they are executive or non-executive.The Commerce Act provides the minimum and maximum number(three and nine respectively) of directors a company can have. Forlisted companies, POSA provides that they must have at least 10 percent of independent directors, but does not provide for a maximum. A board is headed by a non-executive chairperson who isresponsible for leadership of the board amongst other things,together with a chief executive director responsible for day to dayoperations. The law provides that the roles of chairperson andexecutive director should not be combined.Boards are not required by law to establish any committees(nomination, remuneration, audit or other) and Bulgariancompanies rarely (if at all) do so.


Directors serving on a board of directors are appointed and removedby shareholder resolution. Directors serving on a managing boardare appointed and removed by supervisory board resolution.Appointment and removal can be effected at any duly convenedshareholders’ or supervisory board meeting. To that extent,directors’ terms are not fixed. At the same time a director can bereappointed to serve an unlimited number of terms.

3.3 What are the main legislative, regulatory and othersources impacting on directors’ contracts andremuneration?

Directors’ remuneration is a non-topic in Bulgaria and there are nolegislative, regulatory or other rules or guidelines on directors’remuneration. Director’s remuneration is set by way of shareholderor supervisory board resolution and is market- (to the extent there isa Bulgarian market for directors) based. State- or municipality-owned companies have guidelines on directors’ remuneration,which generally is tied to the country’s average monthly salary.


Directors are permitted to own securities in their companies andthere is no limit on the number.As to disclosure relating to listed companies, the major shareholdernotification requirements already mentioned in question 2.3 applyequally to director shareholders. Dealings in director-held sharesare subject to insider dealing rules set out in the Act against MarketAbuse with Financial Instruments 2007 (which are beyond thescope of this publication).


Board meetings are called at least once every quarter or morefrequently if passing a board resolution is required, by giving notice

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to all directors as required by the company’s articles of association.


Directors’ duties and liabilities are contained in the Commerce Act(which sets the minimum), the company’s charter and, in case ofmanagers, in the management agreement.The key statutory duties and liabilities of a company directorcomprise:

attendance and participation in board meetings andactivities - this is the cornerstone duty of a company director.If not enough directors participate in a meeting there may notbe a quorum. This would prevent the board from passingresolutions and hamper the company’s ability to carry out itsbusiness. Attending a board meeting does not oblige thedirector to actively participate in the discussion. Often thedirector will not feel herself sufficiently competent to do so.It does not oblige a director to vote either. However, thecompany charter may not provide for the possibility of anabstention. If a director is unable to attend a board meeting,she may authorise only a fellow director to represent her andvote on her behalf at the board meeting; andduty of care - this is a universal duty recognised in manyjurisdictions. The standard for such duty is stronger than the“duty of a good husband” known to Bulgarian civil lawwhich is generally understood to include a duty of care to beexpected from a reasonable citizen acting in good faith. Thestandard for the duty of care for a director is set at what isexpected from a “good merchant”, i.e. from a professional.The basic standard of the duty of care will be met if thedirector uses her best efforts so as to enable the company toachieve its business objectives. It is important to becognizant of the fact that the duty is to use efforts and not toachieve results. Failure to achieve results may be (and oftenis) due to factors beyond directors’ control.

The directors of a company will generally be thought to havecomplied with their duty of care if:(i) the board’s decision is taken on the basis of sufficient and

objective information; (ii) if, where one or more directors are not competent to decide

on a matter, they have sought professional advice; (iii) the board’s decision complies with the law, the company

charter and applicable general meetings’ resolutions; (iv) the board’s decision makes good business sense; and/or(v) the board’s decision is timely.It is important to recognise that a director must act in the bestinterests of the company and not of the company’s shareholders,creditors or any other stakeholders of the company. Still, to theextent directors must act in compliance with general meetingresolutions, this means that often directors act in accordance withthe decisions/policy set by the majority shareholders of thecompany. Note, however, that directors are required to performtheir functions in the interest of all shareholders and not justmajority shareholders. This director’s duty forms an important partof minority shareholder protection accorded by Bulgarian law;

duty of loyalty - similar to the duty of care this is a widelyrecognised director duty. Essentially, the duty of loyalty is aduty not to act in a way which would give rise to a conflictof interest with the company’s interests. Specifically, theduty of loyalty requires a director:(i) not to disclose to third parties technological,

production, commercial or other proprietaryinformation which she has obtained as a director ifsuch information could affect the company’s business.Public information is excluded. It is noteworthy that

the prohibition applies to disclosure to shareholders oremployees of the company who are entitled tocompany information but within limits set by differentrules;

(ii) not to carry out business in competition with thecompany’s business. This prohibition applies only tomembers of managing boards/boards of directors andnot to members of supervisory boards. The carryingout of a competitive business encompasses enteringinto transactions, participating in commercialcompanies as unlimited partners, participating inmanagement/supervisory bodies of joint stockcompanies or cooperatives, or serving as managers or“procurists” of limited liability companies. Carryingout a business competing with the company’s ispossible but only if and to the extent the company’scharter so allows or the company consents to thecarrying out of such business;

(iii) to notify the company of the director’s or a partyrelated to the director intention to enter into one ormore transactions with the company. The duty tonotify applies to all directors. It also applies to atransaction which (a) falls outside of the usualbusiness of the company (regardless of the transactionvalue) and/or (b) deviates substantially from themarket terms for similar transactions. Failure tonotify does not affect the validity of the transactionbut the breaching director is liable to the company fordamages;

(iv) not to participate in any way in passing resolutionsrelating to matters which may give rise to a conflict ofinterest between the company and the director.Similarly to (iii) above, prior notification to the boardof a potential conflict will be sufficient to remedy theconflict; and

(v) to disclose circumstances which may be material toher being elected to serve as a director of the company.If such circumstance(s) arise after she has beenelected, she must notify the board of suchcircumstance(s) immediately upon its (their)occurrence; and

liabilities - directors are jointly and severally liable to thecompany for the breach of any of the duties specified in.They are also so liable to the company’s creditors. This isregardless of the internal allocation of powers orresponsibility among the directors.

The invocation of such liability is subject to important limitations.For example, liability cannot be imposed on directors who havebeen absolved from liability by way of shareholders’ resolution. Inaddition, liability can generally only be imposed on directors whohave voted in favour of the corporate action which has causeddamages to the company, or on directors who may have votedagainst such action but have persuaded other directors to vote infavour of it.Finally, no joint and several liability would arise if a director hasentered into a transaction in breach of the law, the company’scharter or applicable general meeting’s resolutions. In this case thedirector who has entered into the transaction would be liableindividually. In addition, if an interested transaction is entered into,the non-notifying director would be liable individually.


No specific corporate governance responsibilities exist as a matterof law. The following are some (but by no means all) of the



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responsibilities of directors which can be inferred from theCommerce Act’s underlying principles.

Collective responsibility for the success of the company.Internal control: by maintaining a sound system of internalcontrol to safeguard shareholders’ investment and thecompany’s assets.Financial reporting: by presenting a balanced andunderstandable assessment of the company’s position andprospects.

Listed companies are required to adopt and adhere to a programmefor the implementation of the international standards on goodcorporate governance. However, such programme is not defined inthe law and no penalty exists for the company not having adoptedsuch programme.


The law requires that the composition of the board and the articlesof association be publicly disclosed (by way of entry into theCommercial register). No specific board practices are required tobe disclosed.


Yes. Although a company cannot indemnify directors in respect ofbreaches of their duties to the company itself, it can indemnify themin respect of liability to third parties (other than criminal liabilityand regulatory penalties). Companies are also permitted tomaintain insurance in respect of directors’ liability to the company.



No corporate social responsibility rules, practice or guidelines existas a matter of Bulgarian law.


Employees do not have a specific role in corporate governance.There is, for example, no requirement to have employeerepresentatives on the board. Employees have certain informationand consultation rights, most notably in relation to a businesscombination or a tender offer in which the company is participating.

5 Transparency


Transparency and disclosure is a key part of corporate governancebest practice, allowing shareholders access to relevant informationso that they can assess whether or not they are satisfied with theway that their company’s affairs are being conducted. Whilst theinvestor relations director will have specific responsibility forfinancial statements, communication of shareholder meetings’

materials and some others, in accordance with the principal ofcollective responsibility, it is the board as a whole, not any oneindividual director, that is responsible for transparency anddisclosure.


As regards financial reporting, all companies must prepare annualfinancial statements and submit them to the Commercial Registerthus making them public. The annual financial statements mustcontain the prescribed financial information and directors’ andauditors’ reports, must contain a business review, the purpose ofwhich is to help shareholders assess how directors have performedtheir duty to promote the success of the company.Listed companies are required to publish their annual financialstatements which must contain additional information as disclosurerules require. As regards all information (not specifically financial),POSA and associated statutory instruments also govern thedisclosure of ad hoc information such as inside information likelyto have a significant effect on the price of the issuer’s securities andrequires a listed company to make regulatory announcements assoon as possible of any inside information directly concerning it,unless specified exceptions apply. Stock exchange rules alsorequire regulatory notifications in many specific situations, forexample where significant transactions are entered into.


All companies must have their annual financial statements auditedand must appoint auditors on an annual basis to prepare an auditreport to accompany them. The auditors’ report must coveramongst other things (i) the way in which the accounts have beenprepared, and (ii) whether, in the opinion of the auditors, the annualaccounts give a “true and fair” view of the state of affairs of thecompany in question. For listed companies POSA requiresadditional information (see question 3.7 above).


Recent amendments to POSA allow for certain shareholder rights inrespect of general meetings of shareholders to be published on thecompany website such as the right to propose items to be placed onthe agenda and proposed drafts of a resolution in respect of suchitems. In addition, the company must publish the minutes of allgeneral meetings of shareholders and keep them online for at leasta year.

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Vassil Hadjov

Spasov & Bratanov 35, Slavyanska StreetSofia 1000Bulgaria

Tel: +359 2980 1808Fax: +359 2980 2510Email: [email protected]: www.sbn-law.com

Vassil Hadjov is a partner with more than 9 years of experience asa corporate and finance lawyer. Before joining Spasov & Bratanov heworked as a legal counsel in European Bank for Reconstruction andDevelopment’s banking and corporate recovery teams and as anassociate lawyer in Freshfields Bruckhaus Deringer’s global projectfinance group in London. Before that he spent two years as anassociate with a major Sofia law firm. Mr Hadjov holds masterdegrees in law from Sofia and New York Universities and a diplomain Japanese culture studies from Soka University in Tokyo. He is amember of the Sofia and New York Bars. He is fluent in English andRussian and has a good command of Japanese and French.Recognised as “very proactive” and “excellent all-round businesslawyer with a keen commercial sense for banking and projectfinance that is able to get right to the issues and solve things fastand reliably” IFLR 1000: The Guide to the World’s LeadingFinancial Law Firms 2006 edition. In addition, clients are quotedto describe Mr. Hadjov as “a US-trained excellent lawyer” and the“go-to lawyer for banking and finance work” and admire his“extensive knowledge of foreign legislation.” Chambers & Partners2007 and 2008 Global Guides.

Alexander Angelov

Spasov & Bratanov 35, Slavyanska StreetSofia 1000Bulgaria

Tel: +359 2980 1808Fax: +359 2980 2510Email: [email protected]: www.sbn-law.com

Alexander Angelov is an Associate at Spasov and Bratanov,Advocate, LL.M. (Sofia) and has been a Member of the Bar since2007. He has attended a post-graduate course on EU Law(including Competition Law), International Private Law andCommercial Arbitration at The Hague; he has made severalresearches in the field of EU Law (free movement of persons). Mr.Angelov specialises in commercial and competition law (includingEU related aspects) and is part of the corporate and competition lawpractice team at Spasov and Bratanov.

Spasov & Bratanov is a leading corporate and finance law firm based in Sofia, Bulgaria comprising 4 partners and 10associates. The firm’s corporate practice includes structuring of and advising on mergers and acquisitions of privateand state-owned businesses, asset acquisitions, leveraged buy-outs, and on capital market transactions.

We typically conduct the transaction negotiations, represent the client before government agencies and regulatorybodies, draft the legal documentation on the transaction and organise execution and closing in a timely and cost-efficient manner.

We deliver sound, commercially-driven and innovative advice which meets the demands of mature economy basedinvestors.

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Chapter 5


Osler, Hoskin & Harcourt LLP

Canada



This guide discusses corporations in Canada, focusing in particularon public companies.


In Canada, the primary sources of corporate governancerequirements are corporate legislation, securities legislation, stockexchange rules and common law.Corporate LegislationFederal and provincial corporate statues provide that directors shallmanage, or supervise the management of, the business and affairs ofthe corporation. Directors may delegate certain matters tocommittees of the board or to officers. In exercising their powersand discharging their duties, directors must act honestly and in goodfaith with a view to the best interests of the corporation and exercisethe care, diligence and skill that a reasonably prudent person wouldexercise in comparable circumstances. In general, a corporation in Canada is incorporated by filing articlesof incorporation with the appropriate government authority. Thearticles of incorporation address certain corporate governancematters. For example, the articles may specify any restrictions onthe business that the corporation may carry on, the maximum andminimum number of directors, and any rights attaching to eachclass of shares. Corporations also often enact by-laws whichaddress corporate governance issues such as quorum at boardmeetings and the authority of corporate officers.Securities LegislationSpecific corporate governance guidelines applicable to publiccompanies relating to issues such as the composition of the board ofdirectors, the board’s mandate, descriptions of directors’ andofficers’ positions, written codes of ethical business conduct,nomination of directors, director remuneration and performanceassessments of the board and individual directors are dealt with inNational Policy 58-201 - Corporate Governance Guidelines.National Instrument 58-101 - Disclosure of Corporate GovernancePractices mandates disclosure related to these guidelines. Ingeneral, the Canadian securities regulators require that corporationscomply with these guidelines or explain their lack of compliance. In December 2008, the Canadian securities regulators published forcomment guidelines and disclosure requirements intended toreplace the current corporate governance policies. The proposed

guidelines are broader and more principles-based, and thecorresponding proposed disclosure requirements more general innature, than the current corporate governance policies. Stock Exchange RulesCanadian public corporations listed on the Toronto Stock Exchange(the “TSX”) are required to comply with National Instrument 58-101 - Disclosure of Corporate Governance Practices (describedabove). The TSX also provides listed issuers with suggestions foradditional voluntary disclosure. Common LawCanadian common law also addresses corporate governancematters. For example, Canadian common law interprets directors’duties and derives certain general principles applicable to thedischarge of those duties.


Current topical issues and developments in Canadian corporategovernance include new securities law requirements intended toimprove the quality of executive compensation disclosure;shareholder proposals calling for the adoption of advisory votes onexecutive compensation (“say on pay”); shareholder proposalsrequiring the resignation of any directors who do not receive amajority of votes in favour of their election; a proposal to create anational securities regulator to replace the current system of thirteenprovincial and territorial agencies; and a TSX proposal to requiresecurity holder approval for the issuance of securities in payment ofthe purchase price for an acquisition of a public company whichexceeds fifty per cent of the number of outstanding securities of thelisted issuer (currently shareholder approval is only required if inexcess of one hundred per cent of the number of outstandingsecurities are to be issued). Shareholder activism, demonstrated by more frequent shareholderproposals and enhanced dialogue between shareholder activists andmanagement, continues to be an important trend in Canadiancorporate governance.

2 Shareholders


Shareholders may affect the operation and management of acorporation by electing directors and removing or refusing to re-elect directors with whom they are dissatisfied. However, in

Andrew J. MacDougall

Mark A. Trachuk

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Osler, Hoskin & Harcourt LLP Canada

practice, it is often difficult for shareholders to remove or refuse tore-elect directors, particularly where the shares of the corporationare widely held. In general, it is the shareholder-elected directors, and not theshareholders themselves, who are responsible for the operation andmanagement of the corporation. However, under the corporatestatutes, certain matters are considered so fundamental that theyrequire the approval of shareholders. Such fundamental changesinclude effecting certain amalgamations or reorganisations; sellingall or substantially all of the corporation’s assets; adding orremoving any restrictions on the business that the corporation maycarry on; changing the corporation’s share capital; changing thearticles of incorporation to increase or decrease the number ofdirectors or the minimum or maximum number of directors;confirming by-laws; and adding or changing restrictions on theissue, transfer or ownership of shares. If a fundamental change affects holders of certain series or classesof shares differently than others, the change must also be approvedby a majority of the series or class of shares whose existing rightsmay be affected by the change, whether or not such sharesotherwise carry voting rights. In addition, certain fundamentalchanges entitle shareholders to formally dissent and to be paid thefair value of their shares. Shareholder approval of certain transactions may also be requiredunder securities laws or stock exchange rules, whether or notrequired under the corporate law. For example, although corporatelaw empowers the directors to issue shares from the corporation’sauthorised share capital without consultation with the shareholders,in some circumstances the issuance of shares will nevertheless besubject to shareholder approval under the rules of the TSX. Finally, subject to certain statutory requirements, shareholders areentitled to have their proposals put to the other shareholders at thecorporation’s annual meeting or to requisition a special meeting tohave their proposals considered by the shareholders, even thoughthese proposals may not be supported by the directors. Theseproposals may include the names of nominees for election asdirector if the proposal is signed by holders of not less than five percent of shares of a class entitled to vote at the meeting.


Under Canadian corporate law a corporation is a legal entity distinctfrom its shareholders and the acts of the corporation are notattributable to its shareholders. However, in theory, in exceptionalcircumstances this so called “corporate veil” may be “pierced” andindividual shareholders found liable for the acts or omissions of thecorporation. In practice this is extremely rare and courts generallywould only pierce the corporate veil when the corporation is a de facto“alter ego” for the shareholders, or is used to perpetrate a fraud.


In general, shareholders cannot be disenfranchised. However,where its articles permit, a corporation may issue non-voting sharesor multiple-vote shares, each of which may cause certainshareholders to have fewer or more votes than would otherwisecorrespond to their economic interest in the corporation.


The corporate statutes provide several ways for shareholders to take

action against directors, including the oppression remedy,derivative actions and compliance or restraining orders.The oppression remedy is a broad remedy available to acomplainant where the corporation, the board or the corporation’saffiliate has acted in a manner which was oppressive or unfairlyprejudicial to, or which unfairly disregarded, the complainant’sinterests. A complainant may be a current or former security holder,creditor, director or officer of the corporation or any of its affiliates,or any other person that the court agrees is a proper person to bringan oppression action. If a court finds oppression, it may make anyorder that it considers appropriate to remedy an oppressive or unfairact or situation. Alternatively, a shareholder may seek redress on behalf of thecorporation in a derivative action for the directors’ breach of thecorporation’s rights. A shareholder will only be granted leave tobring a derivative action if the shareholder first gives the directorsreasonable notice of its intention to bring an action and the directorsdo not cause the corporation to bring and diligently prosecute theaction. The court must also be satisfied that the shareholder isacting in good faith and in the best interests of the corporation. Finally, if a corporation or a director, officer, employee or agent ofthe corporation breaches the corporation’s governing corporatestatute, articles of incorporation, by-laws or unanimous shareholderagreement, a shareholder may apply to a court for an order directingcompliance or restraining the breach.


Under securities legislation, shareholders holding more than ten percent of the voting rights attached to all voting securities of acorporation are considered “insiders” of the corporation. Insidersmust file a report with the securities commission upon becoming aninsider, and thereafter file reports reflecting any changes in thebeneficial ownership or direction or control of their securities.Shareholders holding more than twenty per cent of the voting rightsattached to all voting securities of a corporation are considered“control persons” and are subject to restrictions on their ability todispose of their shares or acquire more shares.


Annual meetings of shareholders are required by law. The items forconsideration at an annual meeting include the election of directorsand the appointment of auditors. While the financial statements arenot approved by the shareholders, these are usually presented tothem in conjunction with the annual meeting. Special meetings may be called at any time and are normally calledby the directors to seek shareholder approval for a particular matter.Shareholders holding at least five per cent of the corporation’sshares may require the directors to call a special meeting of theshareholders, and if the directors fail to do so, these shareholdersmay call the meeting themselves. Publicly-traded corporations and certain widely-held privatecorporations are required to send out a management proxy circularsoliciting proxies from their shareholders with respect to anymeeting of the shareholders. Subject to certain statutory limits,shareholders may require the corporation to put a proposal beforethe shareholders and to have it set out in a management proxycircular. If notice of a substantive matter has not been put in the meetingmaterials, there is very limited scope for the shareholders to request



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that the meeting deal with the matter. At the meeting, shareholdersmay ask the chair of the meeting to consider a substantive matterand request it be put to a vote. In many instances, the request maybe ruled out of order by the chair because notice of the matter wasnot given in the management proxy circular. If there is a vote onthe matter, it is only advisory in nature and not binding on thedirectors.



Corporations are managed by a board of directors (the “board”).The directors’ primary role is that of stewardship. Directors areresponsible for managing, or supervising the management of, thecorporation. Typically directors will supervise, direct or oversee the business andaffairs of a corporation, and delegate responsibility for the day-to-day management of a corporation’s affairs to a management teamconsisting of the Chief Executive Officer, Chief Operating Officer,Chief Financial Officer and other senior executives who areresponsible to, and report back to, the board. Appointing thesesenior executives and evaluating their performance are among themost important functions of the board. Notwithstanding the delegation to senior executives of very broadpowers over a corporation’s affairs, the board must reserve to itselfthe ability to intervene in management’s decisions and to exercisefinal judgment on any matter that is material to the corporation.The overriding principle governing delegation is that directors mustretain ultimate control over the corporation. The board of directors also delegates to committees of the boardand sometimes to other committees composed, in whole or in part,of non-board members. In practice, the committees of many boardsdo not formally approve the matters before them, but return thematter to the full board with their recommendation. All publiccorporations are required by statute to have an audit committee, andprivate corporations frequently choose to have an audit committeeas a matter of good practice.


Directors are usually elected by shareholders at the annual meeting.If there is a vacancy on the board between annual meetings theremaining directors may fill the vacancy until the next annualmeeting unless the articles, by-laws or corporate statutes provideotherwise.Directors may be elected for terms of up to three years, although itis more common for directors to be elected each year by theshareholders at the annual meeting. There is no statutory limit onthe number of terms for which an individual may serve as a director.Directors may be removed from office by a majority vote ofshareholders at a shareholder meeting. The directors themselvesmay call a shareholder meeting for this purpose, or shareholdersholding at least five per cent of the issued and outstanding sharesmay requisition such a meeting.


Director remuneration is usually set by the board. Independent

directors are normally paid an annual retainer along with a certainamount for each board meeting or committee meeting that theyattend. Chairs of boards and committees receive extraremuneration. Executive directors are not normally remuneratedseparately for their service on the board. Securities and corporate rules require that public companiesdisclose, on an annual basis, the compensation paid to each of thecorporation’s directors. The TSX requires shareholder approval of security-basedcompensation arrangements (i.e., option grants to employees anddirectors) that require securities to be issued from treasury.


Directors are permitted to own shares in the corporation, but wherethe corporation is public they will be subject - as “insiders” of thecorporations on whose boards they serve and of any othercorporation of which their corporation owns or controls more thanten per cent of the voting shares - to insider trading rules. Theserules include prohibitions against trading with knowledge ofmaterial changes or facts, and require insiders to report to securitiesauthorities their ownership of and any trade they make in, securitiesof such corporations.


Boards may generally meet anywhere permitted under the articlesand by-laws, subject to the requirement in some provincialcorporate statutes that the majority of meetings be held in Canada.Under most corporate statutes, meetings can also be held byteleconference or videoconference.All directors must receive notice of all board meetings, and in orderfor business to be conducted at the meeting, the quorumrequirements in the corporation’s governing document or in theapplicable corporate statute must be met and the minimum numberof resident Canadian directors must be present. Most provincialstatutes require that a majority of directors present be residentCanadians, but Ontario has no such requirement, and the CanadaBusiness Corporations Act only requires that twenty-five per centof those present be resident Canadians. The corporation must keep minutes of board meetings.


Directors derive responsibility and liability from a variety ofsources, including the corporation’s governing statute, securitiesand stock exchange requirements for public companies, statutesdealing with specific matters such as income tax or the environmentwhich may impose personal liability on directors if the corporationbreaches those statutes, and under general principles of commonlaw. The corporate statutes impose two principal duties on directors: afiduciary duty; and a duty of care. Directors cannot contract out ofthese responsibilities and may be personally liable for any breach ofthese duties.The directors’ fiduciary duty requires them to act “honestly and ingood faith with a view to the best interests of the corporation” inexercising their powers and discharging their duties.

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The duty of care that directors owe their corporations mandates thatin discharging their duties, directors “exercise the care, diligenceand skill that a reasonably prudent person would exercise incomparable circumstances”. Directors are required to devote thenecessary time and attention to bring their own judgment to bear onthe matter and make an informed decision. If they do this, thecourts will be reluctant to interfere with the resulting decision(sometimes referred to as the “business judgment rule”).


The board of directors is generally responsible for the stewardshipof the corporation, which includes developing the corporation’sapproach to corporate governance. Securities legislationrecommends that a board adopt a written mandate in which itacknowledges responsibility for stewardship of the corporation.The board is responsible for overseeing, among other things,strategic planning and the monitoring of opportunities and risks. Inorder for a board to discharge its responsibilities, it must not onlybe aware of and approve the general direction and plans of thecorporation, it must also be satisfied that the plans that it hasapproved are being effectively implemented and that appropriateinternal and external monitoring and audit systems are in place toensure that the corporation’s affairs are being run responsibly.


Securities legislation requires a public company to disclose detailsrelated to its corporate governance practices in any managementinformation circular prepared for a meeting at which directors are tobe elected. This disclosure includes the identity of directors whoare independent and whether a majority of directors areindependent; whether the chair of the board is an independentdirector or whether there is a lead director; information about thecomposition of the board and the background of its members,including each director’s board meeting attendance record; the textof the board’s written mandate or a description of how the boarddelineates its role and responsibilities; information related to theorientation and continuing education of directors; informationrelated to processes intended to foster ethical business conduct; adescription of the nomination process for directors; a description ofthe process by which director compensation is determined,including the identity of and work performed by any compensationconsultant retained by the corporation; a description of any boardcommittees in addition to the audit, nominating and compensationcommittees; and a description of how the performance of directorsis monitored and assessed. The corporation must also describe inits compensation documentation and analysis how decisions aboutthe compensation of the corporation’s officers and directors aremade.Securities legislation also requires a public company to provideinformation regarding its audit committee in the annual informationform (“AIF”) filed under securities legislation.Where shareholder approval is sought in the context of certaintransactions (take-over bid by an insider, issuer bid, businesscombination or related party transaction), the managementinformation circular must include a discussion of the review andapproval process of the board and any special committee.


The corporate statutes in Canada permit a corporation to indemnifyits directors, both past and present, when the directors have acted ingood faith with a view to the best interests of the corporation. Acorporation is not permitted to indemnify a director for a breach ofhis or her fiduciary duty, or for fines in criminal or administrativeproceedings unless the director had reasonable grounds forbelieving that the impugned conduct was lawful. Furthermore, if acorporation is suing the director, it may not indemnify the directorfor costs without the approval of the court and may not, in anyevent, indemnify the director for an amount paid by the director tosettle the action or satisfy the judgment. Corporations are required by statute to indemnify their directors forall costs relating to litigation in which the director was involved asa result of having been a director where the director acts honestly,in good faith and with a view to the best interests of the corporation.In most corporate statutes, this is conditional on successfullydefending the action or proceeding on the merits, but under theFederal and the Ontario statute, this is conditional on the courtfinding that the director did not commit any fault. Corporate statutes permit a corporation to purchase insuranceagainst any liability which may be incurred by past and presentdirectors and any person who, at the corporation’s request, acts as adirector of another entity of which the corporation is a shareholderor a creditor. Some corporate statutes prohibit a corporation fromacquiring insurance which covers a director’s failure to act honestlyand in good faith with a view to the best interests of the corporation.



Canadian corporate and securities laws do not specifically mandatecorporate social responsibility expectations of corporations.However, if a public corporation has implemented any social orenvironmental policies that are fundamental to its operations, suchas policies regarding the corporation’s relationship with theenvironment, with the communities in which it does business, or thecorporation’s human rights policies, the corporation must describethese policies in its AIF. The corporation must also describe thesteps it has taken to implement these policies. Further, corporationsmust outline the financial and operational effects of environmentalprotection requirements on the capital expenditures, earnings andcompetitive position of the corporation in the current financial yearand the expected effect in future years.


Most corporations will expect their employees to effect companypolicy with respect to social or environmental responsibility, andmany corporations extend their code of business conduct and ethicsto employees. Audit committees of public corporations are required to establishprocedures for the confidential submission by employees ofconcerns regarding questionable accounting or auditing matters.



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5 Transparency


The board of directors is ultimately responsible for the overallmanagement of the corporation, and therefore the responsibility fordisclosure and transparency ultimately lies with the directors.However, day to day compliance with the continuous disclosureobligations of the corporation falls to the management team.Typically the board will adopt a disclosure policy to guide membersof management on issues of disclosure and some corporations willestablish a disclosure committees in order to consider and reviewthe corporation’s disclosure and ensure that all disclosurerequirements have been met fully and accurately.


The principal corporate governance related disclosure requirementsare outlined above in the description of public disclosurerequirements concerning management body practices. See question3.8. In summary, under Canadian securities legislation, corporationsare required to disclose their corporate governance practices againstthe specific guidelines issued by Canadian securities regulators intheir management proxy circular and/or AIF. In addition, there arealso specific disclosure requirements related to the public filing ofdocuments affecting the rights of shareholders, such as a votingtrust agreement or shareholders rights plan, and if the board hasadopted a code of business conduct and ethics, that must be publiclyfiled as well.


All public corporations are required to engage an external auditor toreview their financial statements. The auditor’s role is limited toconducting an audit to obtain reasonable assurance that the financialstatements of the corporation are free of material misstatement andproviding an opinion on the financial statements based on the audit.There is no requirement for auditor review of the corporation’scorporate governance disclosure.As noted above, many corporations have established a disclosurecommittee comprised of members of management which reviewsthe corporation’s disclosure for accuracy. Such review wouldinclude disclosure relating to the corporation’s corporategovernance practices.


Public companies must make their mandated disclosure documentsavailable on the System for Electronic Document Analysis andRetrieval (“SEDAR”) website maintained by the Canadiansecurities regulators.Canadian law does not require that public corporations makeavailable information on websites. Nevertheless, as a matter ofgood practice, many public corporations provide online access toinformation filed on SEDAR and news releases. An increasingnumber of corporations also post on their websites the text of theircommittee charters, their code of conduct and key policies.

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Mark A. Trachuk

Osler, Hoskin & Harcourt LLPBox 50, 1 First Canadian Place Toronto, Ontario Canada M5X 1B8

Tel: +416 862 4749 Fax: +416 862 6666Email: [email protected]: www.osler.com

Mark Trachuk is a partner in the Toronto office where he practisescorporate and securities law with an emphasis on mergers,acquisitions and restructurings. Mark regularly advises boards ofdirectors and special committees on corporate governance mattersrelated to major transactions. Mark has extensive internationalexperience and practised in the firm’s London office from 1991 to1994 and again from 1996 to 1999 when he was managingpartner. Mark has also spent extended periods in Asia practising inOsler’s Singapore office. Mark is recognized in Lexpert’s Guide to theLeading 500 Lawyers in Canada, Chambers Guide to the World’sLeading Lawyers, PLC’s Which Lawyer Guide, Best Lawyers andMartindale-Hubbell. Mark is the Chair of Osler’s Corporate PracticeGroup, which is the largest practice group in the firm, and has heldnumerous other management roles including Chair of the CorporateFinance Practice.

Andrew J. MacDougall

Osler, Hoskin & Harcourt LLPBox 50, 1 First Canadian Place Toronto, Ontario Canada M5X 1B8

Tel: +416 862 4732 Fax: +416 862 6666Email: [email protected]: www.osler.com

Andrew MacDougall is a partner in Osler’s Business LawDepartment and is experienced in merger and acquisitiontransactions, including asset acquisitions and dispositions, publicand private share purchase transactions, share subscriptions andinvestments, take-over bids, issuer bids, amalgamations and going-private transactions, as well as corporate reorganizations andrestructurings. He has a long-standing interest in corporategovernance matters, beginning with his involvement as a staffmember of the Toronto Stock Exchange Report on CorporateGovernance in 1994 and continuing with his current participation asa member of, and the sole lawyer on, the Risk Management andGovernance Board of the Canadian Institute of CharteredAccountants. That board oversees the publication of guidancematerials for boards of directors and senior executives on corporategovernance and risk and control, including its well known “20Questions” series of director publications.

Osler advises many of Canada’s corporate leaders as well as U.S. and international parties with extensive interests inCanada. Year after year, an impressive body of independent research confirms the firm’s pre-eminent position in theCanadian legal marketplace. With 465+ lawyers in Toronto, Montréal, Calgary, Ottawa and New York, Osler providesintegrated legal services with specialists in virtually every area of business law.


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Chapter 6


Zhong Lun Law Firm

China



The corporate entity discussed in this chapter is the limited liabilitycompany set forth in the Company Law of the People’s Republic ofChina (“PRC”). The limited liability company under the PRCCompany Law can take one of two forms: (i) a non-share issuing‘limited liability company’, in which a shareholder holds its legalinterests in the total equity of the company based on the amount ofits proportionate contribution to the registered capital of thecompany (“Type A Company”); or (ii) a ‘company limited byshares’, in which (as the name suggests) shareholder interests arerepresented by the number of shares issued to shareholders (“TypeB Company”). Different establishment requirements apply during the set-up ofthese two types of companies. For instance, the number ofshareholders of a Type A Company must not exceed 50, whereas thenumber of shareholders of a Type B Company must be above 2 butbelow 200. The minimum registered capital amount of a Type ACompany is RMB30,000, while that of a Type B company isRMB5,000,000.


The corporate governance of a limited liability company isprimarily regulated by the PRC Company Law (“Company Law”),the PRC Securities Law (“Securities Law”), the PRC Chinese-foreign Equity Joint Venture Law and its Implementing Rules, thePRC Chinese-foreign Cooperative Joint Venture Law and itsImplementing Rules, the PRC Wholly Foreign-owned EnterpriseLaw and its Implementing Law (the “WFOE Law”) and theMeasures for Administration of Information Disclosure by PublicCompanies (issued by the State Securities Supervision andRegulatory Commission, the “Disclosure Measures”).


The limited liability company is currently the predominant form ofcorporate entity in China today. Since promulgation of theCompany Law in 1993, most State-owned enterprises have beenreorganised into limited liability companies. Vast numbers ofprivate limited liability companies have been established, and morethan 1,600 Chinese companies have been listed on domestic andforeign stock exchanges. To date, most of the companies in China

have adopted corporate governance structures mandated by theCompany Law and its related regulations.The most critical corporate governance issues in China include: (i)lack of independence in the operation and management of corporateentities that were once State-owned enterprises (i.e. legacy ties tolocal government interests are still pervasive); (ii) non-adherence tocorporate governance norms by individual founders or families ofprivate companies (i.e. a non-acceptance by private family businessesof independent directors or management); and (iii) lack of effectiveimplementation of minority shareholder protection rights.

2 Shareholders


Under the Company Law, shareholders generally do not have theright to exercise direct operational or management authority overthe affairs of a company, other than through decisions taken by theShareholder Assembly at duly convened shareholder meetings.Generally, shareholders are able to exercise the following majorrights affecting the operation and management of the companythrough the Shareholder Assembly: (i) the right to vote on all major issues of the company, which

typically include the company’s operational policy andinvestment plans, annual budgets and final accounts,dividend distribution and loss recovery plans, increase ordecrease of the company’s registered capital, issuance ofcorporate bonds, restructuring of the company, dissolutionand liquidation of the company, amendments to thecompany’s articles of association; and

(ii) the right to appoint members of the board of directors, theboard of supervisors and senior management.

Outside the Shareholder Assembly, shareholders also have thefollowing rights vis a vis the company and its management: (i) the right to receive information about the company, including

access to the minutes of the company’s shareholdermeetings, the minutes of the board meetings and the minutesof the meetings of the board of supervisors, and access to thecompany’s accounting books and financial reports;

(ii) the right to propose to the board of the company to convenean interim shareholder meeting and (subject to certainconditions) the right to call an interim shareholder meeting;

(iii) the right to apply to the court to cancel or revoke board orshareholder resolutions that were passed in violation of laws,administrative regulations or the company’s articles ofassociation;

Simon Kai-Tse Cheong

Shirley Xu

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Zhong Lun Law Firm China

(iv) the right to request the company to redeem shares upon theoccurrence of certain events; and

(v) the right to sue directors, supervisors and senior managers(see detailed discussion in question 2.9 below) for damagecaused to shareholders and/or the company due to violationof laws, administrative regulations or the company’s articlesof association.

Unlike a domestic corporate entity where the highest governingauthority is the Shareholder Assembly, the highest governingauthority of a Chinese-foreign equity joint venture (“EJV”) is itsboard of directors. The EJV consists of directors appointed by theChinese and foreign shareholders in proportion to their equityinterest in the company. A shareholder of an EJV typically exercisesits rights and powers in the operation and management of thecompany through the directors it appoints to the board.Therefore, one of the most important rights of shareholders of anEJV is the right to appoint directors to the board of the company.Another important right is the right to nominate senior managementpersonnel, such as the general manager, chief executive officer andchief financial officer, whose engagement is subject to approval bythe board. In practice, it is rare that a nominated candidate for asenior management position is rejected by the board.The rights and powers of a shareholder of a Chinese-foreigncooperative joint venture (“CJV”) in the management andoperation of the company are very similar to those of an EJV, exceptthat the highest governing authority of a CJV could be either theboard of directors or what is called a “joint managementcommittee”. The use of a “joint management committee” in lieu ofa board of directors is extremely rare. A shareholder would exerciseits rights in the company through appointees to the jointmanagement committee.The WFOE Law provides shareholders of a wholly foreign-ownedenterprise (“WFOE”) much more flexibility in the exercise of theirpowers and rights over the affairs of the company. Theshareholder(s) may decide all the major issues concerning theWFOE, or make such decisions through a director (or the board ofdirectors, as the case may be) or a senior manager appointed by theshareholder.


In general, shareholders are not liable for acts or omissions of acorporate entity, except in the following circumstances: (1) if a shareholder abuses the independent limited liability

status of the corporate entity for the purposes of evadingpayment of debts, thus causing serious damage to thecreditors of the company. In these circumstances, theshareholder is jointly and severally liable for the debts of thecompany;

(2) if a shareholder is the sole shareholder of a limited liabilitycompany and is not able to prove that the company assets areindependent of its own assets. In these circumstances, theshareholder is jointly and severally liable for the debts of thecompany; or

(3) if there is false information, misleading representation ormaterial omission in a company’s prospectus, financialreports, listing reports, annual reports, mid-term reports,interim reports or other disclosed information which causesinvestors to suffer losses in trading the company’s securities.In these circumstances, if a controlling shareholder or aperson who effectively controls the company is at fault, suchshareholder or person shall be jointly and severally liablewith the company and the issuer for the losses so caused.


No, provided that a shareholder has complied with all of itsobligation to make its capital contribution to the company.


A shareholder can seek enforcement action against members of themanagement body under the following circumstances: (1) if a director or a senior manager of a corporate entity acts in

violation of laws, administrative regulations or theprovisions of the company’s articles of association, thuscausing damage to a shareholder. In these circumstances, theshareholder has the right to sue such director or manager fordamage suffered; and

(2) if a director, a supervisor or a senior manager of a corporateentity acts in violation of laws, administrative regulations orthe provisions of the company’s articles of association, thuscausing damage to the company. In these circumstances,certain qualified shareholders may, after following theprocedures set forth under law, sue the director, supervisor orsenior manager to compensate the company for all damagesuffered.


(1) Limitations Various limitations apply to the transfer of equity interests inChinese companies.(a) Major limitations applicable to equity interests in limited

liability companies (i.e. “Type A Companies”): (i) transfers of equity interests in Type A Companies (not

including a foreign-invested company) are subject tothe prior consent of more than 50% of the non-transferring shareholders. Non-transferringshareholders also have preemptive rights to purchasethe equity interests subject to transfer;

(ii) transfers of equity interests of an EJV or CJV aresubject to unanimous consent of all shareholders.Non-transferring shareholders also have pre-emptiverights to purchase the equity interests subject totransfer. In addition, the transfer requires approval bythe competent approval authority as well as filing withthe registration authority; and

(iii) transfers of equity interests in a WFOE are subject toapproval by the competent approval authority andfiling with the registration authority.

(b) Major limitations applicable to companies limited by shares(i.e. “Type B Companies”): (i) any shareholder that is apromoter or sponsor of a company limited by shares is notpermitted to transfer its shares within one year ofestablishment of the company; (ii) if a shareholder holdingmore than 5% of the shares of a public company sells itsshares within six months after purchase, or purchases sharesof the public company within six months after it sells itsshares, all the income generated from such trading activitybelongs to the company; (iii) in connection with the takeoverof a public company, the purchaser is prevented fromtransferring the acquired shares within 12 months uponcompletion of the takeover; and (iv) when an investor, aloneor in concert with other investors (through agreement orother arrangement), acquires 5% of the issued shares of apublic company through trading of the company’s securitieson a stock exchange, it is required to comply with mandatorydisclosure obligations and is prohibited from trading the



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company’s shares for a certain period of time (see paragraph(2) below).

(2) Disclosure Requirements (a) When an investor, alone or in concert with other investors

(through agreement or other arrangement), acquires 5% ofthe issued shares of a public company through trading of thecompany’s securities on a stock exchange, the investor isrequired to: (i) submit a written report to the securitiesregulatory authority and the stock exchange; (ii) notify thecompany of the acquisition; and (iii) issue a publicannouncement of the same within three days after the eventtakes place. The investor is also prohibited from trading thecompany’s shares within such period. The same disclosurerequirements apply whenever the shares held by the investorincreases or decreases by 5%, and the investor will beprohibited from trading the company’s shares during thereporting period as well as within two days after the publicannouncement is made.

(b) A public company is required to disclose in its annual andmid-term reports information regarding: (i) the ten largestshareholders of the company; (ii) the shareholders who eachhold more than 5% of the issued shares of the company; (iii)the controlling shareholder(s) of the company; and (iv) theperson(s) who effectively control the company.


The regular shareholder meetings of a limited liability company(i.e. “Type A Company”) are held in accordance with the provisionsof the company’s articles of association. In practice, regularshareholder meetings are normally held once every quarter or onceevery six months.The regular shareholder meetings of a company limited by shares(i.e. “Type B Company”) are normally held once or twice a year.Interim shareholder meetings may be held under certaincircumstances as set forth in PRC Company law or in thecompany’s articles of association.PRC law is silent on this issue. There is no well-established judicialpractice supporting the rights of indirect shareholders in thegovernance of corporate entities.(1) Certain shareholders have the right to call shareholder

meetings: (a) For the initial shareholder meeting of a limited

liability company (i.e. “Type A Company”), thelargest contributor to the registered capital of thecompany is required to call the shareholder meeting.

(b) A shareholder (or shareholders) holding more than10% of the voting rights of a limited liability company(i.e. “Type A Company”) or 10% of the issued sharesof a company limited by shares (i.e. “Type BCompany”) may call an interim shareholder meetingif the board of directors or the board of supervisors (asthe case may be) fails to call the shareholder meetingafter such shareholder(s) have made such proposal.

(2) Written resolutions can be passed in lieu of holding ashareholder meeting for the following matters concerning alimited liability company: (i) the company’s operationalpolicies and investment plans; (ii) appointment and removalof directors or supervisors, and determining theirremuneration; (iii) approval of reports of the board ofdirectors and reports of the board of supervisors; (iv)approval of the company’s annual financial budget plans andfinal accounts; (v) approval of the company’s dividenddistribution plan and loss recovery plan; (vi) increase ordecrease of the company’s registered capital; (vii) issuanceof corporate bonds; and (viii) restructuring of the company;

and (ix) amendments to the company’s articles ofassociation.

PRC law does not prohibit electronic communication to, or by,shareholders. Electronic communication should be possible if thisform of communication is expressly permitted in the company’sarticles of association. However, public announcements that arerequired to be made to public investors must take the form asrequired by law (for example, certain announcements must bepublished in designated newspapers).



A corporate entity is essentially managed by the board of directors(or the executive director in case there is no board) and the seniormanagement of the entity by exercising their respective functionsand responsibilities (see question 3.7 below).


(1) Directors Members of the board of directors of a corporate entity aregenerally appointed and removed by the shareholders. Eachdirector has a term of office not exceeding three years (or four yearsfor directors of an EJV) unless he is reappointed or earlier removed.In case of a wholly state-owned company, the board of directorsmust include certain directors selected by the company’s staff. (2) Senior ManagementSenior managers of a corporate entity typically include the generalmanager, deputy general manager(s), chief financial officer andsecretary of the board (for public companies). Like the members ofthe board of directors, these executives are appointed and removedby the board.


There are no laws or regulations specifically addressing the natureof employment contracts or remuneration of directors. However,the PRC Company Law does provide for a term of office notexceeding three years for a director and includes a general provisionthat the remuneration of directors shall be determined by theShareholder Assembly.


The Company Law requires directors and senior management todisclose to the company his or her shareholder interests in thecompany and any changes in shareholding. During his or her termof office, the director or senior manager can only transfer up to 25%of the shares he/she holds in the company each year and isprohibited from transferring any of his or her shares within one yearafter the shares of the company are first listed on a stock exchange.The director or senior manager is also prohibited from selling his orher shares within six months after he or she ceases to be a directoror a senior manager.

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(1) Meetings of the Board of Directors Under the Company Law, the Chairman of the board of directorsshould call and preside over board meetings. The procedures for convening and conducting board meetings of alimited liability company should follow the provisions of thecompany’s articles of association. Typically, the Chairman shouldsend a notice of meeting no less than the minimum number of daysstipulated in the articles of association. The notice should set forththe date of the meeting, the venue for the meeting and the matters tobe discussed during the meeting. Quorum requirements forconvening board meetings of a limited liability company (i.e. “TypeA Company”, not including a foreign-invested company) may also bespecified in the company’s articles of association. In the case of boardmeetings for EJVs and CJVs, a quorum requires two-thirds of alldirectors to be present at the meeting, either in person or by proxy. With respect to regular meetings of the board of directors of acompany limited by shares (i.e. “Type B Company”), the CompanyLaw requires that a meeting notice be sent to all the directors andsupervisors ten days prior to the meeting. A quorum requires asimple majority of the directors to be present at the meeting, eitherin person or by proxy. Following a board meeting, the board should prepare minutesreflecting the decisions of the board at such meeting. The directors(or their proxies) present at the meeting are required to sign themeeting minutes. (2) Meetings of Senior ManagementPRC law does not mandate any processes for the conduct ofmeetings of senior management of a corporate entity.


Under the Company Law, directors and senior managers of corporateentities owe duties of loyalty and diligence towards the company.Directors and senior managers must not: (i) misappropriate the fundsof the company; (ii) make unauthorised use of the company’s funds orassets; (iii) enter into unauthorised transactions with the company; (iv)take a business opportunity away from the company for his/her or athird party’s benefit; (v) conduct business in competition with thecompany; or (vi) disclose the company’s confidential information andproprietary information without due authorisation. Directors, supervisors and senior managers of a public company arealso responsible for ensuring that information disclosed by thecompany is true, correct, complete and that the information isdisclosed in a prompt and fair manner. Independent directors of a public company owe general duties ofgood faith and diligence to the company and its shareholders. Theyare also required to protect the interests of the company and alsothose of the shareholders, particularly minority shareholders. If a director or a senior manager acts in violation of laws,administrative regulations or the provisions of the company’s articlesof association, he or she is liable to compensate the company or theshareholders (as the case may be) for damage caused. If there is any false information, misrepresentations or materialomissions in a company’s prospectus, financial reports, listingreports, annual reports, mid-term reports, interim reports or otherdisclosed information which causes investors to suffer losses intrading of the company’s securities, the directors, supervisors andsenior managers of the company shall be jointly and severally liable

with the company and issuer for the losses caused. The burden ofproof will be on the director, supervisor or senior manager toestablish that he or she did not breach his/her duties.


(1) Board of Directors(a) The board of directors of a corporate entity (other than a foreign-invested enterprise) exercises the following primary responsibilitiesand functions: (i) convening shareholder meetings and reporting tothe Shareholder Assembly; (ii) implementing the resolutions of theShareholder Assembly; (iii) deciding the company’s operationalplans and investment proposals; (iv) formulating the company’sannual financial budget plans and final account plans; (v)formulating the company’s dividend distribution plans and lossrecovery plans; (vi) formulating plans for increase or decrease ofthe company’s registered capital and the issuance of corporatebonds; (vii) formulating plans for restructuring of the company;(viii) deciding the internal organisation of the company; (ix)appointment and removal of senior management personnel anddeciding their remuneration; and (x) formulating the company’sbasic management system. In addition to these rights, anindependent director of a public company enjoys certain otherrights, including: (i) review and pre-approval of major related-partytransactions; (ii) proposing recommendations to the board for theengagement or dismissal of the company’s accountants; (iii)requesting the board to call interim shareholder meetings; and (iv)independently engaging an external auditor for the company. (b) The board of directors of an EJV is the highest authority of thecompany and determines all major issues concerning themanagement and operation of the company. Decisions concerningthe following matters require unanimous consent of the boardmembers present at a duly convened board meeting: (i) amendmentto the company’s articles of association; (ii) increase or decrease ofthe registered capital of the company; (iii) suspension of business ordissolution/liquidation of the company; and (iv) merger of thecompany with another economic entity or division of the company.Decisions concerning all other major issues require unanimousconsent, or consent of the simple majority or super-majority of theboard members, as agreed by the shareholders in the joint venturecontract and the company’s articles of association. (c) The functions and responsibilities of the board of directors of aCJV are very similar to those of an EJV. In case a joint managementcommittee is set up instead of a board of directors, the jointmanagement committee will exercise the functions andresponsibilities of the board.(d) The WFOE Law allows foreign shareholder(s) of a WFOE moreflexibility in the management and operation of the WFOE. Theforeign shareholder(s) may directly or indirectly (through the boardof directors, or an executive director, or senior management)operate and manage the business of the WFOE. (2) Senior ManagementThe primary responsibilities of key senior management of limitedliability companies are as follows:(a) The general manager is responsible for the company’s dailymanagement and operation and implements the resolutions of theboard and the company’s annual business/investment plans. He orshe also has the right to appoint or remove management personnel,other than those appointed or removed by the board. (b) The deputy general manager(s) assist the general manager in hiswork.



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(c) The chief financial officer is responsible for the financial mattersof the company and is responsible for preparing the financialstatements of the company.(d) The board secretary of a public company is responsible forpreparation of shareholder meetings and board meetings, keepingcustody of relevant corporate documents and shareholderinformation and handling information disclosures concerning thecompany. In addition, he/she has the right to attend the shareholdermeetings and the meetings of the management bodies, to obtaininformation about the financial and business situation of thecompany and to review all disclosure documents. In an effort to improve corporate governance and supervise theduties of members of the board and senior management, theCompany Law also requires a corporate entity to constitute a boardof supervisors (or in case of a small entity, one or two supervisors).The board of supervisors may exercise the following powers andresponsibilities: (i) inspect the company’s finances;(ii) supervise the performance of duties by directors and senior

management and propose the removal of directors or seniormanagers who violate laws and administrative regulations,the company’s articles of association or the resolutions of theboard of directors;

(iii) require directors or senior managers who act against theinterests of the company to rectify the situation; and

(iv) file a lawsuit against directors or senior managers inaccordance with applicable laws;


There is no specific disclosure requirement concerningmanagement body practices under PRC law.


The practice of a company indemnifying or insuring its directors andsenior managers for breach of fiduciary duties is not prohibited byPRC law. In practice, the provision of corporate indemnities andinsurances are becoming a part of corporate governance of manycorporate entities, in particular foreign-invested companies in China.



PRC Company Law includes a general provision requiring a corporateentity to take social responsibility in its business operations. There areno other laws, regulations or practice in this aspect.


(a) PRC Company Law requires a corporate entity to solicitopinions from company staff when making decisionsconcerning the restructuring of the company, when decidingmajor operational issues, or formulating important rules forthe company.

(b) If a corporate entity is formed by two or more state-ownedenterprises or other state-owned investment entities, the

board members must include a representative (orrepresentatives) of the company staff.

(c) At least one third of the board of supervisors of a corporateentity must include representatives of the company’s staff.

5 Transparency


Under the Securities Law and the Disclosure Measures, thesecretary of the board of a public company is responsible forinformation disclosure. Other than public announcements by theboard of supervisors, all information disclosed by a public companymust be in the form of a public announcement of the board ofdirectors. A public company is required to disclose its annual reports, mid-term reports and quarterly reports, interim reports, informationabout issuance of securities and any other information required tobe published on websites (see question 5.3 below). (a) The annual report should include, among others, the

following information: (i) general information about thecompany; (ii) financial reports and business conditions; (iii)resumes of, and performance of duties by, each of thedirectors, supervisors and senior managers; (iv) the shares ofthe company held by such personnel and their annualremuneration; (v) information about the issued share capitalof the company and its bonds; (vi) information concerningthe ten largest shareholders of the company and the numberof shares held by each of them; (vii) information about theshareholders who hold more than 5% of the issued shares ofthe company; (viii) information about the controllingshareholder(s) and information about the person(s) whoeffectively control the company; (ix) reports of the board ofdirectors; and (xi) management discussion and analysis.

(b) The mid-term report should include, among others, thefollowing information: (i) the company’s financial reportsand business conditions; (ii) any change to the shares orbonds issued by the company; (iii) information about theissued shares and bonds, including information about the tenlargest shareholders of the company and the number ofshares held by each of them; (iv) information about thechanges to the controlling shareholders or the person(s) whoeffectively control the company; and (v) managementdiscussion and analysis.

(c) The quarterly report should mainly include the generalinformation about the company and primary accounting dataand financial index.The directors and senior managers are required to confirm inwriting the regular reports issued by the company. The boardof supervisors is required to review the reports and issue itsopinions. The directors, supervisors and senior managementare responsible for ensuring that the information disclosed bythe company is true, correct and complete.

(d) Interim reports of a company normally include informationon the occurrence of major corporate events (which mayhave an impact on the share price of the company),clarifications of corporate issues, notices of shareholdermeetings, public announcements of the resolutions ofshareholder meetings, etc.


Please see the answer to question 5.1 above.

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There is no specific role of an auditor in making such disclosures,except that the year-end financial statements of a corporate entitymust be audited.


According to the Disclosure Measures and the listing rules ofShenzhen and Shanghai Stock Exchanges, the followinginformation is required to be published on websites:(i) in connection with an initial public offering of a company’s

shares, the company’s prospectus (which includes corporategovernance information) and related documents;

(ii) any changes to the shares of a public company which areheld by a director, supervisor or senior manager of thecompany;

(iii) a public company’s regular reports (annual, mid-term andquarterly reports) and interim reports;

(iv) major undertakings made by a public company and/or theshareholder(s) of the company;

(v) any information which would be helpful for shareholders tomake reasonable decisions with respect to the issues to bediscussed; and

(vi) any amendments to a public company’s articles ofassociation.

Shirley Xu

Zhong Lun Law Firm 36-37/F, SK Tower, 6A Jianguomenwai Avenue Chaoyang District Beijing 100022 China

Tel: +86 10 5957 2039Fax: +86 10 6858 1838Email: [email protected]: www.zhonglun.com

Shirley Xu has practised Chinese law at both well established PRClaw firms and international law firms (including Graham & Jamesand Freshfields Bruckhaus Deringer) for over 17 years. She frequently advises multinational companies on their equity andloan investments in China. Fluent in English, she specialises inMergers & Acquisitions, private equity investment, general corporatematters and project finance. She has been repeatedly identified byAsia Law & Practice through its surveys as one of Asia’s leadingbusiness lawyers in the areas of M & A and Banking in recent years.

Simon Kai-Tse Cheong

Zhong Lun Law Firm 36-37/F, SK Tower, 6A Jianguomenwai Avenue Chaoyang District Beijing 100022 China

Tel: +86 10 5957 2067Fax: +86 10 6858 1838Email: [email protected]: www.zhonglun.com

Simon Cheong was formally Senior Legal Counsel to the World BankGroup’s International Finance Corporation in Beijing responsible forthe IFC’s investment activities in mainland China. Cheong advised IFC on a variety of high-profile investments intomainland companies, including Minsheng Bank, Changyu Wineryand Fosun Pharmaceuticals. Prior to IFC, Cheong was at Freshfields Bruckhaus Deringer inBeijing and Baker & McKenzie in Hong Kong. Cheong has over 13years experience advising multinationals on their investmentactivities in China. Cheong specialises in cross-border M&A andadvising on private equity transactions.

Zhong Lun Law Firm was founded in 1993 and quickly has emerged as one of China’s leading law firms and also oneof the top 50 law firms in the Asia Pacific Region. Zhong Lun has more than 90 partners and 250 associates and hasoffices in Beijing, Shanghai, Shenzhen Guangzhou, Tokyo and Wuhan. Zhong Lun is a domestic firm that combines thebest PRC lawyers with the management techniques and client-centered philosophy of the leading international firmswhere many of its lawyers were trained. The firm provides creative and feasible solutions to novel issues that allowclients to achieve their objectives within a rapidly evolving and hence challenging legal and business environment.

In recent years, Zhong Lun received a number of awards for its excellent legal services in respective areas, including,among others, the “Best Legal Service Provider in the Area of Construction” in 2003 awarded by Asia Legal Business(ALB), the “Best Legal Service Provider in the Area of Real Estate” in 2004 by ALB, the “Best Securitization Transactionin Asia of 2006” by Euromoney and International Financial Law Review, the “Real Estate & Construction Deal of theYear (2006)” by ALB, “Beijing Law Firm of the Year (2006)” by ALB, “Energy & Resources Deal of the Year (2006)”by ALB, “Equity Market Deal of the Year (2006)” by ALB, the “Dispute Resolution Law Firm of the Year (2006)” byALB and the “Insolvency & Restructuring Law Firm of the Year (2006)” by ALB. Zhong Lun also received high rankingin Chambers Asia 2008 in the major areas of corporate/merges & acquisitions, real estate, TMT, banking and finance,dispute resolution, capital market, securitisation and international trade.

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The main corporate entity to be discussed is a joint-stock company (acompany limited by shares, the “Company”). The Company issuesshares and such shares that are recognised must be in documentary orbook-entered (registered in Security Centre) forms are. Subject to theapproval and fulfilment of the statutory conditions, the shares may besubmitted for trade on the publicly (regulated) markets. The minimumamount of registered capital is equal to CZK 2,000,000.Another type of corporate entity is a limited liability company (orthe “LLC”). The LLC can be established by up to 50 individualsor legal entities. The constitutional documents of an LLC consist ofeither a Founder’s Deed (where there is a single founding member)or a Memorandum of Association (or the “Memorandum”) wherethere are two or more founders. Both documents must be drawn upin the form of a notarial deed. A single-member LLC may not bethe sole founder or member of another LLC. One individual maybe a single member of a maximum of three limited liabilitycompanies. The liability of each of the members is limited to thetotal of the unpaid parts of all members’ contributions to theregistered capital as registered in the Commercial Register. Theminimum amount of registered capital is equal to CZK 200,000 andit must be divisible by 1,000.

1.2 What are the main legislative, regulatory and othersources of corporate governance?

The main legislative source regulating the Company and the LLC isAct No. 513/1991 Coll. Commercial Code, as amended (the“Commercial Code”). The Commercial Code contains generalprovisions regarding the establishment, registration, organisation,governance, corporate financing, functioning and dissolution of theCompanies and the LLCs. A majority of provisions in the Commercial Code regulating theCompany is mandatory (ius cogens), or it stipulates the minimumstandards for regulating the rights of minority shareholders.However, a rather inconsiderable amount of Commercial provisionsin the Code delegate the regulations of certain issues to the Articlesof Association (the “Articles”). The Articles are an obligatorydocument of the Company regulating its internal relationships.Correspondingly, the shareholders of a LLC are entitled to regulatecertain issues in the Memorandum. Certain issues are also regulated by Act No. 591/1992 Coll., onSecurities, as amended, and Act No. 256/2004 Coll. on CapitalMarkets, as amended, in addition to other statutes.


The current topical issues in Czech corporate governance are (i)squeezing-out of minority shareholders with respect to theprotection of their rights and (ii) changes (conversions) ofCompanies/LLCs (new regulation of mergers and transformation oflegal forms in place).

2 Shareholders

2.1 What rights and powers do shareholders have with regardto the operational duties and management of corporateentity/entities?

The shareholders have a catalogue of basic rights to: (i) participate inthe General Meeting of Shareholders (the “General Meeting”); (ii)vote at the General Meeting; and (iii) require information concerningthe Company from the management of the Company/LLC.Shareholders are allowed to attend the General Meeting personally ormay appoint representation by a proxy. A member of the Board ofDirectors/Executive cannot be a shareholder’s proxy. The Board ofDirectors (executive body of the Company) and the Executive/s(executive body of the LLC) shall follow the principles andinstructions approved by the General Meeting, provided that theyconform to the statutory provisions and the Articles. Unless stipulatedotherwise in the Commercial Code, no person is authorised to giveinstructions to members of the Board of Directors/Executivesconcerning the management of the Company’s/LLC’s business. Should a Company’s registered capital exceed CZK 100,000,000,shareholder(s) possessing shares with a total nominal valueexceeding 3% of the registered capital or shareholder(s) possessingshares with total nominal value exceeding 5% in Companies withregistered capital less than CZK 100,000,000, are entitled to ask theBoard of Directors to convoke the General Meeting to discuss anddecide on the proposed matters. In the event that the General Meeting has already been convoked,shareholders defined in the above paragraph are also entitled torequest that the Board of Directors add other matters to be discussedand decided to the agenda of the General Meeting. The Board ofDirectors is obliged to add the proposed matters to be discussed anddecided to the agenda of the General Meeting on the condition that(i) the request of a shareholder is received before the convocationof the General Meeting or (ii) should the request be delivered to theCompany after convocation of the General Meeting, the Board ofDirectors shall extend the agenda of the General Meeting by way ofan additional invitation letter or an invitation notice (see question

Dan Loukota

Daniel Weinhold

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2.6) served to the shareholders/published ten days prior the GeneralMeeting at least. Issues not involved in the agenda of the General Meeting may bediscussed and decided on the General Meeting, however, only withconsent of all shareholders.


Generally, the shareholders are not liable for acts of omission of theCompany.


The shareholder may be disfranchised in the event he is delayed withhis obligation in paying-up the subscribed shares and he been servedwith an additional written notice to pay-up the subscribed shareswithin 60 days or within the time-period stipulated in the Articles. Further, a shareholder possessing 90% shares of the registeredcapital and simultaneously 90% shares of voting rights attached tohis shares is entitled to request the Board of Directors to convokethe General Meeting which would decide on the transfer of allshares of minority shareholder to the possession of the majorityshareholder (the squeezing-out of minority shareholders). Theminority shareholders are entitled to receive a reasonable price pershare as is determined by an expert in its report. Should the sharesbe accepted to be traded on public markets, the decision on transferof share is undermined by the prior consent of the Czech NationalBank, and such expert report is not required. Based on a claim of aminority shareholder, the price may be subject to court supervision,i.e. the minority shareholder may claim a higher price than offered(paid) by the majority shareholder. The principles of such decisionare binding for the majority shareholder and also towards othershareholders not participating in the court case. Besides, a shareholder can neither exercise his voting right, if: (i) it isattached to an interim certificate and he is in default on partialpayments towards the issuance price of non-fully-paid shares; (ii) theGeneral Meeting is deciding on the valuation of his non-monetaryinvestment contribution; (iii) the General Meeting is decidingwhether to grant him or a person with whom he is acting in concertan advantage (a benefit) or whether they should be released fromperforming such an obligation, or whether he should be dismissedfrom the office of a company statutory organ due to his breach of dutywhen active in such office; and (iv) he is in breach of his obligationto make a tender; and in other cases as prescribed by law.


No, the Company has the right to enforce claims against the membersof the management body (Board of Directors) exclusively. Membersof the Board of Directors, who are liable towards the company fordamage, shall be jointly and severally liable (as sureties) if the boardmember concerned failed to settle such damage or creditors’ claimscannot be satisfied from the company’s property due to its insolvencyor due to its cessation of making payments. The scope of suchliability shall be limited to the scope of the duty of the board memberto provide damages. The liability of a board member is dischargedwhen he settles the damage incurred. The minority shareholders mayrequest that the Supervisory Board claim damages or other claimsagainst members of the Board of Directors. The Company isrepresented by a designated member of the Supervisory Board shouldthe claim be enforced in court proceedings.

Stated principles apply for the liability of the Executives of an LLCmutatis mutandis.

2.5 Are there any limitations on, or disclosures required inrelation to interests in securities by shareholders?

A shareholder of a Company acquiring interest in voting rightsattached to shares traded on an official public market in the CzechRepublic or on an official stock-exchange market in another EUMember State in an amount which equals or exceeds 3%, and if theregistered capital of the Company exceeds CZK 100,000,000 in anamount which equals or exceeds 5%, 10%, 15%, 20%, 25%, 30%,40%, 50% or 75% or he decreases his share in voting rights underthe stated limits, is obliged to inform the Company and the CzechNational Bank accordingly.

2.6 What shareholder meetings are commonly held and whatrights do shareholders have in such regard?

The General Meeting is the only shareholder meeting recognised byCzech law. It is the supreme body of the Company/LLC. The General Meeting of the Company is convoked by the Board ofDirectors either by an invitation letter served to shareholders(Company with registered shares) or by publication of the invitationnotice in (i) the Commercial Bulletin and (ii) a state-widedistributed daily paper stipulated in the Articles (a Company withbearer shares). The General Meeting has a quorum if a shareholder is in attendancewhose shares have a total nominal value exceeding 30% of theregistered capital of the Company, unless the Articles require higherattendance. If a General Meeting falls short of a quorum, the Boardof Directors shall convoke an alternate General Meeting. Thealternate General Meeting shall have the same agenda as the regular(annual) General Meeting which is substituted. The Board of Directors is obliged to convoke the regular GeneralMeeting at least on an annual basis within the time-period stipulatedin the Articles, however, no later than six months after the end of themost recent fiscal year. It is within the power of the General Meeting to carry out thefollowing: a. decide on amendments/modifications of the Articles;b. decide on an increase or decrease in registered capital;c. decide on the issuance of bonds;d. elect and recall members of the Board of Directors, unless

the Articles determine that such members are elected andrecalled by the Supervisory Board;

e. elect and recall members of the Supervisory Board;f. approve the Company’s financial statements;g. decide on the financial remuneration for members of the

Board of Directors and the supervisory board;h. decide on application for the listing of the Company’s shares

on public markets or to decide on the de-listing of its shares;i. decide on the winding up of the Company;j. decide on a merger, transfer of business assets to a sole

shareholder or on the division or conversion of legal form;k. decide on the conclusion of a contract on transfer of

enterprise of its part;l. approve transactions made in the name of the Company

before its incorporation; andm. approve controlling agreements, agreements on profit

transfer and silent partnership agreements.The General Meeting has a quorum if shareholders are in



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attendance whose shares have a total nominal value exceeding 30%of the registered capital of the Company, unless the Articlesstipulate a higher quorum. The General Meeting passes resolutions by a majority vote of theattending shareholders, unless the Commercial Code or the Articlesrequire a higher majority. Decisions enumerated above underparagraphs a, b, c, i, k, shall be approved by a two-thirds majorityof shareholders present at the General Meeting. Decisions on achange in the type of shares, application of their listing of de-listingon public markets and on a change of rights connected to sometypes of shares shall be approved by three-fourths of shareholderspossessing the respective type of shares and who are present at theGeneral Meeting. The number of shareholder’s votes is determinedas a proportion between the nominal value of shares held therebyand the total amount of registered capital of the Company. TheArticles may determine a general voting cap per shareholder. The General Meeting of the LLC shall be convened by theExecutives at least once a year. The General Meeting, whichapproves ordinary financial statements, must be convened no laterthan six months after the last day of the accounting period, unlessthe law, the Memorandum, or statutes provide for a shorter period. Members of the LLC whose contributions attain in total at least10% of registered capital may call for a General Meeting to beconvened. If the executive officers fail to convene it within onemonth of the delivery of such request, the members may convenethe General Meeting themselves.The General Meeting of the LLC constitutes a quorum wheremembers having at least half of all the votes are present, unless theMemorandum requires a higher number of votes. Each member hasone vote for every CZK 1,000 of his investment contribution, unlessthe Memorandum provides for otherwise. The General Meetingmakes a decision by a simple majority of votes of the attendingmembers, unless the law or the Memorandum requires a highernumber of votes. The powers of the General Meeting of an LLC include:a. approval of transactions made in the name of the LLC prior

to its incorporation;b. approval of the LLC’s ordinary, extraordinary and

consolidated financial statements and, in instances laid downby law, interim financial statements, distribution of its profitsand settlement of any losses;

c. approval of the statutes and their alterations;d. decision/making on amending the contents of the

Memorandum, unless such alteration is based on anotherlegal fact;

e. decision/making on an increase or reduction of registeredcapital or acceptance of a particular nonmonetary investmentcontribution, or approval to set off a monetary receivablefrom the LLC (i.e. its debt) against a payable portion of amember’s investment contribution;

f. appointment, removal (dismissal) and remuneration of theExecutives and of the Supervisory Board’s members;

g. expulsion of a member of the Company;h. appointment, removal and remuneration of a liquidator, and

decision-making on whether to wind up the company byentering into liquidation, if the Memorandum so allows;

i. decision-making on a merger, transfer of business assets to asole member, division, or conversion of legal form;

j. approval of a control contract, a profit transfer contract and acontract with a silent partner, and their alterations;

k. approval of a contract on performance of an office; andl. any other matters which are within the competence of the

General Meeting under the law or the Memorandum.

Decision enumerated above under paragraphs c, d and e and adecision on the winding-up of a LLC by entering into liquidationalways requires the approval of at least a two-thirds majority of allmembers’ votes, unless the law or the Memorandum requires ahigher number of votes; a notarial deed on any such decision mustbe drawn up. If registered capital is reduced in such a way thatmembers’ investment contributions are decreased irregularly, theconsent of all members is required.



The Company is managed by the Board of Directors. The Board ofDirectors is a collective body consisting of three members at least,unless the Company has a sole shareholder. Members of the Boardof Directors elect a chairman of the Board of Directors fromamongst them. The Board of Directors manages the Company’sactivities and acts in the name of the Company. The Company is obliged to assemble a Supervisory Board. TheSupervisory Board is a collective body comprised of three membersat least or any higher number which is divisible by three. Shouldthe statutory conditions be fulfilled, one-third of the members of theSupervisory Board are elected by the employees of the Company(see question 4.2). The Supervisory Board monitors the performance of the scope ofpowers by the Board of Directors and conducts the businessactivities of the Company. The LLC is managed by one or more Executives. Each of theExecutives, if there is more than one, has the right to actindependently in the name of the company, unless the Memorandumor statutes provide otherwise. Executives are appointed by a GeneralMeeting from amongst the Company’s members or other individual.Executives decide on matters related to the business management ofan LLC, unless under the Memorandum such matters fall within thescope of powers of the General Meeting.The LLC will only establish a Supervisory Board if this is laiddown in its Memorandum.


Members of the Board of Directors (Executives of LLC) are electedby the General Meeting, unless they are elected by the SupervisoryBoard (see question 3.1 par. 2 and 3). The tenure for members ofthe Board of Directors is five years (in the case of Executives isunlimited), unless the Articles stipulate a shorter time-period. The General Meeting is also entitled to recall members of the Boardof Directors/Executives (see question 2.6 par. 4 and 10). A member of the Board of Directors may resign from his positionby giving notice to the Board of Directors. The tenure of suchperson shall end on the day when the resignation is discussed orshould have been discussed by the Board of Directors; suchregulation shall apply to Executives mutatis mutandis.

3.3 What are the main legislative, regulatory and othersources which impact contracts and the remuneration ofmembers of the management body?

The main regulatory source on contract and remuneration of themanagement body (Board of Directors/Executives) is theCommercial Code. It does not stipulate the amount, structure, or

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other characters for the remuneration of the members of the Boardof Directors, however, it stipulates certain conditions based onwhich remuneration can be paid out. According to the CommercialCode, any consideration (benefits, emoluments) by the Company infavour of a person who is the body of the Company, or a member ofsuch to which this person is not entitled under the statutoryprovisions or the Articles and is subject to the approval by theGeneral Meeting, unless the person has been awarded the right tosupply (benefits) in a contract on the performance of his office(which is subject to approval of the GM itself).


There are some limitations required in relation to interests in sharesheld by the members of the Board of Directors/Executives, whomay not participate in the business activities of another entity as apartner with unlimited liability or as a person controlling otherpersons engaged in an identical or similar line of business activities.


The Board of Directors is entitled to decide on issues should themajority of its members be present at its session, unless stipulatedotherwise in a statute or the Articles. A resolution is approved bythe majority of members present. The Chairman’s vote shall be thedecisive one in the event of a tie. The Articles may provide forvotes cast in writing or by means of communication with personsoutside the meeting room, provided that such is agreed upon by allmembers of the statutory organ concerned (voting per rollam). The minutes of any meeting of the Board of Directors and itsdecisions (resolutions) shall be signed by the Chairman of theBoard of Directors and minutes clerk. The minutes shall record thenames of the members of the Board of Directors who voted againstthe approved decision. Where there are several Executives of an LLC, the mutual consentof a majority is required for making a decision on the LLC’sbusiness management, unless the Memorandum of Associationprovides for otherwise; voting per rollam is also acceptable.


The Board of Directors/Executives ensures for the propermanagement of the Company’s business, including accounting andremaining in compliance with the statutes as well as submittingannual reports and financial statements to the General Meeting forits approval. Members of the Board of Directors/Executives shallexercise their scope of powers with due fiduciary care and not todisclose any confidential information and facts to third parties, ifsuch disclosure is potentially detrimental to the Company. Members of the Board of Directors/Executives who have incurreddamage to the Company by breaching legal duties while exercisingtheir powers shall be liable for such damage jointly and severally.A contract between the Company and a member of the Board ofDirectors/Executive, which exclude or limit the liability of amember of the Board of Directors, shall be deemed null and void. The Commercial Code stipulates the minimal duties as regards tocompetitive conduct. Unless the Articles determine furtherrestrictions, a member of the Board of Directors/Executive is notallowed to (i) carry out an identical or similar business activity as

that of the Company, nor is he entitled to enter into businessrelationships with the Company, (ii) mediate Company trades forother entities, (iii) participate in the business activities of otherentity as a partner with unlimited liability or as a person controllingother entities engaged in and identical or similar line of businessactivities, (iv) act as a member of a management body of otherentity with identical or similar line of business activities, unlesssuch entity is a holding-type group.


The scope of main specific corporate governanceresponsibilities/function of the members of the Board of Directorsincludes, in particular, the following:(i) shall elaborate an annual report. This report shall be

submitted to the Supervisory Board for discussion and, afterdecision of the Supervisory Board on its approval, shall besubmitted to the General Meeting;

(ii) acts in name of the Company; (iii) decides all Company matters, unless they fall within the

scope of powers of the General Meeting or SupervisoryBoard under the Commercial Code or the Company’s statute;

(iv) must convene a General Meeting of shareholders withoutundue delay, when the total unsettled losses of a joint-stockcompany represents one-half of its registered capital, or thecompany becomes insolvent; and

(v) shall exercise their scope of powers with due fiduciary careand not to disclose any confidential information and facts tothird parties, if such disclosure is potentially detrimental tothe Company. If there is a dispute as to whether a particularmember of the Board of Directors has performed with duefiduciary care, the burden of proof shall be borne by suchmember himself.

The Executives of an LLC are concerned with businessmanagement of the Company and must ensure that the LLC dulymaintains accounting records, other records as well as a list of theLLC members. They must inform the LLC members of mattersconcerning the LLC. The Executives are also required to file aninsolvency petition if the LLC becomes insolvent or isoverburdened with debts.


The Board of Directors/Executives practises are disclosed in anannual report. By approving the annual report the General Meeting,such approval confirms the practises of the management body of theCompany/LLC. In the case of Business Groups, where acontrolling agreement has not been concluded, the Board ofDirectors/Executives shall draw up a written report on therelationships between the controlling entity and the controlledentity and on relationships between this controlled entity and othercontrolled entities, i.e. controlled by the same controlling entity,provided that this controlled entity, acting with due fiduciary care,is informed of the identity of the controlling entity and the identityof the other persons controlled by the former. The annual report shall be filed within the Collection of Deedsmaintained by the respective Commercial Registry court in anelectronic version. All documents filed with the Collection ofDeeds are Internet accessible.



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No, Czech law does not allow the Company/LLC to indemnify orinsure members of the Board of Directors/Executives for a breachof their duties.



There is no law which would specifically regulate corporate socialresponsibility.


Should the Company have more than 50 employees each employedfor more than 20 hours per week, one-third of the members of theSupervisory Board shall be elected by the employees of theCompany. The electoral code for the election and recall of Supervisory Boardmembers by employees shall be drawn up and approved by theCompany’s Board of Directors after consulting with the trade unionboard or the works’ council. Where a Company has more than1,000 employees in an employment relationship, the electoral codemay allow for an indirect election or recall of members of theSupervisory Board provided that each elector is elected byapproximately the same number of voters. To the contrary, an LLC is not obligated to establish a SupervisoryBoard based on the number of its employees. Employees are notinvolved in the corporate governance of a Czech LLC with respectto the Commercial Code.

5 Transparency


The Board of Directors/Executives is responsible for disclosure andtransparency. It shall file an annual report with the Collection ofDeeds of the respective Commercial Registry court (see above) aswell as financial statements and report on relations betweeninterconnected entities. All types of documents filed with theCollection of Deeds are to be submitted in electronic form and areInternet accessible.


The financial statements, annual report and report on relationsbetween interconnected entities shall be approved by the GeneralMeeting. Such documents shall be filed with the Collection ofDeeds regardless if they are approved by the General Meetingtogether along with information concerning the rejection of theapproval.


On the condition that (i) the Company’s assets exceed CZK40,000,000, (ii) the annual Company turnover exceeds CZK80,000,000, or (iii) the average annual number of Companyemployees exceeds 50, the Company is obliged to have its financialstatements controlled by an auditor. The LLC is obliged to have its financial statements controlled by anauditor provided it meets at least two of the three above mentionedconditions.

5.4 What corporate governance information should bepublished on Web sites?

Should the Company/LLC have any Web sites, it is obliged to statethe company name, registered seat, ID number, registry court fileand insert number under which the Company is incorporated.

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Daniel Weinhold

Weinhold Legal, v.o.s.Charles Square Center, Karlovo námestí 10120 00 Praha 2Czech Republic

Tel.: +420 225 385 333Fax: +420 225 385 444Email: [email protected]: www.weinholdlegal.com

Daniel Weinhold is the managing partner of Weinhold Legal. Daniel has experience in both domestic and internationalcommercial law in the areas of Mergers & Acquisitions, Securities,Building law and Litigation. Apart from his general commercial lawpractice, he is focused on providing legal services in the area ofbanking and financial services, including treasury operations,financial derivatives, master agreements, leasing activities and otherrelated matters. Daniel also has an impressive litigation record, inparticular, representation related to commercial disputes and tax-related issues.Daniel Weinhold was ranked as a runner-up in the categories ofBanking and Finance for the Lawyer of the Year 2005 competition,and in the category of Financial and Banking Law and in thecategory of Commercial Law of the Lawyer of the Year 2007competition, organised by epravo.cz under the patronage of theCzech Bar Association. In addition, he was highly recommended by the PLC Which lawyer? inBanking and Finance, Private Equity, Corporate/M&A and Tax litigationmatters. Moreover, he is ranked as an expert lawyer in the area ofCorporate/M&A by the IFLR 1000 and www.expertguides.com; inBanking & Finance, Corporate and M&A, Dispute Resolution for theCzech Republic and in Corporate and Finance for Slovakia by theEuropean Legal Experts.Daniel graduated from the Law Faculty of Charles University inPrague with the title of JUDr. and afterwards furthered his studiesby obtaining his Ph.D. He is a Czech-qualified attorney-at-law andis registered with the Czech Bar Association and is also a memberof the Slovak Bar Association.Apart from his native Czech, Daniel is fluent in English.

Dan Loukota

Weinhold Legal, v.o.s.Charles Square Center, Karlovo námestí 10120 00 Praha 2 Czech Republic

Tel.: +420 225 385 333Fax: +420 225 385 444Email: [email protected]: www.weinholdlegal.com

Dan Loukota is an attorney-at-law and joined Weinhold Legal in2007. Prior to joining Weinhold Legal, he was a partner of the firmMarek & Loukota. Dan specialises in representation before litigation matters, as well asarbitration and administrative proceedings. He further specialises inrights in rem and rights to immovable assets. In the past, Dan has assisted various Czech and internationalcompanies such as: Meinl European Land, JULIUS MEINL, EUNEDGroup, Taisei Corporation, Assay Office of the Czech Republic,Komercni banka. Dan graduated from the Law Faculty of Charles University in Praguein 1997. During the 1993/4 academic year he studied at theHebrew University in Jerusalem. Dan speaks fluent Czech and English.

Weinhold Legal was established in 1996 and has a team of more than forty-five local and foreign lawyers located inPrague and Bratislava bringing together international know-how and detailed knowledge of the local environment.

Weinhold Legal provides high-class legal services to international and local clients alike in the following areas: Mergers& Acquisitions, Banking and Finance, Privatisations, Company law, E-commerce, Intellectual Property and InformationTechnology, Labour law, Competition law, Real Estate, Public and Private Tenders, Representation in Court,Administrative and Arbitration Proceedings as well as EU law.

Weinhold Legal has been awarded the accolade “The Law Firm of the Year 2008” in the Competition Law category inthe first year of the competition which was organised by the publisher, epravo.cz, under the auspices of the Czech BarAssociation. Forty-five leading law firms were polled as the basis for the awards. Furthermore, Weinhold Legal wasshort-listed in the majority of categories, and also placed as a runner-up in Corporate Law, Real Estate/Development,Mergers & Acquisition and Labour Law.

Weinhold Legal is ranked amongst one of the largest international law firms in the market in the annual publication,Book of Lists. Since 2000, Weinhold Legal’s ranking according to size amongst international law firms has held steadybetween the 1st and 5th positions.

One of Weinhold Legal’s outstanding qualities is its regular cooperation with leading tax, accounting and corporatefinance specialists; the firm is able to provide comprehensive solutions to business questions and to manage, implementand close complex transactions. Weinhold Legal is the only law firm active in the Czech market which holds a securityclearance from the National Security Authority, enabling access to classified information. Such is clear evidence ofWeinhold Legal’s exceptionally careful approach towards confidentiality issues and the capacity to realise large projectswithin the public sector.

Weinhold Legal is able to provide services to its clients in Czech, Slovak, English and German and also offers lawyersspeaking French, Hebrew, and Polish.

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Chapter 8



The companies discussed in the below answers are public limitedliability companies whose shares may or may not be listed onNASDAQ OMX Copenhagen (hereinafter referred to as“NASDAQ”).


The law is as stated as of 1 May 2009.New legislation covering all public limited liability companies waspassed on 29 May 2009. The Minister of Finance and Economicswill determine when the new legislation shall enter into force. The new legislation contains significant overall changes to the Act.The following main areas contain substantial changes in the newlegislation:

establishment of public limited liability companies;the rights attached to the shares;rules regarding the general meetings;the set up of the management of the company;employee representation;shareholder loans;self-financing;capital outflow; andcross-border move.

The new legislation has been passed with the purpose of creating amore flexible set of rules which will bring Denmark in front when itcomes to the usage of technological options and which will make iteasier to start and run a business in corporate form. The focus hasbeen to make Danish companies competitive by bringing theadministrative burdens to a minimum, as well as to make Denmark anattractive country for foreign companies to establish themselves in.The primary legislation in force which covers all public limitedliability companies is the Danish Companies Act of 2006(Consolidated Act no. 649 of 15 June 2006 as amended)(hereinafter referred to as the “Act”). All public limited liability companies have articles of association,which are publicly available. The articles of association contains,amongst other things, provisions on the purpose of the company,matters relating to the company's share capital, general meetings,board of directors (in Danish: bestyrelse), management (in Danish:direktion) and signatory powers.

Listed companies are also required to adhere to the provisions of theDanish Securities Trading Act (Consolidated Act no. 360 of 6 May2009 as amended) and the rules and regulations adopted by theDanish Financial Supervisory Authority (hereinafter referred to asthe “DFSA”) pursuant thereto (collectively referred to as the“Securities Regulations”).The Securities Regulations are to a wide extent based on EP/Rdir2003/71of 4 November 2003 regarding prospectuses, EP/Rdir2004/109 regarding transparency, EP/Rdir 2003/6 regarding insidertrading and EP/Rdir 2004/25 regarding take-over offers.The Securities Regulations include the following:

provisions designed to discourage market abuse, includingrules on insider trading, dealing with inside information andprice manipulation;provisions on disclosure requirements and periodicreporting;provisions on public take-overs; andprovisions on prospectus requirements in connection with apublic offer or application for admittance for listing onNASDAQ of shares or other securities.

Companies whose shares are listed on NASDAQ must in additionabide by the rules and regulations issued by NASDAQ. These rulesinclude, among other things, listing requirements, disclosurerequirements and a “comply or explain” principle.The “comply or explain” principle states that listed companies musteither comply with the recommendations in the Nørby committee's(now: Committee on Corporate Governance) report on corporategovernance in Denmark - recommendations for good corporatemanagement in Denmark, or explain in its annual report why itchooses not to comply. The Nørby committee rendered its first setof recommendations in 2001 at the request of the Danish Commerceand Companies Agency (the “DCCA”). The latest revised versionof the recommendations is dated 10 December 2008. Therecommendations do not have the force of law.


The topical issue in corporate governance in Denmark today, andwhich has been from the beginning, is the issue of with who’sinterest in mind shall the company be operated. Should it bemanaged with the interest of the shareholders, the generalstakeholders and/or the management in mind? This overall question leads to the issue of independence of theboard of directors, remuneration of the management (and the boardmembers), the role of corporate social responsibility as well as the


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board’s and the management’s role and behaviour in take-oversituations. During the last years, particular attention has been drawn tocorporate social responsibility.

2 Shareholders


Shareholders have the right to attend, speak and vote at the generalmeetings of the company.It is not required by the owners (shareholders) of a public limitedliability company that they take part in the daily running of thecompany. However, there are issues which cannot be decided uponwithout a general meeting and thereby the participation of theshareholders. These issues include amongst others:

Changes to the company’s articles of association.Decisions regarding increases or reductions of the sharecapital, the liquidation of the company, mergers ordemergers.Election of the majority of the members of the board.Election of the company's accountant.Approval of the annual report and distribution of profit andcoverage of loss.Decision to authorise the purchase of own shares.


A public limited liability company is characterised by the basicpremise that the shareholders are not personally liable for the actsand/or omissions of the company, and the liability of theshareholder is therefore limited to the amount of their capitalinvestment in the company, i.e. the amount the shareholders havepaid for their shares. There are, however, exceptions to this overall rule. According tothe Act, shareholders are liable for damages suffered by thecompany, other shareholders or third parties if the shareholder hasacted out of wilful misconduct or gross negligence.


According to the Act, where a shareholder holds more than nine-tenths of the shares in a company as well as nine-tenths of thevoting rights, such shareholder and the company’s board ofdirectors may in a joint decision require the company’s remainingshareholders to allow their shares to be acquired by thatshareholder. Subject to such decision being made, the minorityshareholders shall be invited to transfer their shares to theshareholder within a period of four weeks in accordance with therules applicable to convening a general meeting.In addition, the articles of association can contain provisionsaccording to which a shareholder can be required to allow its sharesto be redeemed.


Founders, members of the board or members of management areliable for damages suffered by the company when such damages are

caused in the performance of their duties due to wilful misconductor gross negligence. This also applies where damage has been inflicted uponshareholders, creditors of the company or any third party by aviolation of the provisions of the Act or the articles of associationof the company.


No limitations on an investor’s ability to invest in shares exist underDanish law, nor do any rules exist which regulate the speed withwhich a shareholder may build up his shareholdings. A company may have a provision in its articles of association whichonly allows a shareholder to hold up to a certain specifiedpercentage of the shares in the company. Danish take-overregulations do, however, require a shareholder to launch amandatory public tender offer, if and when a transfer of sharesresults in the transferee being e.g. able to exercise decisiveinfluence over the company and possess more than one-third of thevoting rights.A company may also have provisions in its articles of associationwhich sets out overall ownership or voting limits. An ownershiplimit provision states that no shareholder is permitted to own morethan a specific pre-decided percentage of the shares in the company.A voting limit provision states that no matter how large apercentage of shares any one shareholder possesses, his votes onlycount for a certain pre-decided percentage.A listed company and its shareholders do have certain disclosureobligations. These obligations include disclosing large sharepossessions to the DFSA. Large share possessions are defined asshareholders who possess or control (directly or indirectly) at least5 percent of the voting rights or whose shares represent at least 5percent of the share capital in the company. The company is alsoobligated to disclose changes in the share possession to the DFSAin cases where a share possession exceeds or is reduced below thelimits of 5, 10, 15, 20, 25, 50, 90 or 100 percent. The same is thecase if thresholds of either one-third or two-thirds of the votingrights or the share capital are crossed. Executive employees in listed companies are required to disclose tothe company their personal transactions/trades which relates to theshares of the company or other securities which are tied to theshares of the company. Executive employees are defined in theSecurities Regulations as members of the company's board ormanagement, or a supervisory organ related to the company, as wellas other executive employees who have access to inside orprivileged information which directly or indirectly relates to thecompany if this executive employee has the authority to makeexecutive decisions of a superior nature regarding the company’sfuture business development.


An annual general meeting must be held at a time which allows forthe approved annual report to be timely filed with the DCCA. Theannual report must be received by the DCCA no later than fivemonths after the end of the company's financial year. In the case oflisted companies the annual report must be received by the DCCAno later than four months after the end of the company's financialyear.The board of directors is responsible for convening generalmeetings. A notice must be given to the shareholders. Meetings

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shall be convened at the earliest four weeks prior to the meetingdate (unless the articles of association states a longer notice) and atthe latest eight days prior to the meeting date. The notice must beaccompanied by the agenda for the meeting and if changes to thearticles of association are on the agenda, the notice must alsoinclude the essence of the proposed changes.At the annual general meeting the agenda normally includes:

approval of the annual report;utilisation of profits or coverage of loss in accordance withthe approved annual report;election of members of the board; andelection of the auditor.

The agenda of the annual general meeting of some listed companiesalso include a resolution of the shareholders to authorise the boardto purchase own shares in accordance with limitations set out in theAct.In addition to the annual general meetings, extraordinary generalmeetings may be held when the board, the auditor or shareholdersrepresenting no less than 10 percent (or such lower percentage asshall be stated in the articles of association) of the company's sharecapital find it appropriate. Unless otherwise stated in the Act or in the articles of association,voting at general meetings require a simple majority of those votingeither in person or by proxy. According to the Act changes in thecompany's articles of association require either two-thirds majority(of both the votes cast, as well as of the voting share capitalrepresented at the general meeting) or nine-tenths majority (also ofboth the votes cast, as well as of the voting share capital representedat the general meeting). Changes in the company's articles ofassociation which cause an increase in the obligations of theshareholders towards the company require the acceptance of allshareholders. The board calls for the holding of a general meeting, whetherannual or extraordinary. Shareholders representing no less than 10 percent (or such lowerpercentage as shall be stated in the articles of association) of thecompany’s share capital may request the board to hold anextraordinary general meeting. All shareholders have the right to have a specific topic or issueadded to the agenda for a general meeting, if the shareholder hasmade a request thereof in writing to the board at a point in timewhere it is still possible to have the new topic or issue added to theagenda.The general meeting may decide to utilise electronic exchange ofdocuments as well as electronic mail as the means ofcommunication between the company and its shareholders in lieu ofhard copies of communication and the presentation of documentsotherwise required by law.The economic and administrative rights are attached to the shares.These rights may only be transferred by proxy, pledge or executionagainst the share. The Act does not contain provisions givingindirect shareholders direct rights in public limited liabilitycompanies.A shareholder may give proxy for an agent to represent theregistered shareholder and vote at general meetings on his behalf.The agent is required to present a written, dated proxy at the generalmeeting. Such proxy may not be given for a period exceeding 12months. However, proxy may be given to the board for a specificgeneral meeting where the agenda is already known. If security in the share has been given the voting rights remain withthe shareholder unless otherwise agreed. If the parties have agreedthat the voting rights be transferred to the pledge, this person will

then become an indirect shareholder and will be able to exercise thedirect rights of the shareholder.If someone levies execution on a share the voting rights aretransferred to that person along with all other rights related to theshare.



Public limited liability companies have a two-tier managementconsisting of a board of directors (in Danish: bestyrelse) and amanagement (in Danish: direktion). The board is responsible for the hiring (and firing) of themanagement board and to instruct management and to givemanagement assignments and guidelines to follow. The board is also responsible for making decisions which are ofgreat importance to the company and they include decisionsregarding risk management, compliance programmes and control ofthe bookkeeping and accounting systems. The board is furtherresponsible for the asset and fund management of the company.The majority of the members of the board shall consist of personswho are not also managers in the company. The chairman of theboard may not carry out tasks for the company which are notnaturally a part of the duties of the chairman except for isolatedtasks which the chairman is requests to carry out for and by theboard.The board elects its own chairman unless a different procedure isset out in the articles of association. In case of a tied vote thedecision is made by lot. A manager may not be elected as chairmanof the board.The management board is responsible for the daily running of thecompany within the limits and guidelines set out by the board. Themanagement board makes all decisions which are considered to bea part of the ordinary course of business. Members of the board of directors and management board musthave full legal capacity.


The board of directors must consist of no less than three members,and such board members are elected by the shareholders at thegeneral meeting. A board member may at any time resign from theboard. Notification of resignation must be given to the board andin cases where the member has not been elected by the generalmeeting (i.e. employee elected members) notice must also be givento the person(s) who has appointed the member.Employees in companies, which have maintained an average of noless than 35 employees during a period of three consecutive years,have the right to appoint and elect employee representatives on theboard. The number of employee representatives corresponds to halfof the number of the members elected by the shareholders, howeverno less than two members.The articles of association may contain more detailed provisions onappointment and removal of board members.The management is appointed by the board of directors and shall becomprised of one to three members unless the articles of associationof the company dictate a larger number of members.

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Managers who are registered with the DCCA are not covered by theDanish Salaried Employees Act and the Holidays with Pay Act.The rights and obligations of the members of management aretherefore regulated in their service contracts. Such servicecontracts are in general subject to freedom of contract and regulatethe manager's duties, remuneration and bonus, termination,vacation rights and pension, as well as other benefits.Members of the board of directors and management may receiveremuneration both in the form of base pay and performance relatedbonus. The base pay may not exceed what is considered to beordinary given the nature of the appointment and the extent of thetasks as well as what is considered financially sound relative to thefinancial situation of the company.Managers are hired by the board of directors and the shareholderstherefore do not have any direct influence on the hiring of themanagers of the company. If a listed company has incentive pay systems for their board ofdirectors and/or for the management, such system's overallguidelines must have been subject to debate at a general meeting.Such debate must take place prior to the company entering intocontracts containing incentive pay of any kind. If the generalmeeting has approved guidelines for an incentive pay system thismust be stated in the articles of association.


When members of the board or management take up anappointment they are obligated to inform the board of their sharesin the company or in the group of companies as well as inform of alater sale of such shares. The company shall keep a record of theshares held by members of the board and management.Executive employees in public listed companies are required todisclose to the company their personal transactions/trades whichrelates to the shares of the company or other securities which aretied to the shares of the company. Executive employees are definedin the Securities Regulations as members of the company's board ormanagement, or a supervisory organ related to the company, as wellas other executive employees who have access to inside orprivileged information which directly or indirectly relates to thecompany if this executive employee has the authority to makeexecutive decisions of a superior nature regarding the company'sfuture business development.


The chairman of the board calls for board meetings to be held asoften as he finds appropriate. Any member of the board or amanager may demand that a board meeting is held. The chairmanof the board shall ensure that all members receive notice of themeeting. A manager who is not a member of the board has the rightto be present and to speak at board meetings unless the board in thespecific situations decides otherwise.Board meetings are held in person unless the board decides thatmembers may participate by electronic means (and suchparticipation is compatible with the members carrying out theirduties as board members). Certain limited duties may be dealt with

in writing if the decision to do so has been made in advance. Amember of the board or a manager may however demand that ameeting is held in lieu thereof.Votes at board meetings are decided by simple majority. It iscommonly seen that the articles of association contains a ruleaccording to which the chairman of the board shall have thedecisive vote in case of the vote otherwise being even.The board shall have a set of rules of procedure.


Members of the board and management have a general obligation toact within the limits of the law and regulations as well as within thelimits of the articles of association.Members of the board and management also have a generalobligation to operate the company in a manner which is in the bestinterest of the shareholders and in a manner which is financiallyappropriate. The members are at all times obligated to act withintheir powers.


The Committee on Corporate Governance has issued a list ofrecommendations to public limited liability companies. Companieslisted on NASDAQ must either comply with the recommendationsor explain why they choose not to comply.The main specific corporate governance areas of responsibilities ofthe members of the board and management as set out by theCommittee on Corporate Governance are as follows:

The shareholders’ role and cooperation with the board andthe management - hereunder the exercise of ownership andcommunication; restrictions on voting rights; preparation forthe annual general meeting, including notice andauthorisation; and duties of the board and rights of theshareholders in the event of take-over bids.The importance of the stakeholders to the company -hereunder the company’s policies in relation to thestakeholders; and the role of the stakeholders and theirinterests.Openness and transparency - hereunder information andpublication of information; investor relations; the companyreport; additional information; and quarterly reports.The tasks and responsibilities of the board - hereunder thechairman’s tasks; procedures; and information from themanagement to the board.The composition of the board - hereunder the recruitmentand election of board members; introduction to andeducation of new board members; the number of boardmembers; the independence of the board members; meetingfrequency; time allocated to board work and the number ofboards which each member is allowed to render boardmember services for; retirement age of the board members;their election period; the use of board committees; self-assessment of the boards work and assessment of themanagement's work; and assessment of the collaborationbetween the board and the management. Board members arenot considered to be independent if they are employees of thecompany or has been employed by the company within thepast five years, have been a member of the managementboard of the company, is a professional consultant to thecompany be employed by or have a financial interest in acompany which is a professional consultant to the company,

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or have some other essential strategic interest in the companyother than that of a shareholder. Remuneration of the board and management - hereunderprinciples of establishing incentive schemes; and opennessand transparency regarding performance related pay basedon shares.Risk management - both the identification of possible risks;as well as the development of a plan which sets outguidelines for risk management.Auditing.


The Committee on Corporate Governance’s report containsrecommendations regarding disclosure of management practices.Companies are recommended to disclose all information ofimportance to the shareholders and the financial market's evaluationof the company and its activities, business goals, strategies andresults immediately in a reliable manner unless such disclosure maybe omitted in accordance with the listing rules.


The company may maintain insurance which covers the liability ofthe board and management.Although there are no provisions specifically dealing with the issue ofindemnification of members of the board, it is possible to enter into anagreement regarding this issue. Board members will sometimesrequire for the company or its shareholder(s) to indemnify the memberof his liability related to the performance of his duties as a boardmember in order for him to accept the appointment. The shareholders can vote at the annual general meeting on theissue of discharging the board and management in relation toliability for the content of the annual report (granting the board andmanagement discharge). Such decision requires simple majority.



There are no laws which regulate corporate social responsibility(hereinafter referred to as “CSR”) in Denmark.The issue of CSR is however an important topic and manycompanies are aware of the effects of publicly announcing itsopinion and compliance in regards to CSR. There is a marketingvalue in posting CSR reports on the company’s website or topublicly disclose the company’s view on CSR. Companies mayalso elect to publish its report on CSR in its annual report.


The employees of a company (which has maintained an average ofat least 35 employees in the past three consecutive years) have theright to appoint employee representatives on the board of directors.The employee elected board members have the same voting andother rights as the board members elected by the shareholders andare able to influence the decisions which are made by the board ofdirectors in general.

5 Transparency


The board as a whole is responsible for disclosure and transparency.The Committee on Corporate Governance recommends that theboard make all information regarding the company which is ofimportance to shareholders, the financial market or stakeholders ingeneral publicly known. The shareholders especially have aninterest in being able to follow the development and business plansof the company and the company will in many cases have aninterest in making such information easily accessible to theshareholders.Listed companies are subject to the Securities Regulations and theNASDAQ rules, which contain detailed requirements for publicdisclosure.


Listed companies are required to publish financial reports in theform of annual account statements, annual reports, half year reportsand quarterly periodic reports. Further, a listed company shallexplain in its annual report if it does not comply with therecommendations set out in the report by the Committee onCorporate Governance.


The annual report is prepared by the management of the companyand audited by its auditor. The report must contain statements fromthe auditor regarding whether he finds that the annual accounts givea true and accurate view of the financial situation of the company.


Listed companies must without undue delay and for an appropriateperiod after the publishing of inside information, make all suchinformation available on the company’s website. Stock exchange announcements must be published on thecompany’s website in accordance with the Securities Regulations.Listed companies must in addition hereto publish their approvedguidelines for their incentive pay system on the company’s website. Finally, companies are required to publish the name of thecompany, the address of the corporate headquarters as well as thecorporate registration number of the company on its website if sucha website exists.

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Morten Jensen

Rønne & Lundgren Tuborg Havnevej 18 DK-2900 HellerupDenmark

Tel: +45 3525 2535Fax: +45 3525 2536Email: [email protected]: www.ronnelundgren.dk

Morten Jensen is a partner in the corporate and M&A departmentspecialising in mergers and acquisitions, capital markets law andcertain areas of banking and finance law. He acts on a regular basisfor listed and privately held companies, private equity funds andfinancial institutions. He recently acted for Saint Gobain andMeggitt in Danish acquisitions.

Dorthe Rosenkilde Saunders

Rønne & Lundgren Tuborg Havnevej 18 DK-2900 HellerupDenmark

Tel: +45 3525 2535Fax: +45 3525 2536Email: [email protected]: www.ronnelundgren.dk

Dorthe Rosenkilde Saunders is an assistant attorney in the corporateand M&A department. She advises on mergers and acquisitions aswell as on general corporate matters.

Rønne & Lundgren is one of Denmark's fastest growing law firms. We employ approximately 80 people, of which morethan half are attorneys.

We aim to meet the market's demand for accessibility, speed and business understanding that characterises a modernlaw firm.

Rønne & Lundgren assists Danish and foreign listed and privately held companies, organisations and public institutionswithin our Practice Areas.

It is important to us that our advisory is focused on solutions. The law and our understanding of the client’s situationare our tools to reach the right solution on the issues we are working with.

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48

Chapter 9


Luiga Mody Hääl Borenius

Estonia



The most commonly used legal forms for corporate entities inEstonia are private limited company (osaühing, “OÜ”) and publiclimited company (aktsiaselts, “AS”). Private limited companiesmake up the vast majority of registered companies, while publiclimited companies account for a modest proportion of companies onthe Commercial Register. A private limited company is a company characterised by smallercapital requirements (EEK 40,000, approx. EUR 2,560) and asimple, 1-tier management structure. Private limited companiestend to be closely-held businesses formed and managed by arelatively small group of shareholders.A public limited company is characterised by greater capitalrequirements (EEK 400,000, approx. EUR 25,600) and thepossibility to have different classes of shares; it is required to registerits shares with the Estonian Central Register of Securities (ECRS)and to submit to independent audits. The management structure ofa public limited company must include a supervisory council inaddition to the shareholders’ meeting and the management board.Most large companies are public limited companies. The single type of corporate entity in Estonia, the shares of whichare publicly tradable, is the public limited company.


The legal environment of the corporate governance is set by theCommercial Code, which includes most of the regulation related today-to-day management of companies.Other main sources of corporate governance regulation include theLaw of Obligations, the General Principles of the Civil Code Act, theCompetition Act and the Securities Market Act. In addition, certaincommercial entities, such as banks, investment funds, and insurancecompanies, are subject to various industry-specific regulations. In addition to the abovementioned legal acts, corporate governanceof listed companies is further regulated by the Tallinn StockExchange Rules, issued by the Tallinn Stock Exchange, and theCorporate Governance Recommendations (hereinafter the “CGR”),issued by the Financial Supervisory Authority in co-operation withthe Tallinn Stock Exchange. The former is mandatory for listedcompanies whereas the latter is mandatory on a comply-or-explainbasis. The CGR are recommended but not mandatory also for non-listed companies.


The most recent developments, introduced on 27 February 2009,include amendments to the Commercial Code which facilitateadditional issue of shares of public limited companies intending tobring their shares to be traded in a regulated market or the shares ofwhich are already traded in a regulated market. The aim of theamendments was to facilitate the transfer of newly issued shares toinvestors simultaneously with payment for the respective shares andto ensure that such shares could be traded immediately in theregulated market after their transfer to the investors.In addition to the above, another draft amendment act of theCommercial Code is currently being processed, enablingshareholders of public limited companies to cast their votes by mailor in electronic format and requiring companies to disclose moreinformation on their web-sites concerning the proposals made inconnection with the agenda of upcoming shareholders’ meetingsand earlier meeting minutes.

2 Shareholders


The shareholders of both private and public limited companies haveall basic shareholder rights, including the right to obtaininformation on the company on a timely and regular basis, the rightto participate and vote in the shareholders’ meetings, the right toelect supervisory council members (management board members incase of a private limited company without a supervisory council),and the right for a share in the profits of the company.The shareholders’ rights in a company are exercised through thegeneral meeting. A general meeting is exclusively competent toamend the articles of association, increase and reduce share capital,issue convertible bonds (in case of public limited companies), electand remove members of the supervisory council (managementboard members in case of a private limited company without asupervisory council), elect an auditor, designate a special audit,approve the annual accounts and distribute profit, decide ondissolution, merger, division or transformation of the company,decide on conclusion and terms and conditions of transactions withthe members of the supervisory council, decide on the conduct oflegal disputes with the members of the supervisory council, andappointment of the representative of the company in suchtransactions and disputes; and decide on other matters placed in thecompetence of the general meeting by law.

Karina Paatsi

Heili Haabu

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Luiga Mody Hääl Borenius Estonia

In case of private limited companies, additional issues may beplaced within the competence of the general meeting. The samedoes not apply to public limited companies, the general meeting ofwhich may adopt resolutions on matters not listed in theCommercial Code only at the demand of the management board orsupervisory council of the company. In either case, shareholdersare held jointly and severally liable in the same manner as membersof the management board or supervisory council for damage causedby resolutions adopted in issues falling into the competence of therespective managing bodies.


Shareholders are not held personally liable for the obligations of thecompany. However, if a shareholder has wrongfully caused damageto a third party, to another shareholder or to the company itself, theshareholder will be held liable for such damage. A shareholder willnot be liable for any damage caused if the shareholder did notparticipate in the adoption of the resolution which resulted indamage or if the shareholder voted against the resolution.


Provided that certain conditions are present, a shareholder can beexcluded from a private limited company upon the request of othershareholders. The same does not apply in public limitedcompanies, except in case of exercising the general takeover ofshares for monetary compensation by a shareholder holding theshares representing at least nine-tenths of the share capital providedthat at least 95% of the votes represented by the shares vote infavour of the takeover.


The shareholders and the company have the right to seekenforcement action against members of the management board andthe supervisory council in the event of a breach of respectiveindividual’s obligations. Please see also question 3.6 below.


As to the speed of acquiring securities or the maximum amount ofshares held by a shareholder, no regulatory limitations exist whichwould fit in the scope of the present questionnaire. However, theprovisions of mandatory takeover need to be taken into account incase of a listed company. One should also consider the restrictionsimposed by the insider trading related provisions. As to disclosure, together with the annual accounts the companymust present the list of shareholders who own more than 10% of thevotes represented by the shares whereas such level for listedcompanies is 5% of the votes represented by the shares.If all the shares in a company belong to one single shareholder or if,in addition to the single shareholder, the shares of the company areowned only by the company itself, the management board shallimmediately submit a corresponding written notice to theCommercial Register. Further, a person acquiring, directly or indirectly, the number ofvotes in a listed company up to or more than 5, 10, 15, 20, 25 or50% or up to or more than 1/3 or 2/3 of all the votes represented bysuch issuer’s shares shall notify the issuer of such acquisition within

4 trading days. The issuer will disclose respective informationaccording to applicable rules. The same obligation of disclosureapplies in case the number of votes of a shareholder in an issuerfalls below the said thresholds.Certain disclosure obligations are also imposed on a listed companyacquiring or transferring its own shares.


In private limited companies, the shareholders can adopt resolutionseither in general meetings or by a written procedure without callinga meeting (written resolution). In public limited companies, a general meeting must be heldannually, within 6 months of the end of the financial year. Thismeeting must approve the annual accounts and decide distributionof profit or measures to be applied for covering the loss. Passing ofother resolutions at the ordinary general meeting is also common.In case of both private and public limited companies, one or moreshareholders together representing at least 10% of the company’sshare capital can require the management board to call a specialgeneral meeting. If the management board does not call this meetingwithin 1 month after receipt of the shareholders’ request, theshareholders can call the meeting themselves and decide its agenda. Shareholders can require an issue that is not on the agenda of ageneral meeting to be included, if at least 90% of the shareholdersrepresenting at least two-thirds of the company’s share capitalconsent to this.



The management structure of private and public limited companiesis very similar. Both are governed by a meeting of shareholders(general meeting) and a management board. In addition, publiclimited companies must have a supervisory council. Private limitedcompanies must only have a supervisory council if either: (i) thereare fewer than 3 management board members and the share capitalexceeds EEK 400,000; or (ii) the company’s articles of associationrequire it. The management board is an executive body charged with day-to-day management duties, as well as representing the company in itsrelations with third persons. The management board may consist ofone or several members elected for 3 years, unless the articles ofassociation provide a different term of authorities. The CGRsuggests having more than 1 member in the management board.Every member of the management board may represent thecompany in all legal acts, unless the articles of association prescribea joint right of representation for some or all of the members of theboard. Joint representation shall apply with regard to third partiesonly if it is entered on the Commercial Register. The supervisory council engages in surveillance and longer-rangemanagement activities, such as supervising the management boardand devising business plans. There must be at least 3 members inthe supervisory council. The management board is accountable tothe supervisory council and must follow the lawful instructions thesupervisory council issues. The management board needs to obtainthe consent of the supervisory council for conclusion of transactionswhich are beyond the scope of everyday economic activities,including conclusion of transactions which bring about theacquisition or termination of holdings in other companies, the



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foundation or dissolution of subsidiaries, the transfer orencumbrance of immovables or registered movables, the making ofinvestments or the assumption of loans exceeding a prescribed sumof expenditure for the current financial year, etc. The articles ofassociation of the company may also exempt the management boardfrom applying for the consent of the supervisory council forconclusion of certain transactions or include additional transactionsfor which the consent of the supervisory council is required.The general meeting of shareholders is the supreme decision-making forum of a company. Resolutions may be adopted at eitherregular or extraordinary general meetings. Shareholders of privatelimited companies may adopt resolutions also in a writtenprocedure without convening a meeting. The same option(adopting a resolution without convening a meeting) is available forshareholders of public limited companies only if they all consent tothe resolution and sign it.


Members of the supervisory council are elected and removed by theshareholders’ general meeting. Articles of association may stipulatethat up to 50% of the members of the supervisory council may beappointed and removed in a different way (e.g. appointed by acertain shareholder, etc.). Under the CGR at least half of themembers of the supervisory council must be independent within themeaning of the CGR. The respective resolution is submitted to theCommercial Register by the management board, along with the listof supervisory council members and the written consent of the newlyelected supervisory council member. From among its members, thesupervisory council elects a chairman who takes care of theadministrative issues in the workings of the supervisory council.Supervisory council members are elected for 5 years unless thearticles of association stipulate a shorter term of office. Management board members are elected by the supervisory councilor, in a private limited company without a supervisory council, bya shareholders’ meeting. The resolution of the supervisorycouncil/shareholders’ meeting on election or removal ofmanagement board members is submitted to the CommercialRegister, along with a notarised application signed by the electedboard member and either (i) another board member already enteredto the company’s registry card (in case of private limited companieswithout a supervisory council) or (ii) the chairman of thesupervisory council. Instead of filing notarised documents,residents with Estonian identification cards can file digitally signeddocuments to the Commercial Register. The members of the management board are elected for 3 yearsunless the articles of association stipulate another term of office(which cannot, however, be longer than 5 years).


The main sources impacting contracts and remuneration of membersof the management boards and supervisory council are theCommercial Code, which provides general framework for paymentof remuneration, and the Law of Obligations, which regulatesmandate agreements (the service contracts of management board andsupervisory council members qualify as mandate agreements underEstonian law). Further detailed regulation of management board andsupervisory council members’ service agreements and payment offees (including issuing options) has been provided in the Tallinn

Stock Exchange Rules and in the CGR for listed companies.Management board and supervisory council members can receiveremuneration corresponding to their tasks and the financial situationof the company. The amount and procedure for paying theremuneration to management board members is determined by asupervisory council. The remuneration of supervisory councilmembers and management board members of private limitedcompanies without a supervisory council is decided by the generalmeeting resolution.If the economic situation of a company significantly deterioratesand further payment to a member of the management board orsupervisory council of the fees established for or agreed upon withthe member, or further allowing of other benefits to the memberwould be extremely unfair to the company, the company mayrequire a decrease of the fees or benefits. If a decrease of fees orother benefits is demanded, the member of the management boardor supervisory council may cancel the contract concluded with himor her by notifying the company 1 month in advance.


For unlisted companies, the Commercial Code does not restrict thepurchase or sale of shares by members of management bodies.Insider trading is prohibited in listed companies. Members ofmanagement board and supervisory council are insiders under theSecurities Market Act and cannot, directly or indirectly, acquire ortransfer, either for themselves or for others, securities to which theinside information relates. More detailed rules for avoiding insidertrading derive from the Tallinn Stock Exchange Rules, whichprohibit members of the management bodies and persons related tothem to trade in the issuer’s securities with the purposes of gainingprofit on short-term fluctuation of share prices and during theprohibited periods set forth by the Rules. The members of the management bodies of listed companies areobliged to disclose to the company information on their interestsand transactions in securities of the company. In addition, certainspecific disclosure requirements apply to the members of managingbodies of credit institutions and investment fund managers underfield-specific regulation.


The Commercial Code does not provide any formal requirementsfor the adoption of resolutions by the management board, and it isnot common to specify any requirements in the articles. Typically,if the management board meetings are held in the company, amanagement board meeting is quorate if more than 50% ofmanagement board members are present. A simple majority ofvotes is usually sufficient to adopt management board resolutions.The supervisory council adopts its resolutions in its meetings,which are held when necessary and at least once every 3 months, or,alternatively, in a written procedure. A meeting shall be called bythe chairman of the supervisory council or by a member of thesupervisory council substituting for the chairman. Advance noticeof at least 1 day shall be given of the holding of a meeting and ofits agenda unless the articles of association prescribe a longer term. The quorum for a supervisory council meeting is more than 50% ofthe supervisory council members and a resolution is passed if morethan 50% of the participating supervisory council members vote infavour of it. The articles may provide a larger quorum requirement

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and for a larger majority to be required to pass resolutions. A meeting of the supervisory council shall be called if this isdemanded by a member of the supervisory council, themanagement board, an auditor or shareholders whose sharesrepresent at least one-tenth of the share capital. If the meeting is notcalled within 2 weeks after the date of receipt of the relevantrequest, a member of the supervisory council, the managementboard, auditors or shareholders have the right to call the meetingthemselves. An issue which is not included in the agenda in thenotice may be added to the agenda by the supervisory council onlyif all members of the supervisory council participate in the meetingand at least three-quarters of the members of the supervisorycouncil support including the issue on the agenda.The course of supervisory council meetings is documented inmeeting minutes. The minutes are signed by all members of thesupervisory council who participate in the meeting and by thesecretary of the meeting. The dissenting opinion of a member of thesupervisory council is entered in the minutes and confirmed by hisor her signature.If the requirements of law or of the articles of association areviolated in the calling of a meeting of the supervisory council, thesupervisory council is not authorised to adopt resolutions, unless allthe members of the supervisory council participate in the meeting.Decisions made at such meeting of the supervisory council are voidunless the members of the supervisory council with respect towhom the procedure for calling the meeting was violated approveof the decisions.


Members of a company’s management board and supervisory councilmust fulfil various general duties for the company, includingupholding a fiduciary duty of loyalty, acting with due diligence,performing their duties with sufficient skill and in a mannercommensurate with their knowledge and abilities, and acting tomaximise the benefits to the company and to prevent any losses. Astrict confidentiality requirement also applies where members of themanagement board or supervisory council learn of facts that thecompany has a legitimate interest in keeping confidential. Members of the management board and supervisory council whocause damage to the company by violation of their obligations will beheld jointly and severally liable for compensation for the damagecaused. The liability of the management board and supervisorycouncil members does not depend upon their individual culpability.The limitation period for filing claims against management board andsupervisory council members is 5 years under the Commercial Code.The members of the management board and supervisory councilshall not bear liability if they act pursuant to a lawful resolution ofthe shareholders’ general meeting or any other competent body ofthe legal person. The liability of members of managing bodies of a company may belimited or restricted only in the internal relationship between thecompany and the members of the management board or supervisorycouncil. The company may waive its right to file claims against themanagement board or supervisory council member either in themandate agreement concluded with such member or by enteringinto a compromise agreement with the member when the claim hasalready risen. A third party creditor may, nevertheless, file a claimagainst the management board or supervisory council memberliable for the damage in case the assets of the company alone are notsufficient to satisfy the claims of the creditor.


The management board is responsible for everyday management ofthe company, i.e. for organising the accounting, preparing thegeneral meetings of shareholders, concluding agreements withclients, employees and other third persons, preparing annualaccounts, etc. The management board is responsible for ensuringthe company’s compliance with anti-trust, environment, health andsafety regulations as well as any other general or field-specificregulations that apply to the company. The management board also guarantees the application of necessarymeasures and above all, the performance of internal audit in orderto detect, as early as possible, any circumstances which are likely topose a danger to the operation of the company.The supervisory council supervises the activities of the managementboard, grants approvals for concluding transactions beyond everydaybusiness activities, presents to the general meeting a written opinionon the annual accounts prepared by the management board, etc.


Unlisted companies are not subject to any specific requirements todisclose information concerning management body practices. Listed companies should, according to the CGR, publish the divisionof management tasks of the company between the management boardand the supervisory council to the extent not already provided in thearticles of association. In case of changing the division of tasks thecompany must publish the content of the change, the effect to thecompany and the period of implementation of the change.The CGR set forth that the notice on calling of a general meetinghas to be published on the company’s website simultaneously withsending the notices out to the shareholders as well as relevantinformation pertaining to the agenda of the general meeting. Inaddition, the supervisory council shall disclose its opinion on theitem on the agenda of the general meeting (please see question 5.4below).


Estonian law does not prohibit members of managing bodies of acompany from obtaining civil liability insurance or the companyfrom paying such insurance payments. So far it has not, however,become a common practice in Estonian companies, except for incertain larger corporations.



There are no legal requirements or regulations with regard tocorporate social responsibility in Estonia. Nevertheless, quite a fewcompanies contribute to the social sphere via direct funding or viaparticipation in charity events and the like.



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In Estonia the employees do not have direct role in corporategovernance.However, under the employment laws the company must consultthe employees on various matters, for example prior to collectivetermination of the employment contracts, change of the employerdue to the merger or enterprise transfer.

5 Transparency


The disclosure requirements stipulated by law, the Tallinn StockExchange Rules or the CGR are usually directed at the “company”,the “issuer” or the “management board”. As the management boardis liable for the management of the company and represents thecompany, then it may be stated that the board as a whole, not anyone individual member, has the liability for disclosing theinformation requested to be published by the applicable laws andregulations. There are very few exceptions when the disclosuremust be made by any other body (e.g. under the CGR thesupervisory council of the issuer is requested before the generalmeeting of the shareholders to publish its proposed agenda items onthe issuer’s website).


Both the private limited companies and the public limitedcompanies are required to prepare the annual accounts, which mustbe approved by the shareholders. The approved accounts must besubmitted together with the profit distribution proposal and theauditor’s report (if auditing is required) to the Commercial Registeras a result of which the accounts will become publicly available.The listed companies are required under the Tallinn Stock ExchangeRules to publish through the information system of the exchangealso their interim financial reports, the same requirement arises alsofrom the CGR and certain industry-specific laws.


All public limited companies (incl. the listed companies) must havetheir annual accounts audited. Private limited companies are notrequired to audit their accounts unless they meet certain economicor corporate criteria requiring the auditing of the accounts.

The main role of auditing the accounts is the examination of theaccounts and the provision of an opinion pertaining theretoaccording to the auditing rules. The auditor’s report must bepresented together with the annual accounts to the general meetingof the shareholders for their approval. The auditor who preparedthe auditor’s report must participate in the making of the decision toapprove the annual report, and provide explanations concerning theauditor’s report if such request has been made by shareholderswhose shares represent at least one tenth of the share capital.The CGR stipulates additional tasks to the auditors. Among otherobligations the auditor is obliged to disclose to the supervisorycouncil and at the general meeting the facts, which become evidentto the auditor during the course of exercising of a regular audit,indicating non-compliance with the CGR by the management boardor the supervisory council, and to provide to the supervisory boardcertain opinions and overviews upon introducing the report.


At present it is not required under the mandatory laws of Estoniathat all the companies limited by shares must publish certaincorporate governance information on their websites (please seequestion 1.3 above). Several industry-specific laws (such as theInvestment Funds Act, the Credit Institutions Act) request thedisclosure of certain information (e.g. notices calling the generalmeeting of shareholders, annual accounts and interim reports).However, certain disclosure requirements are stipulated in theCGR. Under these rules, upon notification of shareholders andinvestors the issuer shall use proper information channels, includinghis own web site, whereas the published information must beavailable also in English. Among other information companiesapplying the CGR need to publish on their website (i) notificationcalling the general meeting of the shareholders, (ii) the names of themembers of the management board, the supervisory council and theauditor, (iii) basic wages, payable benefits and bonus schemes of amanagement board member as well as their essential features, (iv)existence, duties, membership and position of the committees (e.g.audit committees) established in the issuer, (v) agreements betweenshareholders concerning concerted exercise of shareholders rights(if those are known to the issuer) and (vi) annual accounts and theinterim accounts.

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Heili Haabu

Luiga Mody Hääl Borenius Kawe Plaza, Pärnu mnt 15 10141 Tallinn Estonia

Tel: +372 665 1888Fax: +372 665 1899Email: [email protected] URL: www.lmh.ee

Senior associate Heili Haabu is primarily responsible for advisingclients in employment law matters and representing clients indisputes thereof. She also provides legal counsel in corporategovernance issues and manages correspondence with stateauthorities. In addition, Heili has specialised in drafting varioustypes of commercial contracts and advising clients in transactionsand corporate restructuring.Heili graduated the Faculty of Law in the University of Tartu in2003. Her professional career includes advising the leadingdomestic and international corporations.

Karina Paatsi

Luiga Mody Hääl Borenius Kawe Plaza, Pärnu mnt 15 10141 Tallinn Estonia

Tel: +372 665 1888Fax: +372 665 1899Email: [email protected] URL: www.lmh.ee

Senior associate Karina Paatsi heads the office’s corporate andcommercial practice. Karina provides legal advice in daily corporate governance andcontract law matters, assisting share and shareholder transactions,mergers, divisions, and takeovers. She has also wide-rangingexpertise in matters concerning the legal regulations specifying theemployer-employee relationship. In addition, Karina has also advised the business operations ofcommercial and investment banks and other commercial enterprisesin various financing matters, bond, and securities issues. Karina graduated the Faculty of Law in the University of Tartu in1998. Before joining Luiga Mody Hääl Borenius, Karina worked asin-house counsel of PricewaterhouseCoopers.

Luiga Mody Hääl Borenius is one of the largest law firms on the Estonian legal market with nearly 40 top-tierprofessionals serving mainly corporate clients. The office provides a full range of legal assistance based on local lawas well as focusing on international transactions and contentious litigation. Founded in 1998, the firm has gained awide-ranging expertise counselling entrepreneurs operating in various activity areas including banking, financing, mediaand communications, agriculture, biotechnology, Internet, transit and industrial manufacture. The office’s membershipin the Borenius Group has benefited our clients through easy access to Finnish, Latvian, and Lithuanian know-how andintegrated high level legal services offered by the Group’s 160 professionals in the offices of Helsinki, Tallinn, Riga andVilnius.

For further information, kindly log on to www.lmh.ee.

54

Chapter 10


Roschier, Attorneys Ltd.

Finland



The main corporate entities to be discussed are the public limitedliability company (public company) and the private limited liabilitycompany (private company). The main focus will, however, bedirected at public companies.


Corporate governance is regulated by:The Companies Act (624/2006, as amended) (CompaniesAct) which is applied to both public and private limitedliability companies.The Securities Market Act (495/1989, as amended) (SMA).Public companies have a statutory obligation, based on theSMA, to issue a Corporate Governance Statement for afinancial period commencing 1 September 2008 or later inconnection with the annual report indicating, inter alia, howthey comply with the Finnish Corporate Governance Code of2008 (the Code) (see question 3.8).The Rules of NASDAQ OMX Helsinki Oy (Helsinki StockExchange) and other rules applied by the Helsinki StockExchange, which include, inter alia, insider rulescomplementing the SMA and the Code. a) The Rules of the Helsinki Stock Exchange apply to all

companies that are listed or are applying to list on theHelsinki Stock Exchange.

b) The Code applies only to listed companies but has inpractice been also followed by a number of privatecompanies. Its provisions are not mandatory.However, if public companies do not comply with theCode, they shall give reasons for not doing so(Comply or Explain principle).

In the context of takeovers of public companies, the HelsinkiTakeover Code. The Helsinki Takeover Code is a non-binding recommendation prepared by the Finnish businesscommunity.The standards of the Finnish Financial Supervision Authority(FFSA) which consist of legally binding rules andrecommended provisions, inter alia, in the areas of:a) Listing of securities.b) Disclosure requirements of the issuer and the

shareholder.c) Public takeover bid and mandatory offer.

Statements by the FFSA.A company’s constitution, namely the Articles of Association(the Articles).


Entry into force of the new Code as of 1 January 2009,introducing new recommendations concerning, inter alia,gender equality of board composition.Implementation of the Shareholders’ Rights Directive(2007/36/EC).

2 Shareholders


Shareholders exercise their power of decision at the generalmeeting. In addition, being a shareholder does not carry anyadditional rights to make decisions regarding the company or to acton behalf of the company. Shareholders are protected, inter alia, through the generalprinciples of company law such as equal treatment of shareholdersand directors’ fiduciary duties. Minority shareholders representing at least 10 percent of the totalnumber of shares have the right to demand a special audit of theadministration and accounts of the company. In addition, anindividual shareholder can bring an action for the collection ofdamages to the company under certain preconditions as well asblock certain decisions of the general meeting through which theArticles are amended to his or her detriment.


A company is a legal person distinct from its shareholders.Therefore, the general principle is that shareholders are notpersonally liable for the acts and omissions of the company. However, a shareholder may be held liable for damages for the lossthat he or she, by contributing to a violation of the Companies Actor a company’s Articles, has deliberately or negligently caused tothe company, another shareholder or a third party. Shareholderliability requires that the shareholder can be presumed to have beenadequately acquainted with the company’s activities. Therefore,shareholder liability should not materialise in practice, e.g., when a

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Manne Airaksinen

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minority shareholder takes part in the general meeting of a largelisted company.


The rights attached to the shares held by an individual shareholdercannot be reduced without the consent of the shareholder.However, in a company having several share classes the rights of awhole share class can be reduced by amending the Articles. Such aresolution of the general meeting requires two thirds (2/3) of thevotes cast and of the shares represented in the general meeting and(a) the support of two thirds (2/3) of votes cast within each of theshare classes represented at the meeting and (b) the consent from atleast one half (1/2) of all shareholders within each share classwhose rights are to be reduced. It shall be noted that the CompaniesAct presumes the principle of equal treatment of shareholders, i.e.,that all shares carry equal rights in a company unless otherwiseprovided in the Articles, which principle must be observed in alldecision-making of a company including the above decision. A shareholder with more than 90 percent of all shares and votes inthe company has the right to redeem the shares of the othershareholders at a fair price (squeeze-out). Any disputes concerningthe right to redeem, the redemption price and other potential issuesare resolved through arbitration.


An individual shareholder can on behalf of the company pursue aclaim against a director for damages caused to the company throughnegligence. In the Companies Act, however, there are certainpreconditions that have to be met in order for a shareholder to beable to pursue such claim.Shareholders that represent at least 10 percent of the total numberof shares can pursue the above claim without any preconditions.An individual shareholder can pursue a claim against a director fordirect damages caused to the shareholder through a deliberate ornegligent violation of the provisions of the Companies Act or theArticles. An individual shareholder cannot, in his/her own name,pursue a claim for damages for loss caused to the company.


Pursuant to the provisions of the SMA and the standards of theFFSA, a shareholder of a listed company is required to notify boththe FFSA and the listed company of changes in the proportion oftheir holdings when they reach, exceed or fall below 5, 10, 15, 20,25, 30, 50 or 66.7 percent (disclosure thresholds) of the votingrights or the share capital in the company (flagging obligation).Listed companies have an obligation to publicly disclose theshareholder’s flagging notification.


All companies must hold an annual general meeting (AGM) withinsix months of the end of each financial period. Extraordinarygeneral meetings (EGM) are convened when the board so decidesor the auditor of the company or a minority of 10 percent of theshareholders demand that a meeting be held.Each individual shareholder has the right to have a matter falling

within the competence of the general meeting dealt with by thegeneral meeting. This applies to both the AGM and EGM.Issues that shall be decided upon at every AGM are:

the adoption of audited financial statements which in a parentcompany include also consolidated financial statements;the measures to which the profit of the adopted financialstatements may give rise;the granting of discharge from liability to the directors, themembers of the supervisory board and the managingdirector;the appointment of directors and members of the supervisoryboard and the appointment of auditors, unless otherwiseprovided in the Companies Act or in the Articles on theirterm of appointment; andother matters that according to the Articles are to be decidedby the AGM.

Matters that fall under the competence of the general meeting aredetermined by the Companies Act. However, it may be provided inthe Articles that the general meeting decides on a matter that fallswithin the general competence of the board of directors andmanaging director. Also, the board may submit matters fallingwithin the general competence of the board to be decided by thegeneral meeting. In individual cases, unanimous shareholders mayalso otherwise make decisions on a matter falling within the generalcompetence of the board and managing director.As a rule, resolutions of the general meeting are made by a simplemajority of votes cast. However, certain resolutions must besupported by a qualified majority, i.e., two thirds (2/3) of the votescast and the shares represented at the meeting. Resolutions requiring the support of a qualified majority (2/3)include:

an amendment of the Articles;a share issue in deviation from shareholders’ pre-emptiverights;an issue of option rights and other special rights entitling toshares;an acquisition and redemption of a public company’s ownshares;a directed acquisition of a company’s own shares;a merger or a demerger; andgoing into liquidation and the termination of liquidation.

In companies with several share classes, certain resolutions such asresolutions on mergers and demergers also require the support of aqualified majority of two thirds (2/3) of the votes cast and of thetotal number of shares within each of the share classes representedat the general meeting.In Finland a shareholder holding shares through a nominee isdeemed to be the direct shareholder. The nominee holding shareson behalf of the shareholders has no shareholder rights vis-à-vis thecompany. Shares held through nominees (typically banks) are entered intonominee accounts, where only the information regarding thenominee is recorded and the actual ownership of the shares remainsundisclosed. As such, the nominee-registered shares carry no othershareholder rights except the right to dividend, to convert or tradethe shares and to participate in a share issue. The holder of anominee-registered share may be notified for a temporary entry intothe shareholder register no later than 10 days before the generalmeeting, so that the shareholder can attend the meeting. The use ofother shareholder rights, e.g., disputing a resolution of the generalmeeting, requires that the shareholder is entered permanently intothe shareholder register under his or her own name.



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The company’s management is vested with the company’s board ofdirectors. The directors may, and usually do, appoint a managingdirector (who may also be a member of the board of directors of thecompany) to be responsible for the day-to-day management of thecompany and its business.A company may also have a supervisory board that supervises themanagement of the company. The use and significance ofsupervisory boards has always been limited and it has furtherdeclined in recent years. Therefore, issues regarding supervisoryboards will not be discussed below.


The general meeting appoints the directors by election. However, itis possible to provide in the Articles that the directors are elected bythe supervisory board, or that a minority of the directors is to beappointed according to some other procedure.According to the Code, the efficient preparation of matterspertaining to the nomination and remuneration of directors mayrequire the establishment of a nomination committee, consisting ofnon-executive directors, i.e., directors with no employmentrelationship with, or position in, the company, e.g., to prepare aproposal for the nomination of the directors or matters relating to theremuneration of directors and to plan the succession of directors.A director can be dismissed before the expiry of his/her term by theparty who appointed such director, usually the general meeting. Theterm of a dismissed director shall end with the conclusion of thegeneral meeting deciding on the dismissal, unless the generalmeeting decides on some other point in time. Staggered boards maynot be appointed.

3.3 What are the main legislative, regulatory and other sourcesimpacting on contracts and remuneration of members ofthe management body?

The remuneration of each director is generally determined by thebody who has appointed the director, i.e., usually by the generalmeeting. The directors who are shareholders in the company canparticipate in the decision-making regarding remuneration, butaccording to best practice remuneration is decided upon prior to theelection of directors. The terms and conditions of the service contract of the managingdirector, including remuneration, shall be decided upon by the board.The Code provides for the possibility of establishing a remunerationcommittee consisting of non-executive directors. The remunerationcommittee shall prepare the matters relating to the appointment andremuneration of the managing director and other executives of thecompany as well as the remuneration policy of the personnel.


It is recommended in the Code that the directors hold shares in thecompany, provided that the independence requirement for the boardas a whole is met.

In terms of the independence of the directors, the Code recommendsthat the majority of the directors of a listed company be independentof the company and that of that majority, at least two directors beindependent of the company’s significant shareholders.According to the Code, a director’s shareholdings in the company donot as such compromise his or her independence in relation to thecompany. However, a director is not considered to be independentof a significant shareholder of the company if the director exercises,directly or indirectly, control in the company or if the director is asignificant shareholder of the company (i.e., holds at least 10 percentof all shares or votes in the company).As shareholders of the company, directors are also bound by thedisclosure provisions included in the SMA and the standards of theFFSA. (See question 2.5.)In addition to the disclosure requirements regarding the largestshareholdings in the SMA, the Code recommends that the directors’,the managing director’s and other executives’ shareholdings andshare-related rights and corporations over which they exercisecontrol in the company be disclosed on the company’s website. Alsoaccording to the Code, the number of shares and share-related rightsgranted to a director as remuneration as well as the main informationon share and share-related remuneration schemes regarding themanaging director and other executives need to be disclosed on thecompany’s website.In addition, according to the SMA, listed companies shall maintaina public register of insider holdings. Such register shall includepersonal information of insiders, i.e., persons subject to thedisclosure requirement, and their related persons, as well asinformation on their holdings and trading in securities issued by thecompany. A listed company shall also make the information in thepublic register available on its website.


The chairman of the board shall see to it that the board conveneswhen necessary. A meeting shall be convened if a board member orthe managing director so requests, and if the chairman does not callthe meeting it can be called by a member, if at least one half (1/2) ofthe directors approve of the call, or by the managing director. Thereare no specific rules on the length or manner of notice. No decisionshall be made, unless all directors have been reserved the possibility,as far as possible, to participate in the consideration of the matter. Ifa director is unavailable, this possibility shall be reserved for thedeputy member, if any. If a decision is made without a meetingbeing held, the decision shall be recorded in writing, duly signed,numbered and archived.The directors shall have a quorum when more than one half (1/2) ofthe directors are present, unless a larger portion is required in theArticles. The opinion of the majority shall normally constitute thedecision of the board. In the event of a tie, the chairperson of theboard shall have the casting vote.According to the Code, the board shall adopt a written charterindicating the main duties and working principles of the board.Further, the number of board meetings held during a financial periodas well as the attendance of directors at the meetings shall bereported on the company’s website.

3.6 What are the principal general legal duties and liabilities ofmembers of the management body?

One of the general principles of the Companies Act is that the

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management of the company must at all times act with due careand promote the interests of the company. Since the purpose of acompany is presumed to be to generate profits for its shareholders,the members of the management body must take the benefit of thecompany into account in all decision-making. The members of themanagement must also observe the principle of equal treatment ofshareholders in all their actions.Under the Companies Act the liability of a director is two-fold: adirector can firstly be personally liable to the company (but not toits shareholders or third parties) where he or she has caused loss ordamage through a deliberate or negligent breach of his or her dutyof care; and secondly he or she can be personally liable to thecompany, a shareholder or a third party where he or she has causeddamage through a deliberate or negligent violation of theprovisions of the Companies Act or the Articles. For the saidprovisions of the Companies Act to apply, it is also a requirementthat the director has caused the damage while in office.A director can also be criminally liable under the Penal Code orother laws for breaching a provision that has been denoted aspunishable.


According to the Companies Act the directors are responsible forseeing to the administration of the company and the appropriateorganisation of its operations (general competence). The directorsare also responsible for the appropriate arrangement of the controlof the company accounts and finances. The managing director (usually not a board member) is responsiblefor the day-to-day management of the company and its business.The managing director is also primarily responsible for ensuringthat the accounts of the company are in compliance with the law,whereas the directors are responsible for overseeing the managingdirector’s actions.


According to the Code, companies should disclose in theCorporate Governance Statement a description of:

the main features of the internal control and riskmanagement systems pertaining to the financial reportingprocess;the composition and operations of the board and boardcommittees including, e.g., biographical details of the boardmembers, number of board and committee meetings and themembers’ attendance thereto, board members who areindependent of the company, the company’s significantshareholders as well as a special order of appointment ofdirectors, if applicable; andthe body that is responsible for the duties of the auditcommittee.

Also, information on the managing director and his/her duties shallbe included in the Corporate Governance Statement.In addition, according to the Code, companies should disclose ontheir website, inter alia, the following information regarding theoperation of the management body:

biographical details of director candidates and otherexecutives of the company;shares and share-related rights of the director, the managingdirector and other executives and corporations over which

they exercise control in the company and in companiesbelonging to the same group as the company;essential contents of the board and committee charters; andremuneration and other financial benefits of directors,managing director and other executives.


Directors and the managing director can (and directors of publiccompanies commonly do) obtain insurance against civil liabilities.Companies can purchase this insurance on behalf of their directorsand officers.Each AGM resolves on the discharge from liability to the companyof the directors and of the managing director. It is unusual for anAGM to vote against discharge from liability. A decision by theAGM to grant discharge only concerns liability to the companyand is effective only if all necessary information has beenprovided. Liability towards the shareholders and third parties isnot affected.A director’s, or the managing director’s, liability to the companycan be limited by including in the company’s Articles a provisionthereof that has been approved by all shareholders. However, theliability cannot be limited with regard to a situation where the losshas been caused by a violation of provisions of the Companies Actthat cannot be derogated from in the Articles or where the loss hasbeen caused deliberately or through gross negligence.



According to the Finnish Accounting Standards and to theguidelines of the Accounting Board of the Ministry of Trade andIndustry, companies should in their annual reports addressenvironmental responsibility issues, but there is no statutoryrequirement to report on other areas of corporate socialresponsibility (CSR).Comprehensive CSR in Finland thus usually involves voluntarycommitment to certain operating principles or codes of conduct.For example, the OECD Guidelines for Multinational Enterprises,Global Compact Initiative of the United Nations and GlobalReporting Initiative (GRI) are in use.


A company can agree with its employees on their representation inthe company’s governance, but the employees do not have astatutory right to board representation. If there is no agreement onthe employees’ representation, the employees are entitled to havefrom one to four representatives appointed in the company’smanagement groups or similar bodies that together cover the profitunits of the company.The company shall consult the employees on various matters,especially in relation to major changes in the company. Tighterconsultation requirements relate to termination, lay-off orreduction of employment contracts into part-time contracts onfinancial or productive grounds.



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5 Transparency


The disclosure requirements set by law or the Code are generallydirected at the “company”, which means that ultimately the boardof directors and the managing director bear the responsibility forcompliance with such requirements, as for any operations of thecompany.There are no direct specific disclosure requirements for thedirectors of a company (except for providing the board sufficientinformation to evaluate their qualifications as a director andindependence).


The Companies Act and the SMA set out the main statutorydisclosure requirements relating to the publication of financialreports and continuous disclosure of information relating to thecompany.The financial statements and annual report of all limited liabilitycompanies shall be registered with the Finnish Trade Register.The Corporate Governance Statement to be issued pursuant to theSMA may be presented as a separate statement or as part of theannual report. The statement should, according to the Code, bereviewed by the audit committee or some other competentcommittee of the company. In the absence of such committee theboard shall review the statement.The Corporate Governance Statement and certain other informationshould be disclosed on the company’s website (see question 5.4).A publicly listed company shall prepare interim reports that providea true and fair view of the company’s financial position and result,for the first three, six and nine months of the financial period andshall publish its financial statements and annual report within threemonths from the end of the financial period. The reports shall besubmitted to the FFSA, the stock exchange and central media andmade available on the company’s website for at least five years.Price-sensitive information shall be disclosed to the stock exchangewithout undue delay and made available to the public, unless thereis an acceptable reason to defer the disclosure, in which case theFFSA and the stock exchange shall be informed of the reasons forthe deferral.


The financial statements shall be audited, and an auditor’s reportissued. If necessary, the auditor shall in the report supplement theinformation in the accounts. Liability may arise in case of failure

to comply with statutory duties set by the auditors. Interim reportsare not audited in advance of their issuance. In addition, the company’s auditor shall check that the CorporateGovernance Statement has been issued and that the description ofinternal control and risk management is consistent with thefinancial statements.


According to the Companies Act, at least one week before thegeneral meeting the proposals of the board, the financialstatements, the annual or interim report and the auditor’s report tobe dealt with at the general meeting and documents of similarnature, shall be made available at the head office or on the websiteof the company. The minutes of the general meeting shall be madeavailable not later than two weeks after the meeting. According tothe Code, the above documents as well as the notice to the generalmeeting should be presented on the website. For the investors’convenience, as of 3 August 2009, the total number of shares andvoting rights according to classes as at the date of the notice anditems on the agenda with no proposal for resolution should also bepresented.According to the SMA, a company shall keep its interim reports,interim board report, financial statements and annual report as wellas account statement available on its website for at least five years. According to the Code, a company should disclose on its website:

all information that has been published pursuant to thestatutory disclosure obligation of listed companies;Corporate Governance Statement and the matters concerningmanagement body practices set out under question 3.8;main features of the internal control and risk managementsystems including principles of the company’s riskmanagement, major risks and uncertainties known to theboard, organisation of the internal audit function andessential insider administration procedures;the company’s auditor, his/her fees and fees paid to him/herfor non-audit services;the Articles;shares, share capital, major shareholders and the flaggingannouncements for the past 12 months;shareholder agreements known to the company;financial statements and the report by the board of directorsas well as the auditors’ report and annual report for theprevious financial period, if any; anda calendar of events.

More detailed guidance is set out in the Code. According to theCode, it is of central importance that the entities are clearly definedand can be easily found on the company’s website in an investorfriendly manner.

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Manne Airaksinen

Roschier, Attorneys Ltd.Keskuskatu 7 A FIN-00100 HelsinkiFinland

Tel: +358 20 506 6000Fax: +358 20 506 6100Email: [email protected]: www.roschier.com

Manne Airaksinen is a Partner at Roschier, Attorneys Ltd. inHelsinki. Before joining Roschier he worked as Chief Policy Advisorto the Confederation of Finnish Industries and as a Counsellor ofLegislation at the Finnish Ministry of Justice and was, inter alia, thechairman of the Finnish Company Law Working Group responsiblefor drafting the new Companies Act. In addition to the leadingcommentary on the Companies Act in Finland, he has publishedseveral books and articles on company law, securities markets lawand competition law in both Finnish and English. He is a memberof the Nordic Network for Company Law and the EuropeanCorporate Governance Institute.

Mia Hukkinen

Roschier, Attorneys Ltd.Keskuskatu 7 AFIN-00100 HelsinkiFinland

Tel: +358 20 506 6000Fax: +358 20 506 6100Email: [email protected]: www.roschier.com

Mia Hukkinen is an Associate Lawyer at Roschier, Attorneys Ltd. inHelsinki focusing on corporate law and M&A.

Roschier, as a leading law firm in Northern Europe, operates in the international marketplace. The firm’s clients includeleading domestic and international corporations, financial service and insurance institutions, investors, growth and otherprivate companies with international operations, as well as governmental authorities.

The firm’s Corporate Advisory practice renders high-end advice in all corporate functions including transactionstructuring and corporate restructurings. The advice provided by the practice focuses on corporate governance, riskmanagement and board liability for public companies as well as advice in relation to public takeovers and other publiccompany transactions. The lawyers of the practice also address other matters that are inherent in governance advice,forming part of the integrated services of the Corporate Advisory practice area, such as contractual and preventive riskcounselling.

Please visit www.roschier.com or www.roschierraidla.com for more information.


60

Chapter 11


Gleiss Lutz

Germany



Only stock corporations (Aktiengesellschaft, AG), partnershipslimited by shares (Kommanditgesellschaft auf Aktien, KGaA) orEuropean Companies (Societas Europea, SE) incorporated underGerman law are German entities which can be listed on a stockexchange. The vast majority of listed German corporations arestock corporations. These entities will be discussed below. The largest German stock exchange is the Frankfurt StockExchange (Frankfurter Wertpapierbörse, FWB).


The law is as stated at 1 May 2009. The stock corporation isprimarily governed by the German Stock Corporation Act(Aktiengesetz, AktG). All stock corporations have articles of association (Satzung) which,within the mandatory framework of the Stock Corporation Act,setting the basis for the company’s corporate governance, includingrules on the shareholder meeting, the composition as well as thepower and the duties of the management board (Vorstand) and thesupervisory board (Aufsichtsrat).Listed companies must adhere to a number of additional stockexchange rules (e.g., Rules and Regulations for the Frankfurt StockExchange) and securities laws. These include:

Exchange Act of 2002 (Börsengesetz) governing, inter alia,the regulatory requirements for the admission to a stockexchange and for a delisting of shares.Securities Trading Act of 1994 (Wertpapierhandelsgesetz),governing amongst others disclosure and control of insideinformation by issuers and investors and the prohibition ofinsider trading.Takeover Act of 2001 (Wertpapiererwerbs- und -übernahmegesetz), governing amongst others mandatory andvoluntary tender offers.Securities Prospectus Act of 2005 (Wertpapier-prospektgesetz), governing amongst others the requirementsfor the prospectus to be issued in connection with a publicoffering of shares.

Other corporate governance sources are in particular:Transformation Act of 1994 (Umwandlungsgesetz),governing the requirements and procedures on mergers, de-mergers and other transformations of a company.

Commercial Code of 1897 (Handelsgesetzbuch), governing,inter alia, the duties of a prudent businessman.Co-determination Act of 1976 (Gesetz über dieMitbestimmung der Arbeitnehmer), One-third ParticipationAct of 2004 (Drittelbeteiligungsgesetz) and the WorksCouncil Act of 1972 (Betriebsverfassungsgesetz), all of themgoverning the terms and conditions of employee co-determination and representation in the corporate bodies ofthe company.German Corporate Governance Code of 2002, amended in2008 (CGC). It sets out the code of best practice bysummarising binding provisions of the Stock CorporationAct and otherwise providing recommendations andsuggestions which are not mandatory. The corporate bodiesare obliged to issue annual declarations on confirming thatthey have complied with the CGC or disclosing all deviationsfrom any such provisions. In practice, the DAX-30companies follow 95% of the recommendations and 86% ofthe suggestions under the CGC.

The main regulatory body for listed stock corporations is theFederal Financial Supervisory Authority (Bundesanstalt fürFinanzdienstleistungsaufsicht, BaFin) which is supervising,amongst other things, securities trading and compliance withtransparency and insider trading rules.


Currently, the draft Act on the Implementation of the ShareholderRights Directive (Gesetz zur Umsetzung derAktionärsrechterichtlinie, ARUG) is under consideration of theparliament. The ARUG will implement the EU Shareholder RightsDirective 2007/36/EC and make the cross-border exercise ofshareholder rights easier. Listed companies will be obliged topublish certain information on the internet. Inter alia, therequirements to attend a general meeting will be published andcertain shareholder rights will be explained on the company’swebsite. Further, listed companies may introduce the postal votingfor shareholder resolutions and may admit its shareholders to attenda general meeting online via the internet.Against the background of the global economic downturn, thecurrent discussions on corporate governance focus on the adequacyof the remuneration paid to the management. The recently passedAct on the Stabilisation of the Financial Market (Finanz-marktstabilisierungsgesetz, FMStG) together with the respectiveexecutive order of the government stipulate certain requirements forthe remuneration of the board members of companies in thefinancial sector which apply for state aids. In particular, the annualmonetary remuneration of board members is capped at EUR

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Dr. Ralf Thaeter

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500,000 and discretionary bonuses shall be generally retained.Likely in May 2009, the Act on the Modernisation of AccountingLaw (Bilanzrechtsmodernisierungsgesetz, BilMoG) will beannounced. In particular, the BilMoG requires an “independentfinancial expert” to be represented at the audit committee of thesupervisory board. The BaFin recently decided on the Schaeffler/Continental takeoverthat cash settled options do not trigger disclosure obligations if nofurther agreement has been made regarding (i) the holding of sharesat the account of the option holder, (ii) the later acquisition of sharesor (iii) the joint exercise of voting rights.

2 Shareholders


German stock corporations always have two boards: themanagement board; and the supervisory board (please cf. section 3below).The shareholders directly control the composition of thesupervisory board. If a stock corporation is not subject to employeeco-determination, all supervisory board members are elected by theshareholders. Otherwise, one third or, as the case may be, half ofthe board members are employee representatives. The supervisoryboard appoints and removes the management board members. Viathe supervisory board, the shareholders indirectly control thecomposition of the management board. Beyond that, themanagement board, subject to certain supervision and veto rights ofthe supervisory board, is solely responsible for the day-to-daybusiness and neither the shareholders nor the supervisory board areentitled to give any instructions to the management board. Certainsubstantial transactions require the passing of a shareholders’resolution, e.g., an amendment of the company’s articles ofassociation, an increase of the company’s share capital, a merger orde-merger of the company as well as the disposal of the company’sentire assets. Beyond the explicitly stipulated cases, leading rulingsof the German Federal Supreme Court (Bundesgerichtshof)prescribe that certain other measures substantially impacting thecompany’s structure do also require the approval of the shareholdermeeting. The delisting of the company’s shares from a stockexchange would require such approval.


In general, the shareholders are not liable for acts or omissions ofthe company. Shareholders can be held liable in extremeexceptional cases, e.g. when abusing the company’s legal form toharm creditors.


If the number of shares held by a shareholder reaches certainthresholds, this may trigger a duty of notification or the duty tomake a mandatory public offer. As long as the shareholder does notdischarge this duty, the rights attached to the shares aredisenfranchised (dividends, voting rights).A compulsory purchase of all shares (squeeze-out) is possible if amajority shareholder holds at least 95% of the shares. As a result ofa tender offer, a squeeze-out could also be possible with respect tothe voting shares only. Shares can be redeemed without

shareholder’s approval if the compulsory redemption of shares isprovided in the articles of association (which is very rare).


Generally, only the company can bring an action against membersof the management bodies if they breach their duties towards thecompany. The general meeting can request the company to bring an actionagainst members of the management body and nominate a specialrepresentative to represent the company in this legal action.Minority shareholders, who hold at least 1% of the shares or EUR100,000 of the registered share capital can enforce the company’srights against members of the management bodies in their ownname, if a court has permitted such action.


There are no statutory limitations on the number of shares ashareholder can hold. However, reaching the threshold of 30% ofthe voting rights triggers the obligation to launch a mandatorypublic offer to acquire all shares and a corresponding disclosureobligation. According to the Securities Trading Act, a shareholder(or any third party to which such shareholder’s shares are attributedto) must notify the company and the BaFin if and as soon it reaches,exceeds or falls below 3, 5, 10, 15, 20, 25, 30, 50 or 75% of the(direct or indirect) voting rights in the company. Such disclosure isto be made immediately, at the latest within four trading days.Certain financial instruments are also subject to disclosureobligations (except for the 3% threshold) and count against thepreviously mentioned thresholds. Investors who reach or exceed athreshold of 10% or higher in a listed company have to disclosetheir future intentions with the company and their sources of fundsfor the acquisition of the shares.According to the recently amended Act on the Foreign Trade andPayment Act (Außenwirtschaftsgesetz, AWG) and the Foreign Tradeand Payments Regulation (Außenwirtschaftsverordnung, AWV), theFederal Ministry of Economics and Technology may review, limitor even prohibit the acquisition of at least 25% of the voting rightsin a domestic enterprise by an investor from outside the EU/EFTAif the acquisition jeopardises the public security.


Shareholder meetings are held as general meetings. The invitationtogether with the agenda must be published in the ElectronicFederal Gazette (Bundesanzeiger). Reports and documents,including the annual report, shall be published on the company’swebsite together with the agenda. Each company must hold anannual general meeting within eight months of the end of thecompany’s financial year. Extraordinary general meetings may beheld at any time if needed. AGMs commonly include the followingmatters to be voted on by shareholders: (i) allocating the balancesheet profit; (ii) ratifying acts of the management board and thesupervisory board in the preceding period; (iii) appointing/reappointing the company’s auditors; and (iv) electing theshareholders’ representatives of the supervisory board, as the casemay be, and often provide for authorising the management board tobuy back shares and/or to increase the company’s share capital(authorised capital, genehmigtes Kapital).



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Shareholder resolutions generally require a simple majority of votescast unless otherwise provided for by mandatory law or in thecompany’s articles of association. As a rule, material matters suchas increasing the registered share capital with excluding theshareholders’ subscription rights, require a mandatory 75%majority of the votes cast. Usually, only 40% to 60% of the totalvotes are actually present at an AGM of a listed German stockcorporation.In general, shareholder meetings are called by the managementboard. One or several shareholders acting jointly with at least 5%of the registered share capital are entitled to request themanagement board to convene a general meeting. The articles ofassociation may provide for a lower minimum threshold.Shareholders holding shares in the minimum amount of 5% of theregistered share capital or shares corresponding to EUR 500,000 ofthe registered share capital are entitled to request items to be put onthe agenda. Any shareholder may raise counter motions in advancewith respect to agenda items which must be published by thecompany if submitted to the company not later than two weeks priorto the date of the general meeting.According to the Securities Trading Act, a listed company may useelectronic communication if:

the general meeting has approved this;the means of communication do not differentiate between thedomiciles of the shareholders;provisions have been taken to ensure the safe identificationand addressing of the shareholders; andthe individual shareholder has approved electroniccommunication or such approval is deemed to be given.

The CGC recommends the use of electronic communication.Accordingly, it is already practice in many listed companies.



All German stock corporations have a two-tier board system,consisting of a management board and a supervisory board. Themanagement board is responsible for the day-to-day running of thecorporation, while the supervisory board is supervising thecorporation and the management board. The supervisory board hasno executive powers in the management of the company. A memberof the management board cannot be at the supervisory board at thesame time and vice versa.The management board has to consist of at least one member. In astock corporation having a registered share capital exceeding EUR3,000,000, the management board must comprise at least twomembers, unless the articles of association provide otherwise.According to the CGC, the management board in a publicly listedcompany should consist of at least two members. If themanagement board consists of more than one member, a chairmanof the management board (Vorstandsvorsitzender) can beappointed.The members of the management board manage the corporationcollectively and they are jointly responsible. Internally, theindividual management board members are entrusted with specialresponsibilities such as finance, marketing etc. The managementboard may establish committees that are internally responsible forcertain topics.The supervisory board has to consist of at least three members. Themaximum amount varies between nine and twenty-one, dependingon the registered share capital of the corporation and on the number

of employees. If a stock corporation has more than 500 employees,one third of its supervisory board must be employeerepresentatives. If a stock corporation has more than 2,000employees half of its supervisory board must be employeerepresentatives. The supervisory board may establish committees. Supervisoryboards of large stock corporations usually have an executivecommittee, a nomination committee, a finance committee and aninvestment committee. The CGC recommends establishing anaudit committee.


The members of the management board are appointed by thesupervisory board. The term of office can be up to five years. Members of the management board can be removed by thesupervisory board for cause. Cause could be a gross breach ofduties, inability to adequately and orderly manage the company ora vote of no-confidence by the general meeting. The members of the supervisory board are appointed by the generalmeeting. The employee representatives in co-determinedcompanies are elected by the employees (see question 3.1). Themembers of the supervisory board may be elected as a group oreach member may be elected separately. The CGC recommendsthat every member should be elected separately. The members ofthe supervisory board that were elected by the general meeting canbe removed before maturity by a decision of the general meetingwith 75% of votes cast unless the articles of association provideotherwise. Upon request by the supervisory board, individualmembers can be removed for cause by a court order.


The remuneration of the members of the management board mustbe proportionate to their duties and the situation of the company.The compensation for the supervisory board members must be setup in the articles of association or approved by the shareholdermeeting. The total remuneration of the management board and supervisoryboard members must be disclosed in the annual report. Further, theindividual remuneration of the management board members mustbe disclosed, unless the shareholder meeting has decided with 75%of the votes cast to opt out of such individual disclosure. The CGC recommends that the remuneration for members of themanagement board shall comprise fixed and variable elements toincentivise a sustainable entrepreneurial management. Inemployment agreements with members of the management boardseverance payments in the case of premature termination should notexceed the value of two years’ compensation (severance paymentcap).


There is no limitation of shares that may be owned by members ofthe management bodies.Members of the management bodies are like any shareholdersubject to the disclosure duties, as mentioned in question 2.5, and ofinsider rules. In addition, members of the management board (and

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their family members) have to disclose dealings in stock or relatedfinancial instruments (such as derivatives) to the company and tothe BaFin within five days.


The number of management board meetings is not determined bylaw. Generally, there are internal rules of procedure that regulatethe meetings of the management board.The supervisory board of a listed stock corporation has to conveneat least twice every six calendar months. The meetings of thesupervisory board are convened by the chairman of the supervisoryboard. Upon reasonable request of any member of the supervisoryboard, the chairman must convene a meeting.


There are overarching fiduciary and general duties that apply tomembers of the management board as well as to members of thesupervisory board. These duties include:

to apply the care of a prudent and diligent business man; to act in line with the laws and regulations and the articles ofassociation; to act in loyalty to and always in the best interest of thecompany;to refrain from using business opportunities of the companyfor themselves; andto keep business secrets strictly confidential.

In the case of a breach of these duties, members of the managementand supervisory boards are liable vis-à-vis the company. Theliability vis-à-vis the company is excluded, if the action has beenapproved by the shareholder meeting in advance.


Some specific corporate governance responsibilities are also set upin the Stock Corporation Act. This includes the duty to establishand maintain a transparent accounting system and a sound systemof internal controls.The CGC also sets up recommendations (cf. question 1.2). Underthese rules the management board shall, for example:

aim at the long-term improvement of the company’s value;maintain a dialogue with shareholders and treat allshareholders equally in respect of information; andensure that all provisions of law and the company’s internalpolicies are abided by all group companies (compliance).


An annual declaration has to be issued (cf. question 1.2) and theannex to the annual report has to include disclosure whether thecompany complies with the rules of the CGC, and if not, whichrecommendations are not applied. Upon announcement of theBilMoG (cf. question 1.3), the management report will also have toaddress what management practices have been applied, how boththe management board and the supervisory board operate and howcommittees comprise and how they work.


If members of the management board are liable to third parties, thecompany may only indemnify them, if they are not liable to thecompany for the same reason.With respect to the company’s claims against board members, thecompany can indemnify the board members no earlier than threeyears after the breach of duty has occurred. The board memberscannot be indemnified if a minority of 10% of the registered sharecapital objects to such indemnification.D&O insurances are permitted under German Law. The CGCrecommends that if the corporation takes out a D&O policy, anadequate deductible shall be agreed.



There is no mandatory regulatory law on corporate socialresponsibility (CSR). In practice, however, corporations align withcertain international and national initiatives are committed tocorporate responsibility and sustainability. Usually, reports on thecompany’s activities in the areas of sustainability and social welfareare published on the company’s website. The two main umbrella organisations of the German economy, theFederal Union of German Employer Association and the FederalAssociation of the German Industry, provide a joint internet portalto encourage the corporate social engagement of the Germancorporations (www.csrgermany.de). Further, the Germangovernment established a forum for CSR which comprises certainrepresentatives from economy, civil society, trade unions, scienceand politics and shall advise and support the German government inits plans on developing a national CSR strategy.


Employee co-determination plays a substantial role in the corporategovernance. As there may be employee representatives at thesupervisory board and, if there are more than 2,000 employees, amandatory director of labour (Arbeitsdirektor), the employees’interests are directly represented at the corporate bodies. Employeerepresentatives at the supervisory board mandatorily comprise notonly the company’s employees, but also representatives from thetrade unions. Therefore, a large spectrum of individual or general,joint, but also conflictive employees’ interests may influence thecorporate governance.

5 Transparency


In general, the management board as a whole is responsible for dueand timely disclosures and transparency. In some cases, e.g. thedeclaration whether the company complies with the provisions ofthe CGC, there is a joint responsibility of the management boardand the supervisory board.



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As regards financial reporting, all stock corporations have toprepare and publish annual accounts, which include the prescribedfinancial statements as well as a management report. Themanagement report must give a true and fair view of the actualsituation of the company and show its development including theessential chances and risks.Listed companies have to prepare semi-annual financial reports andinterim reports in between and have to comply with ad-hocdisclosure rules of insider information.


All listed corporations must have their annual financial accountsaudited. Auditors are appointed by the shareholder meeting.Auditors and auditing companies who have had close businessrelations to the company or have already audited seven annualaccounts and provided that the last audit has taken place no longerthan three years ago, are not eligible to be appointed.The auditor’s report must include a comment on the managementreport, the way in which the accounts have been prepared and

statements, whether the financial accounts have been prepared inline with the rules and regulations, and whether the annual accountsgive a “true and fair” view of the state of affairs of the company.Except for special constellations like insolvency of the company,the auditor’s report does not have to be disclosed to theshareholders.


Listed companies must once annually publish a document thatcontains all (1) ad-hoc disclosures, (2) director’s dealings and (3)all disclosures of major shareholdings of the preceding year. Thisdocument must be published on the internet. Further, they have to publish any ad-hoc disclosures on theirwebsite immediately.In order to be listed at the “Prime Standard” or “Entry Standard” ofthe Frankfurt Stock Exchange, companies have to publish theirannual reports and a corporate action timetable on their website.The CGC recommends publishing all information, that has alreadybeen published otherwise, on the company’s website in German andEnglish language.

Dr. Ralf Thaeter

Gleiss Lutz Friedrichstr. 7110117 BerlinGermany

Tel: +49 3080 0979 175Fax: +49 3080 0979 979Email: [email protected]: www.gleisslutz.com

Ralf Thaeter heads Gleiss Lutz’ M&A/Corporate division and has anoutstanding track record in advising clients in connection withnational and international transactions. His credentials includeadvising TXU Europe (in administration) on the disposal of theirinterest in Stadtwerke Kiel AG, Braunschweiger Versorgungs AG;BEWAG (now part of Vattenfall Europe) on the privatisation ofGASAG, First Choice on its merger with the tourism division of TUIAG to TUI Travel Plc. and TUI Travel on strategic partnership withAir Berlin plc. He is “Highly recommended” for Energy and“Recommended” for M&A/Corporate by PLC Which lawyer? and“Recommended” as individual in band 2 for Energy in ChambersEurope 2008.

Dr. Cornelia Topf

Gleiss Lutz Friedrichstr. 7110117 BerlinGermany

Tel: +49 3080 0979 161Fax: +49 3080 0979 979Email: [email protected]: www.gleisslutz.com

Cornelia Topf is an associated partner in the M&A/Corporate divisionof Gleiss Lutz in Berlin. Her principal practice area is M&A. Shespecialises in advising and representing clients on national and crossborder transactions, particularly, in the business sectors naturalresources, energy, traffic and infrastructure, as well as inrestructuring and insolvency law. Her credentials include advisingHeidelbergCement on its sale of Maxit Group to St. Gobain, BerlinAirports on their sale of GlobeGround Berlin to WISAG group, TheBlackstone Group on the acquisition of a participation in a offshorewind farm, Freiberger on the acquisition of Schwan’s European foodbusiness by Freiberger and Dr. Oetker and Fortune Managements,Inc. on the restructuring and the sale of Gate group to Louis DreyfusCommodities S.A.

Gleiss Lutz has 235 lawyers and is widely regarded as one of the leading German law firms. It is a full-service lawfirm, providing comprehensive advice in all areas of national and international business law. Gleiss Lutz is regularlyinvolved in major cross-border transactions and is counsel to a wide range of international clients from all over theworld. Gleiss Lutz was involved in some of the largest and most interesting cross-border M&A deals with a Germandimension. In 2009, Gleiss Lutz won the PLC Which lawyer? award “Law Firm of the Year Germany” and in 2008 theIFLR European Award “German Law Firm of the Year”. It was also presented with the IFLR European Award in thecategories “Private Equity Deal of the Year” and “Restructuring Deal of the Year” for 2008.



Chapter 12

BCM Hanby Wallace

Ireland



The vast majority of Irish registered companies are privatecompanies, with approximately 160,000 private companies on theRegister of Companies. There are approximately 1,700 publiccompanies registered, with 41 public companies listed on the IrishStock Exchange (“ISE”). The ISE is authorised as a marketoperator by the Irish Financial Services Regulatory Authority. Afurther 27 public companies are listed on the Irish EnterpriseExchange (the “IEX”). The IEX is the ISE’s market for small tomid-sized companies. A number of public companies are duallisted on foreign exchanges and must also abide by the rules ofthose exchanges.Our answers below concentrate on (i) officially listed public limitedcompanies whose securities are admitted to listing on the ISE(“listed companies”) and (ii) IEX quoted public limited companieswhose securities are admitted to trading on the IEX.


The primary corporate legislation governing all companies is theCompanies Acts 1963 to 2006 which is supported by secondarylegislation such as ministerial orders or statutory instruments. The Office of the Director of Corporate Enforcement (“ODCE”) ischarged with monitoring compliance with the Companies Acts andhas a number of investigative and enforcement functions includingthe prosecution of persons for suspected breaches of the CompaniesActs. The Companies (Amendment) Bill 2009, which, as of April2009, is before the Irish houses of parliament, proposes conferringadditional powers on the ODCE with regard to access toinformation.All companies have a memorandum and articles of associationwhich reflect the contract and relationship between the shareholdersand set out the internal rules and regulations, the objects of thecompany and other provisions including shareholder meetings,borrowing powers, powers and duties of directors and many otheraspects relating to the governance of the company. The articlesshould be consulted on all governance issues.The listing rules of the ISE (the “Rules”) apply to companies with,or seeking, admission of securities to the official list of the ISE andinclude continuing obligation requirements. In addition to theRules, companies with or seeking admission of securities to tradingon the main market of the ISE must abide by Admission to Trading

Rules. Admission to trading and admission to listing occursimultaneously and are notified to the market by the ISE in a singleannouncement.The UK Combined Code on Corporate Governance (the “Code”)has been annexed to the ISE’s listing rules. The Code has the samepersuasive effect in Ireland as it does in the UK. Irish listedcompanies are required to report on how they have applied theprinciples of the Code or where they have not applied the principlesto justify any instance of non-compliance in their annual reports. Itis then a matter for shareholders and other stakeholders to evaluatesuch explanations. In recent years, for listed companies withinstitutional shareholders, this “comply or explain” approach haslargely been interpreted as amounting to an obligation simply to“comply”. The Code sets out principles of good governance undersuch headings as directors, directors’ remuneration, relations withshareholders, accountability and audit, internal control and auditcommittees. The Market Abuse Regulations deal with insider dealing andimplement the EU Market Abuse Directive and we understand areoutside the scope of this publication. IEX companies are more lightly regulated than listed companiesand must abide by the IEX Rules which are complimentary to theAIM Admission Rules in the UK thereby allowing Irish companiesthe option of co-ordinating admission to both markets using thesame timetable and essentially the same admission document.Many of the companies listed on the IEX are also listed on the AIM.Other than IEX Rules requiring applicant companies to have aminimum market capitalisation of €5 million, the IEX Rules and theAIM Rules are broadly the same. The Code is not expresslyapplicable to companies whose shares are traded on the IEXhowever it is common practice for IEX companies to have regard tothe principles of the Code and to apply those principles in themanner appropriate to the size and nature of the company inquestion.


The current economic global difficulties and their impact on theIrish economy has put corporate governance, particularly in relationto the banking sector, right at the top of the Irish news agenda.Corporate governance topics such as prohibiting the Chairman andthe Chief Executive Officer being one and the same, incorporatingthe Code into legislation, the supervisory role of non-executivedirectors and limiting the number of boards on which the sameindividuals can sit, the role of remuneration and the role of the auditcommittee are all the subject of debate.

Fiona Mahon

Dennis Agnew



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An advisory body, the Company Law Review Group (the “CLRG”)has been charged with advising the government on the review anddevelopment of company law and it has produced a general schemeof a Companies Consolidation and Reform Bill, which if enactedwould generally overhaul and modernise Irish company lawincluding corporate governance. A significant corporate governance topic in recent years has been theproposed requirement for comprehensive annual directors’ compliancestatements. Following much debate, the CLRG has reported back tothe government resulting in an announcement that new legislation willbe enacted in this area and there is growing pressure on thegovernment for such reforms. It is anticipated that this may beaddressed in the Consolidation and Reform Bill referred to above.

2 Shareholders


The shareholders control the composition of the board of directorsand, through the articles of association, the shareholders delegatethe day to day running of the company to the board. However, thearticles of association and legislation reserve certain powers to theshareholders through the passing of shareholder resolutionsincluding the power to change the articles of association, change theobjects of the company, increase the share capital and authorise thedirectors to allot shares.In addition, the Companies Act 1990 (the “1990 Act”) in certaincircumstances requires shareholder approval in relation tosubstantial property transactions between directors and thecompany and loans to directors. For listed companies, shareholders must approve specifictransactions, details of which are set out in the Rules and includeacquisitions and disposals of a certain size as well as related partytransactions.


Listed and IEX companies are public limited companies and as suchshareholders’ liability is limited to the amount of their investment inthe shares for which they have subscribed. This, together with theprinciple of corporate personality means that in only extenuatingcircumstances will the Irish courts look behind the “corporate veil”and hold shareholders liable for debts of the company. It is, however,clear from case law, that the courts will not permit incorporation to beused for fraudulent, illegal or improper purpose. If a shareholder actsas a shadow director that is someone in accordance with whosedirections the directors are accustomed to act, then he could have thesame duties and potential liabilities as that of a director.


Generally no, however under the Companies Act 1963, upontakeover of a company, where 80% of the shares have been acquiredby the bidder, the remaining 20% may be compulsorily acquired onthe same terms by that bidder. This 80% figure rises to 90% forcompanies falling within the jurisdiction of the EU TakeoverDirective which includes listed companies but not IEX companies.


The powers and duties of directors are those which the company hasdelegated to them. The directors occupy a fiduciary positiontowards the company but in carrying out their duties must haveregard to the interests of the shareholders. Generally the most usualcourse for an unhappy shareholder is to sell his shares; however,while the courts generally will not interfere with the internalmanagement of companies, where the directors acted fraudulentlyor recklessly in disregard of the interests of the minority or there hasbeen unfairly prejudicial conduct against shareholders, theshareholders may have some recourse. Individual shareholdersmay also take an action against directors in specific circumstancessuch as where misleading statements have been made in aprospectus or in relation to a takeover.


There are no statutory limitations on the number of securities ashareholder can hold, or the speed with which he can build a stakein a company. However, takeover rules which are beyond the scopeof this publication must be considered and also the articles ofassociation must be consulted. For listed companies, the Rules require that notification ofacquisitions in excess of 5% be notified to the ISE. The 1990 Actintroduced detailed statutory controls on disclosure of interests inshares. Directors, secretaries and their families (including minors)must notify acquisitions by individuals or groups of beneficialinterests in shares amounting to 5% or more of the issued sharecapital of a public company. The company itself must makeregulatory announcements of this information. There is also anobligation to notify the ISE of any acquisitions or disposals ofofficially listed shares carrying voting rights in a public companywhich brings a person’s holdings above or below certain specifiedpercentages. Every public company must keep a register ofinterests in its shares. A public company may, by virtue of the 1990 Act, carry out aninvestigation of the ownership of shares in the company, by issuinga notice in writing to require any person, whom it knows, or hasreasonable cause to believe, is interested in any voting shares withinthe preceding three years and require them to confirm or notify thecompany if they are not so interested. This investigation may alsobe requested by a proportion of the members, holding not less thanone tenth of the shares carrying voting rights.


The two principal shareholder meetings are annual generalmeetings (“AGM”) and extraordinary general meetings (“EGM”). The AGM must be held once in every calendar year and must beheld within 9 months of the financial year end of the Company,except for the first AGM, which must be held within 18 months ofthe date of incorporation. Certain business, known as ordinarybusiness, as set out below, must be dealt with at the AGM, howeveradditional items of ordinary business may be set out in the articlesof association of the Company. Ordinary business generallyincludes declaration of a dividend, receiving the audited financialstatements, election of directors in place of those retiring,reappointment of retiring auditors and fixing the remuneration ofthose auditors

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Any other meeting of shareholders is known as an EGM and maybe convened by the board as required. It is the usual practice for the board to call shareholder meetings;however, shareholders of both listed and IEX companies holdingnot less than 10% may upon requisition require the directors toconvene an EGM and to put resolutions to that meeting.Shareholders are entitled to receive notices of all meetings. TheElectronic Commerce Act 2000 supplemented by the ElectronicCommerce Regulations 2003 provides for the use of electroniccommunications in business communications and e-commerceactivities making it possible for companies to use electroniccommunications for all shareholders who consent to receipt ofcommunications in this way. Voting at general meetings either requires an ordinary resolution(requiring a simple majority of those voting in person or by proxy)or a special resolution (requiring a majority of not less than 75% ofthose voting in person or by proxy).



Companies are managed by a board of directors. All companiesmust have at least two directors, at least one of whom must be anIrish resident (save where an insurance bond is in place). TheCompanies Acts prohibit a body corporate from becoming thedirector of an Irish company. While it is generally acceptedbusiness practice to have non-executive directors and executivedirectors forming part of the board, there is no distinction in Irishlaw and both director types have the same legal duties andresponsibilities. The Code states that the board should identify inthe annual report of the company each non-executive director itconsiders to be independent and where the board determines that adirector is independent notwithstanding the existence of certainrelationships or circumstances which are likely to affect, or couldappear to affect, the director’s judgment then the board must givereasons for its determination. Generally as provided for in the Code, companies will usually havea chairman and chief executive who ideally should be separate. Asmentioned above, instances of Irish companies where the chairmanand chief executive is one and the same person is the subject ofmuch debate at present. The chairman generally will oversee therunning of the board, while the chief executive will manage the dayto day activities of the business of the company. Frequently thereis key management below the board of directors to whom directorswill delegate certain functions.The company’s articles of association are likely to set out someparameters for the management of the company, though it is moreusual for the articles to allow the directors to manage the companyas they see fit. In compliance with the Code, the board should havea balance between executive and non-executive directors,incorporating some independent non-executive directors, with theideal under the Code being a majority of directors being non-executive. The articles of association generally provide for committees of theboard, which should also comply with the requirements of theCode. The recommended committees are the nominationcommittee, dealing with recruitment of board members and keyexecutives, the remuneration committee, responsible forestablishing policy on pay and benefits for executive directors andsenior management; and an audit committee, who oversee standardsand accuracy of the financial reporting and who liaise closely with

the company’s auditors during the audit process. Ideally under theCode, the recommended committees should be comprised solely ofnon-executive directors.


Generally shareholders retain control of any appointments to theboard. The shareholders appoint the initial board on incorporationand have the power to remove a director either by not re-electingthem when they come up for rotation at the AGM, or by an ordinaryresolution of the company. The articles of association will usuallyprovide that where a vacancy arises during the year, the directorscan fill that vacancy. The Code also contains provisions designedto ensure effective appointments and re-appointments of directorsincluding requirements for rigorous review of directors being re-appointed for more than a certain number of terms.Directors of the company may be removed by ordinary resolutionof the company and an extended notice of 28 days is required. Inaddition the director must also be provided with the opportunity toaddress the meeting at which the resolution for his removal is beingproposed.


Companies are obliged to keep at their registered office a copy ofevery contract of service with a director or a director of a subsidiary.The 1990 Act provides that a fixed term contract of employmentwith a director which exceeds five years must be approved by aresolution of the company, particularly where the contract cannot beterminated except in special circumstances. The Code recommends that a notice period for a director be oneyear and generally in most listed companies, this would be the case. A director has no automatic right to remuneration for acting as adirector, however generally the articles of association will containsome provisions for their remuneration. The amount of suchremuneration is a matter for the company and it does not have to bepaid out of profits, nor is it unlawful if it is paid out while thecompany is insolvent, however if it is in excess of what isauthorised by the articles of association, the director may becompelled to repay the excess to the company or any liquidator.The Companies Act, 1963 requires disclosure in the financialstatements of remuneration and other payments to directors. Inaddition, directors are entitled to their expenses incurred in theperformance of their duties as a director.The Code’s guidelines on remuneration focus on linkingremuneration to performance, and time commitments to the role.The Code also recommends that the remuneration committee,which should be made up of non-executive directors have terms ofreference and should have delegated responsibility for settingremuneration for all executive directors and the chairman, includingpension rights and any other compensation. The Code alsorecommends that the committee would review other seniormanagement payments.


For listed and IEX companies, directors are permitted to own sharesin their companies and there is no limit. The 1990 Act requires

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directors and secretaries to notify the company, in writing of theirinterests in the company’s shares or debentures and of any dealingsby them in those shares. If any interests are held in the company’sholding company any fellow subsidiaries or its own subsidiaries,these interests must also be disclosed. The requirement to disclosealso extends to interests held by spouses and minor children ofdirectors or any shares held in trust.In addition any contracts entered into by any director to sell sharesor debentures or any assignment of any rights to subscribe for suchinterests must be disclosed. The disclosure obligation also extendsto any grant by the holding company, subsidiary or fellowsubsidiary of any right to subscribe for shares or debentures orwhere the director exercised or assigned any such right.Other areas of law which will affect the ability of directors to dealin securities but which are beyond the scope of this publication areinsider dealing provisions as set out in the Rules and Market AbuseRegulations.


Generally, the articles of association of a company will allowdirectors to regulate their meetings as they see fit. The Coderequires that directors meet sufficiently regularly to allow them todischarge their duties.


Directors occupy a fiduciary position towards the company and mustalways act in good faith, in the best interests of the company even ifthis conflicts with the interests of the group of companies to whichthe company belongs. As well as to the company, directors oweduties to other stakeholders. Directors’ duties are the same forexecutive and non-executive directors. Under the 1990 Act, thedirectors have a duty to have regard to the interests of the company’semployees as well as the shareholders. Where a company isinsolvent, directors owe the same fiduciary duties to creditors. A director is prohibited to enter into any contracts which may fetterhis discretion and prevents him from exercising his duties as awhole.A director must exercise due skill and care in the performance of hisduties. However, a director is not expected to have a greater skillthan may be reasonably expected of a person of his knowledge andexperience. A director is not expected to give continuous attentionto the affairs of the company, he may delegate duties to others whohe reasonably believes and where no suspicions indicatedotherwise, were capable of carrying out such responsibilities.Directors must never make a secret profit and are required todisclose any interests in contracts with the company. The above are directors’ principal general duties. Directors willalso generally be required to have regard to other specific dutiesunder legislation such as Health and Safety, Data Protection, andEnvironmental legislation in the discharge of their duties.The directors can be personally liable for a range of offences underthe Companies Acts unless they can demonstrate that they took allreasonable steps to prevent a default by the company or that byreason of circumstances beyond their control, they were unable todo so. Liquidators and regulators such as the ODCE areincreasingly vigilant with respect to the conduct of directors. Aliquidator of an insolvent company is compelled to report to theODCE on the conduct of the company’s directors and must bring arestriction application against such directors unless the ODCE

relieves the liquidator of this obligation. Once a restrictionapplication is brought before the courts, the court must restrict thedirector unless the director can prove that he acted honestly andresponsibly and that there is no other reason why it would be justand equitable to restrict him. A restriction order prohibits a personfrom acting as director or from being otherwise involved in thepromotion or formation of a company unless that company meetscertain minimum issued share capital requirements.


The directors are responsible for the success of the company andmust provide effective leadership of the company with due regardto prudent and effective internal controls, which allow the directorsto assess and manage risk to the shareholders’ investment and thecompany’s assets. Under the Code, the directors should annuallyperform a rigorous evaluation of their own performance. Thereshould be clear division of responsibilities between running theboard and running of the business. A balance of executive and non-executive directors is required and the board should receive timelyand appropriate information to allow the directors to discharge theirduties. An effective communication with shareholders should beestablished with effective dialogue around both directors’ andshareholders’ understanding of the company’s objectives. Alldirectors are charged with this responsibility.


Listed companies are expected to disclose their compliance with theCode in their annual report. The Code recognises that there will betimes when a company, particularly smaller companies, will not bein a position to comply fully with the Code, but every companymust give careful consideration to their disclosures. The financialstatements must also give certain financial and other disclosures inthe financial statements, which are outside the scope of thispublication.Under the legislation, the directors must make certain disclosurespublic, by filing them at the Companies Registration Office,relating to appointments and resignations to the board, changes inshare capital and of certain resolutions of the shareholders. Listedcompanies must also comply with the Rules’ requirements ondisclosure under their continuing obligations, such as director’sdealings in shares and options and other relevant information.Listed companies must publish the terms of reference of theirnomination, remuneration and audit committees, the terms andconditions of appointment of their non-executive directors and forall resolutions after a vote has been taken (except on a poll), andprescribed information about the results of the voting.


The extent to which a company may indemnify its directors underthe legislation is very limited. There is a general prohibition on acompany indemnifying a director against any liability fornegligence, breach of duty or breach of trust of which he may beguilty in relation to the company. Any provision contained in thearticles of association of the company, or any contract with thecompany or otherwise which attempts to indemnify any director ofthe company in this way will be deemed void. However, a company

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may indemnify a director with respect to the payment of costsrelating to a successfully defended civil or criminal action or wherea court decides that the director acted honestly and reasonably andought fairly to be excused either wholly or partially from hisliabilities. A company can, however, take out insurance cover fordirectors against loss in respect of the forms of liability mentionedabove. Naturally the insurance will not cover loss due to fraud ordishonesty, wilful default or criminal behaviour.



There is no law or regulation regarding corporate socialresponsibility in Ireland although many companies are workingvoluntarily to integrate social and environmental concerns in theireveryday business operations.


There is no specified role for employees in corporate governance.For example, unless stated otherwise in the articles of association,there is no requirement to have employee representatives on theboard.

5 Transparency


The board of directors have the ultimate responsibility fordisclosure and transparency.


Companies’ financial statements must be published annually andfor listed companies are required under the listing rules to “complyor explain”. This means that generally companies are expected tocomply with the provisions of the Code, however if under certaincircumstances, they cannot comply, for reasons of size or expense,then they must disclose why they are not complying.


Every company is required to appoint auditors, who will review andaudit on an annual basis a company’s books and records andfinancial statements and then produce the auditors’ report to thefinancial statements. The auditors will review compliance with thestatutory and other required statements, such as certain parts of thecompany’s corporate governance statement and provide theiropinion in their report on the adequacy of the disclosures and theirview as to whether the annual accounts give a “true and fair view”of the state of affairs of the company. The auditor can give aqualified audit report if they are not satisfied with any suchdisclosures.


Companies must publish certain information on their websites,including the name of the company and its legal form, the names ofthe directors and their nationalities, if not Irish, the registerednumber of the company and its registered office. If the company isin the process of being wound up that information must also bedisclosed. Under the Code, listed companies should display ontheir websites the terms of reference of the nomination,remuneration and audit committees and the terms and conditions ofappointment of non-executives. IEX companies under the IEXRules must also maintain a website on which prescribedinformation should be available including a description of thebusiness, the names and bio’s of the directors, a description of theboard’s responsibilities and any committees, copies ofconstitutional documents, details of any other exchanges on whichthe company trades or has applied to trade, the number of IEXsecurities in issue and the percentage not in public hands togetherwith the indemnity and percentage holdings of its significantshareholders and most recent annual and half yearly reports.

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Dennis Agnew

BCM Hanby Wallace88 Harcourt StreetDublin 2Ireland

Tel: +353 1418 6900Fax: +353 1418 6901Email: [email protected]: www.bcmhw.com

Dennis is a Partner in the Corporate Department and leads the firm’sInward Investment team which advises clients on establishing andoperating businesses in Ireland. His areas of practice includemergers and acquisitions where he advises across industry sectorsincluding energy, pharma and the drinks and retail industries. Otherareas in which Dennis specialises include joint ventures andshareholder agreements, corporate governance and generalcorporate issues.

Fiona Mahon

BCM Hanby Wallace88 Harcourt StreetDublin 2Ireland

Tel: +353 1418 6900Fax: +353 1418 6901Email: [email protected]: www.bcmhw.com

Fiona Mahon is Head of BCM Hanby Wallace’s Corporate SecretarialDepartment. She is a fellow of the Institute of Chartered Secretariesand Administrators (“ICSA”) and has previously worked in KPMG,Ernst & Young, Mazars and Finavera. With 20 years’ experience asa Chartered Secretary, Fiona has worked both in ProfessionalServices and Industry, advising clients on all aspects of companysecretarial practice, corporate governance and administration.Fiona is a member of the Irish Council of the ICSA and wasPresident from 2003 to 2005. She was a member of the ICSA’sInternational Committee on Education and Corporate Law and haslectured frequently on Corporate Law and Company SecretarialPractice.

BCM Hanby Wallace is one of Ireland’s largest full-services law firms. With more than 110 solicitors, including 40Partners, our 300-strong team is recognised within Ireland and internationally as a leading service provider to publicand private enterprises across all key industry sectors.

Our scale and experience ensures that we provide our clients with top quality legal advice and assistance in a timely,efficient and cost-effective manner without losing essential personal contact. We look to devise solutions and uncoveropportunities, not just point to problems. Our job is to understand our clients, their markets and their business goalsand objectives - and to tailor our services accordingly. In addition to first-rate legal expertise, we apply commercialknowledge, insight and a practical understanding of the totality of the issues to all our client work.




Chapter 13

Michael Shine, Tamir & Co.

Israel



The corporate entities covered in the answers below are officiallylisted public limited companies whose securities are admitted totrading on the Tel Aviv stock exchange (“TASE”), also known as“the Boursa”. The TASE was formed and constituted in accordance with certainprovisions of the Israeli Securities Law, 5728 -1968 (“theSecurities Law”). Its proper management is regulated by theIsraeli Securities Authority (“ISA”), and is the only available publicmarket for trading securities in Israel. The TASE, which currentlylists some 650 companies, is a private company, owned by 29members, comprised of banks and large brokers. Members are theonly ones through which the trade of securities can beaccomplished, although since 2005, market makers are also activein trading. The TASE is required to be managed as a public entityfor all purposes, and therefore maintains a public representativemajority in its Board of Directors, monitored by both the Ministerof Finance and the Israeli Parliament (Knneset) FinancialCommittee.Dual listed public companies are subject to different regulatoryprovisions as opposed to regular publicly listed companies, and aretherefore not discussed in this article. However, it should be notedthat the Securities Law allows Israeli as well as foreign companies,whose shares are traded in certain Stock Exchanges around theworld, such as NYSE, NASDAQ, AMEX and London’s StockExchange Main Market, a special swift route for registering theirshares in TASE and dual list them, without going through furtherscrutiny and regulatory compliance.


The primary corporate legislation covering all types of companiesis contained in the Companies Law, 5759-1999 (“the CompaniesLaw”), which is complemented by certain provisions of itslegislative predecessor - the Companies Ordinance [combinedversion], 5743-1983 (“the Companies Ordinance”). The IsraeliSecurities Law is also a paramount legislative item for publiclytraded companies within the TASE. These laws, along with theregulations promulgated thereunder, as well as the inner regulationsand guidelines enacted by the ISA and the TASE, encompass therelevant legislative and regulatory framework for Israeli corporategovernance.

According to the Companies Law, which is mostly dispositive, acompany may also administer and regulate its activities throughdetailed provisions inserted within its Articles of Association.However, the Companies Law does contain certain cogentprovisional requirements, which cannot be circumvented evenwhen approved by the company’s shareholders. The Companies Law is administered by the Ministry of Justice,which has powers to impose financial sanctions on companieswhich fail to comply with certain requirements stipulated therein.Such sanctions are differentiated from the criminal enforcementroute, which is meant to provide additional determent. TheCompanies Law is also enforceable through private civil litigationThe Securities Law constitutes the basic regulatory structure forTASE Publicly listed companies. It is the law which enables theISA to create a security net for the public, thus ensuring theprosperity of the Israeli capital market. In addition to the ISA, thereare other governmental regulators, such as the Ministry of Financeand Bank of Israel, who are trusted with supervising the propertrade of securities within the TASE. Apart from the relevant laws and regulations, the ISA publishesguidelines and instructions in its Internet Website (www.isa.gov.il).The TASE has also formulated rules which govern the trade ofsecurities in the Boursa. The ISA, lead by Professor Zohar Goshen since January 2008, isalso active in pursuing the enactment of several amendments to theLaws detailed hereinabove, which will correlate with the 2006“Goshen Committee for Adoption of Corporate Governance Code”(“Goshen Committee”).


The field of Israeli corporate governance has changed significantlyover the last few years, both through means of strict legislation,which is aimed to deter non-complying companies, sided withseveral initiatives which purport to assist listed companies to issuesecurities more easily, as well as to encourage foreign companies tobecome publicly traded in the TASE. The Companies Law, which was originally enacted as acomprehensive corporate codex, has been amended several times.Additionally, the Securities Law and Regulations have beenreviewed and altered, in light of the substantial progress madewithin the securities trade in the TASE, introducing market makersand providing numerous new financial products. A strong practicalactivism policy lead by the ISA, soon followed in the footsteps ofthe legislator.

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Detailed below are some of the latest important improvements incorporate governance related laws and regulations:In 2004, the Barnea Committee recommended to equalise thedisclosure requirements of companies’ annual reports, to thoserequired when submitting stock exchange prospectus for IPO’s. Asa result, several amendments to the Securities Law and Regulations,which drastically changed reporting requirements in Israel, werepublished. The amendments included less strenuous requirementsfor public companies, upon issuance of short term securities, bymeans of allowing the use of a “ledge forecast”, which is publishedperiodically, for the issuance of such short term securities, and thusturns them into swift and financially viable procedures. In 2005, an Amendment to the Companies Law involving derivativeactions came into force. The Amendment, which presented relieffor shareholders who wish to file a claim in the name of thecompany, has increased the percentage of derivative actions inIsrael. The amendment included a payment by the plaintiff of onlya portion of the court’s fees, which will be reimbursed by thecompany in case the action is approved by the court. In any case,such derivative action will not be subject to dismissal due to nonpayment of court’s fees. Additionally, the company will be forcedto pay the plaintiff any expenses which the court ruled against it. Incases where a verdict was ruled in favour of the company, the courtmay decide to remunerate the plaintiff for his effort in filing theclaim.In 2006, the Goshen Committee published its report (see question1.2 above). The Committee’s recommendations were fullyaccepted by the ISA, and are therefore currently set as a voluntarystandard, which will eventually most likely be incorporated into therelevant laws. The Committee’s recommendations involved the strengthening ofcontrol mechanisms in Israeli publicly traded companies, due to thecentralised nature of the Israeli capital market and the tradedcompanies within it, which creates an inherent concern for theexistence of director’s conflict of interests. Hence, it was theCommittee’s view that as of January 2007, companies shouldincrease the percentage of independent members of the Board ofDirectors to one third (as opposed to the present requirement of atleast two External Directors, regardless of the size of the Board). As a complementary measure, the Committee recommended that anAudit Committee board will comprise out of a majority of ExternalDirectors, including the chairman of the Committee. Additionally,it is the Committee’s standpoint that each transaction involvinginterested controlling stakeholders, shall require an approval by amajority of the non-interested shareholders, at least until aspecialised Israeli court for companies and securities is established,in order to protect the interests of minority shareholders. Lastly, theCommittee recommended that a publicly traded company shoulddisclose in detail its outlay on remunerating executives, in itsannual financial statements.In 2006, the Israeli Accounting Standards Board publishedAccounting Regulations No. 29 “Adoption of InternationalFinancial Reports Standards - IFRS”, according to whichcompanies trading on the TASE are obliged to have adopted theinternational reporting terminology, no later than January 1st 2008. In 2008, The Goshen Committee’s recommendations to enhance theindependence of Directors in public companies were acceptedthrough means of enactment of the latest amendment (No. 8) to theCompanies Law. The Amendment enabled companies to add aprovision to the Articles of Incorporation, according to which theirBoard of Directors will comprise a majority of independentDirectors (which include External Directors), in case the companydoes not have a holder of controlling interest, as opposed to one

third of the Board in case such a controlling stake holder exists.Subsequently, the ISA published regulations which requirecompanies to disclose in their annual financial statements if suchindependent Directors were indeed appointed, as part of the“Comply or Disclose” ISA’s basic approach, by which thecompanies should either confirm that they comply with the ISA’sRegulations, or disclose their non-compliance

2 Shareholders


Whilst shareholders are the owners of companies, and control thecomposition of the Board of Directors, it is the latter which istrusted with the operation and management of the company. However, the Companies Law and Regulations reserve certainpowers to shareholders through the passing of shareholders’resolutions in a General Assembly of Shareholders, in which eachshareholder is entitled to participate and vote. Among thesemandatory capacities, one can include the change of the company’sname, changes within the company’s Articles of Association,appointment and removal of Auditors, change of Directors, increaseand decrease in Registered Share Capital, approval of transactionswhich involve Directors and/or the controlling stakeholder asinterested parties, as well as a merger of the company. UnlikeDirectors, shareholders are entitled to enter into agreementsbetween themselves regarding their voting arrangements.However, as opposed to the unlimited access of members of theBoard of Directors to corporate related documentation,shareholders can only review limited documents which thecompany is not required to disclose by law. In cases where the Board of Directors is unable to exercise itsauthority, the Companies Law empowers the General Shareholders’Meeting with the ability to exercise the authority of the Board.


The general rule is that shareholders of limited liability companiesare not liable for their company’s acts or omissions. This is part ofthe basic principle that a company has an independent corporatepersonality. Nevertheless, in extraordinary circumstances, such as where thecorporate entity was used to defraud another person or creditors, orwhere it was used while taking un-reasonable risks, the courts havethe authority to pierce the corporate veil and hold the shareholdersliable. According to the Companies Law, a shareholder shall act bona fideand in a fair manner towards the company. Breach of the Duty of Fairness shall be treated as a breach of theFiduciary Duty of an Office holder, which will be deemed as acontractual breach, and subject to contractual remedies as providedby law.In cases where the corporate veil has been pierced, the court mayprevent the liable shareholder from serving as director or GeneralManager, and to refrain from becoming involved in the formationor management of another company, for a period of up to five yearsfrom its decision.

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Israeli law does not permit shareholders to become disenfranchisedwhen their shares have been fully paid for. However, in respect offorced acquisition of shares, such as upon a takeover of a company,there are mandatory provisions which force the transfer of certainshares by minority shareholders.


The general rule is that the proper claimant in an action whichoriginates from a wrongdoing done to the company - is thecompany itself, rather than its shareholders, and therefore the courtswill not interfere with the internal management of companies.There are, however, some exceptions. As mentioned in question1.3, the Companies Law enables a shareholder to bring an action onbehalf of the company through means of a derivative claim, subjectto the court approval and the relevant provisions of the CompaniesLaw (such as first addressing the company and demanding that itexercises its rights through means of filing of a claim), and tosubsequently enjoy certain easements provided by Law. The law confers on the company’s shareholders or directors, tobring an action on behalf of the company, in cases where thecompany itself has refrained from exercising its rightful claim.Other instances where shareholders may seek enforcement actionmay include cases where there has been unfairly prejudicial conductor otherwise deprivation of minority shareholders. Anydiscriminative action may result in the court’s decision toremunerate the minority shareholders, or otherwise instruct thecompany to remove or prevent such discrimination. Additionally, a company may include provisions in its Articles ofAssociation, enabling the General Assembly to gain powers whichare usually held by the company’s Board of Directors and/or theGeneral Manager, but merely in specific instances and for a limitedtime period, as determined in the company’s Articles ofAssociation. In respect of securities trade related enforcement, it is within thepowers of any shareholder who has an affinity to one of thecompany’s securities (which is deemed as each one of thefollowing: ownership, possession, sale or purchase), to initiate aclass action against a company.


Subject to general takeover rules, there are no statutory limitationsto the number of securities a shareholder can hold, or the timeframein which he can build a stake in a company.As regards disclosure, a shareholder holding more than five percentof any particular share is deemed as an Interested Party, as definedby the Companies Law, and is therefore subject to specificdisclosure rules, such as reporting each purchase or sale of furthersecurities, to the company. The company is then obliged to makeregulatory disclosure of this information to the ISA, TASE, and tothe public.


A shareholders’ General Assembly will convene annually and atleast 15 months following its last congregation. The agenda of suchannual meeting, which is to be determined by the Board of

Directors, will involve review and discussion in respect of thecompany’s financial reports, as well as in respect of the report madeby the Board. Further matters which can be discussed therein are:appointment of members of the Board of Directors; appointment ofCertified Public Accountant; any matters which are to be discussedin the company’s annual meeting; as well as any matters stipulatedwithin the Articles of Association and also any matters approved bythe Board of Directors.Although the default position is for the Board of Directors to callshareholder meetings, according to the Companies Law it is withinthe powers of one or more shareholders, holding at least fivepercent of the issued share capital and at least one percent of thevoting rights in the company, or one or more shareholders holdingat least five percent of the voting rights in the company, to demandthat the board of Directors will convene an Extraordinary GeneralMeeting. Additionally, one or more shareholders, holding at leastone percent of the voting rights at the General Meeting, is entitledto request that the Board of Directors include a matter on the agendaof a General Meeting. Electronic voting through the internet, which is aimed to enable costssavings and improve the accessibility of information, is quite rare inIsrael. Nevertheless, electronic voting is permitted when ashareholder is not registered and holds shares through a member ofTASE. Such voting is subject to companies’ confirmation of takingall precautionary measures for securing the information. In respect ofonline access for company’s information, the ISA’s electronic filingsystem (www.magna.isa.gov.il), along with the TASE filing system(www.tase.co.il) ensures access to free and continuous updatedinformation regarding all material events involving the company, aswell as trade information and corporate registration documents.



The company’s organs are the General Assembly of theShareholders, the Board of Directors which determines thecompany’s general policy, and the General Manager who isresponsible for executing the Board of Directors’ plans andstrategies as well as the day to day management. In principle, theGeneral Assembly appoints the directors and the Board of Directorsappoints the General Manager. Activities which are executed by thecompany’s organs are deemed as the company’s operations, andtherefore bind the company even when exercised with deviancefrom proper authority. The detailed capacities of each organ are specified in theCompanies law. The residual authority, meaning any authoritywhich was not specified by law or by the company’s Articles ofAssociation, is adhered to the General Manager, who operatesunder the Board of Directors’ supervision, which may also exercisesuch residual authority.It should be noted, that if the Board of Directors is unable toexercise its mandatory authorities, the General Assembly mayexercise them instead, even without a proper stipulation in thecorporate documents. The same rule applies as for the Board’smandate to exercise the General Manager’s authorities if he isunable to act, or if he refuses to comply in accordance with theBoard’s instructions. A public company has to appoint at least one General Manager, whoshall be responsible for administrating the company’s affairs inaccordance with the Board of Directors’ general policy and subjectto its guidelines. Concurrent serving of the General Manager aschairman of the Board is limited. Generally, the powers of the

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Board of Directors may not be delegated to the General Manager. Also, Generally the Board of Directors may not delegate its powersto a committee of the Board except for the purpose ofrecommendation. The General Manager may, with the approval ofthe Board, delegate any of his/her powers to any other subordinateperson. The Companies Law empowers the Board of Directors to establishcommittees, as it deems fit, unless the company’s Articles ofAssociation stipulate otherwise. The Board may delegate some ofits capacities to committees, appointed by the Board, provided thatthey are not mandatory, non-conveyable capacities, and providedthat all members of such committee are Board members, while atleast one of the members is an External Director.

3.2 How the members of the management body appointed andremoved?

Generally, it is the shareholders who control Board of Director’sappointments, unless indicated otherwise in the company’s Articlesof Association. In that case, the law obligates the company toremove directors in the same way in which they were appointed. However, in respect of the company’s External Directors, they mustbe appointed by the General Assembly, while the latter cannotdelegate its powers in relation to same. The term of service of anExternal Director of a public company is three years and that periodmay be extended for one additional term of three years. TheExternal Directors can only be removed, by the order of the court,in special circumstances specified in the Companies Law. The current mandatory requirement is for at least two ExternalDirectors to serve in a public company’s Board of Directors, ofwhich one must maintain financial accounting capabilities, and theothers must have professional capabilities, as detailed by law.Additionally, if a director was convicted in any of the criminaloffences stipulated within the Companies Law, his tenure willexpire. The General Manager in a public company is appointed andremoved by the Board of Directors, unless otherwise provided inthe Articles of Association. Office holders in a public company, other than the Directors and theGeneral Manager, shall be appointed and dismissed by the GeneralManager.


When discussing the remuneration of Board members, the innerregulatory barriers include an approval by the company’s AuditCommittee, followed by approval from the Board of Directors andthe General Assembly. The same rule applies when the decision tobe made involves a director or otherwise a controlling shareholder’semployment terms, whereas in relation to other senior executives’employment terms, approval by the General Assembly is notrequired.Additional regulatory measures in respect to remuneration are alsoapplied through the demand made by virtue of the Securities Law,to disclose the remuneration paid to its directors and certain otherofficers.The remuneration of External Directors is governed by specialregulations enacted under the Companies Law.


Directors are permitted to own shares indefinitely in companieswhere they serve. However, they are required, as so are thecompany’s senior managers, to disclose their holdings therein, andto report any changes in their shareholding within the company.A shareholder holding at least 10% of the company’s share capital,can demand to receive a full and detailed formal report from theBoard of Directors, which will include a breakdown regardingpayments, as well as any of the company’s obligations for futurepayments, social benefits and pensions being paid to any of theboard members within the course of three years prior to the demandfor such disclosure. Additionally, in cases of transactions made by the company withone of its Office Holders and/or directors, disclosures regardingsuch private interest, are required to be made to the proper companyorgans (Board of Directors, General Assembly, Audit Committee),which in turn are required to disclose it to the public in accordancewith the proper requirements of the Securities Law and Regulationspromulgated thereunder.


Board of Directors’ meetings are convened whenever required, andat least once every three months, upon the request of at least twodirectors, and in companies where the Board consists of fivedirectors, or where a violation of law or proper business conductwere revealed, to the request of only one director. The Chairman ofthe Board may demand the gathering of the Board at any time. Anotice in respect of the meeting, which contains the topics on theagenda, will be served to all Board members in advance. Nevertheless, the Board may pass resolutions without prior notice,and even without actually convening, provided that all of theDirectors entitled to participate in the discussion and vote on thematter brought up for resolution have agreed thereto, unless this isprohibited by the Articles of Association. Usually, a majority of theBoard is required as quorum, in order for a meeting to be convened.Agreements between Board members regarding their voting inBoard meetings are prohibited and deemed as a breach of theirFiduciary Duties toward the company.


Directors are subject to strict Fiduciary Duties. They are requiredto hold and maintain proper capabilities, as well as to reserve thetime to properly perform their duties and promote the company’ssuccess, and are accordingly required to declare their fitness priorto their appointment, as well as to notify if they have become unfitfollowing their appointment and during their tenure. They arerequired to avoid conflicts of interest between their duties to thecompany and any personal interest they may have, and to notify anddisclose any information relevant to the company’s business orinterests. The main duties of the Directors toward the company arethe Duty of Care (means the duty to act and perform as a reasonabledirector and to obtain all information and data needed for thefulfilment of the director’s duties) and the Fiduciary Duties,meaning the duties to act bona fide for the best interest of thecompany. A director who is in breach of the Duty of Care might beheld accountable for being negligent, while breach of FiduciaryDuties are considered to be a breach of the contract between the

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Director and the company. It should be noted that in recent years,the Supreme Court has ruled that the level of performance which isrequired from the Directors in a public company is high, andinclude the duty to actively participate in the Board’s meetings andconstantly respond to any significant development in a company’sposition.


Generally, the Board of Directors is charged with defining andprioritising the company’s long term strategy and goals, and willsupervise the General Manager’s execution of same. In addition,the Board shall, inter alia: examine the company’s financial statusand set the credit limit of the company; determine the organisationalstructure of the company and its wage policy; be responsible forpreparing financial reports; report to the Annual General Meetingon the position of the company’s business and on the outcome of itsactivities; appoint and remove the General Manager; decide ongeneral acts and transactions requiring its approval; allot shares andsecurities convertible to shares; resolve to affect a distribution; giveits opinion on special tender offers; and establish Board committeesas it sees fit. The aforesaid powers of the Board of Directors maynot be delegated to the General Manager.


The Board of Directors of each listed public company must submitimmediate reports on all material matters involving its affairs, andmay influence the public investors. Such Immediate reports arepublished in the ISA’s filing system “Magna” (see question 2.6above). Additionally, ISA regulations promulgated pursuant to theGoshen Committee’s report, obligate public companies to discloseif they have adopted the Goshen Committee Corporate GovernanceCode, as well as the Laws, Regulations and Rules promulgatedpursuant to its publication. However, the demand is to “comply ordisclose”, without any need of detailing the reason for non-compliance. Additionally, the company must disclose any unusualremuneration and/or bonuses to members of the company’smanagement.Apart from the disclosures pertaining to the company’s Board ofDirectors as a whole, it is within the responsibilities of eachmember of the Board, as part of his Fiduciary Duty, to disclose tothe company any information involving the company’s affairs,which was brought to his attention by virtue of his capacities. Otherspecific mandatory disclosures, such as pertaining to a Director’scriminal conviction, or whether upon loss of legal capacity, ismandated by certain provisions set within the Companies Law.


Although a company may not indemnify Office Holders in respectof breaches of their Fiduciary Duties, it may install an antecedentalprovision to exempt them from their Care Duties toward thecompany (except for such duties involving a distribution) as well asfrom their liabilities towards third parties. A similar provision to exempt Office Holders from damagesemanating from breach of their Duty of Care towards third partiesis also viable. Another provisional exemption may be inserted in

respect of debts, expenses or other financial liabilities imposed onOffice Holders, when such liabilities emanated from actions oromissions were brought about by virtue of their capacities and dueon account of breach of their Care Duties towards the company, oreven by their breach of their Fiduciary Duty toward same, providedthat they acted in good faith and had reasonable foundation ofpresuming that the act would not harm the good of the company. A decision to exempt, insure or indemnify Office Holders and/orDirectors must be approved by the Companies respective Organs, asdetailed within the Companies Law.



The role of Corporate Social Responsibility (“CSR”) in Israelipublic companies has increased substantially within the past fewyears. Following the pioneer work of international wide spreadcorporate entities, whether Israeli based, or through their influenceon Israeli subsidiaries or representatives, there are nowadays manypublic companies which employ CSR managers. However, notincluding two exceptions from 2007, reporting standards have yetto be exhausted by Israeli companies, so much as to enable thefiling of reports to the private CSR promotional organisation knownas the “Global Reporting Initiative” (“GRI”). In 1998, an Israeli private association called “MAALA-business forsocial responsibility” (“MAALA”) was formed in order to facilitateand promote CSR within Israeli companies. The Associationaspires to be the leading professional resource available to assistIsraeli businesses in developing and implementing a CSR strategythat contributes both to the companies’ success and to theenrichment of Israeli society. MAALA, which is mainly funded byits member companies, inaugurated a CSR rating in 2003, whichwas achieved by presenting a wide spread questionnaire for TASEcompanies, then examined by a public committee. Subsequently, aSocially Responsible Investing Index (“SRI”), which is comprisedof the 20 top rated TASE companies in the field of CSR, waslaunched. This index is publicly traded.In 2008, the rating included 39 public companies. This year’sgrading questionnaire inaugurated a chapter involving corporategovernance.


The Companies Law does not distinguish a specific role foremployees in corporate governance. However, the EmploymentProtection Act (Exposure of Violations, Misconduct oradministrative Impropriety) 5775 1997, as well as activists judicialrulings of labour courts, have been used for protection ofemployee’s rights.Courts may intervene in favour of employees whenever the latter’srights were violated and/or adversely affected under any applicablelaw, due to their attempt to safeguard theirs as well as theircolleague’s rights. For example, courts are entitled to awardremuneration for any harmed employee, as well as rule aconjunction order which abolishes employee lay offs, in caseswhere such dismissal emanated from the employee’s claims for thecompany’s misconduct or violation of mandatory employmentconditions.

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5 Transparency


Under Israeli Law, it is generally the Board of Directors as a whole,which is responsible for the company’s disclosure and transparency.Within the framework of its responsibilities and obligations, theBoard will be in charge for the preparation and ratification of thecompany’s financial reports, as well as for reporting the company’scurrent status and affairs at each Annual General Meeting. Asmentioned above, the Board must appoint an Audit Committee fromamong the Board members, who is trusted with the role ofscrutinising the company’s business management, in addition to anappointment of a Certified Public Accountant who is charged withreviewing and advising in respect of the company’s financialreports. Accordingly, the Board, the Audit Committee and theCertified Public Accountant play a paramount role in ensuringproper internal disclosure of the company’s affairs. Other than the company’s internal supervision mechanisms, it isrequired to report its financial status to the ISA, the TASE and to theRegistrar of Companies. A public company must submit bothannual and quarterly financial reports, as well as immediate reportsrelating to any material event involving the company, all of whichare published on the ISA website and are open for review by thepublic.


As regards financial reports, all listed public companies mustprepare and publish audited annual reports, un-audited quarterlyreports, and a Board of Directors’ report which summarises andexplains any recent changes within the company - all of which asper required by the Securities Law and Regulations enactedthereunder. Additionally, listed companies must submit ad-hocreports such as inside information likely to have a significant effecton the company’s affairs, and in regards to traded securities. Theannual and quarterly accounts must contain prescribed financialinformation and Directors’ and Auditors’ reports, which will enableinvestors to properly review the company’s status. Additionally,Israeli law obligates each company to keep accounting recordswhich will enable contemporary inner regulations by the Board ofDirectors, as well as possibility for immediate disclosures.


The Companies Law requires public companies to appoint an AuditCommittee, as well as an Certified Public Accountant, both ofwhich are trusted with supervising the company’s proper businessconduct, and serve as regulators from within the company. Unlikeother Board committees, whose formation is optional, theestablishment of an Audit Committee is mandatory. The chairmanof the Board of Directors, as well any Director employed by orotherwise providing services to the company, and a controllingshareholder or any relative of a controlling shareholder, may not bea member of the Audit Committee, which must consist of at leastthree Directors. A decision made by the Audit Committee, whereits official authorisation was delegated by the Board of Directors,will be deemed as a decision of the Board, unless otherwiseindicated in the company’s Articles of Association.The Companies Law obligates companies to appoint an ExternalCertified Public Accountant who is appointed by the GeneralAssembly. The Certified Public Accountant will be unconnected,whether directly or indirectly, with the company’s affairs and itsappointment will be for one year. The Certified Public Accountant has the right to review any of thecompany’s documents, to receive an explanation regarding theircontent at any time, and to participate in the General Assembly, inwhich financial reports are submitted and/or reviewed.Accordingly, the Certified Public Accountant is obliged to reportany irregularities discovered in the company’s financial reports, theresult of which will be the immediate gathering of the Board, andwill be responsible toward the company for his opinion in respectof the company’s financial reports.In addition, the Board will appoint an Internal Auditor, at theproposal of the Audit Committee, whose role is to examine, whetherthe company’s actions comply with the law and orderly businessprocedures.


As mentioned in question 2.6 above, the ISA operates a filingsystem, which contains all mandatory reports required to bedisclosed by public companies by power of the Securities Law andrelevant regulations, among which are yearly audited financialreports, quarterly unedited financial reports, as well as immediatereports on all material matters concerning the company.

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Joseph Tamir

Michael Shine, Tamir & Co.49 Rothschild Blvd. Tel Aviv65784 Israel

Tel: +972 3560 3001Fax: +972 3560 3002Email: [email protected]: www.shinelaw.com

Joseph Tamir, is a graduate of the Hebrew University, LL.B., Bar-IlanUniversity, LL.M. He is the author of several law books in the areaof commercial law and is the co-author of articles published inleading law journals on the subject of dispute resolution, M&As, andIsraeli law. Tamir has extensive experience in litigation and handlingcommercial disputes, which has been acquired at all courts levels.Practice areas: litigation, arbitration, commercial law, corporateLaw, property law. Mr. Tamir manages the Local Practice Division.

Shira Shine-Fried

Michael Shine, Tamir & Co.49 Rothschild Blvd. Tel Aviv65784 Israel

Tel: +972 3560 3001Fax: +972 3560 3002Email: [email protected]: www.shinelaw.com

Shira Shine-Fried, a graduate of the University of Manchester (U.K),chairs the Trust Committee of the Tel Aviv District Israel BarAssociation and is the co-author of several articles published inleading law journals on the subject of M&As, international taxationand the use of trusts. Mrs. Shine-Fried manages the InternationalPractice Division. Practice areas: commercial law; family asset structuring andplanning, trust law, international tax and estate planning and M&As.

Michael Shine, Tamir & Co. is a leader in Israel in multinational family asset protection and structuring. The firmmaintains an “in-house” fully licensed foreign Trust Company, which solely services the highest due diligence andcompliance standards. The firm offers a fully comprehensive group of service companies providing corporatedirectorships and corporate nominee and fiduciary services. The firm also specialises in commercial law, real estate,mergers and acquisitions, foreign investment transactions, commercial litigation, succession and inheritance and not-for-profit organisations.

The firm’s staff complement is 33, comprising 3 Partners, 10 Associates, a Compliance Officer, 3 Financial Managers,3 paralegals, and a back-up administrative staff of 11, as well as 2 in-house tax consultants.


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78

Chapter 14


Studio Santa Maria

Italy



The corporate entities covered in the answers below are officialpublic limited companies whose shares are listed on the Italianregulated market, organised and managed by the Italian StockExchange, Borsa Italiana S.p.A. (“società quotate”, hereinafter the“Listed Companies”).Notwithstanding the fact that companies which are not listed butwhose shares are widely distributed among the public (“societàdiffuse tra il pubblico in misura rilevante”) (these are Italian issuersthat contemporaneously: (a) have shareholders, other than thecontrolling shareholders, that number more than 200 and own atleast 5% of the paid-up share capital; (b) are not eligible to draw upsimplified annual financial statements; and (c) are not listed inregulated market) are regulated by rules often coincident with orsimilar to the ones applicable to Listed Companies, they have notbeen considered in this paper due to their very limited number(currently there are in total 90 companies which are not listed butwhose shares are widely distributed among the public (source:official website of Consob).For the same reasons, companies which adopt two-tier or one-tiergovernance model, which are non standard in Italy, have not beenincluded (the one-tier and two-tier governance models have beenintroduced in our legislation in 2003) .In fact, in Italy the more common system of corporate governance- indicated as “traditional” - is based on two corporate bodiesappointed by the shareholders:

the board of directors, having the function to manage thecompany; andthe board of statutory auditors, having the function tosupervise compliance with the law, the principles of propermanagement and, in particular, the adequacy of theorganisational, administrative and reporting structure and itsactual operation.


The primary corporate legislation covering all corporate entities isthe Italian Civil Code.In addition Listed Companies are subject to a specific set of rulesset out in the Legislative Decree n. 58/1998 (the “ConsolidatedFinancial Act”) and its implementing regulations adopted byConsob (Consob (Commissione Nazionale per le Società e la

Borsa) is the public authority responsible in order to regulate theItalian securities market, and to survey and monitor the observanceof these rules) with resolution n. 11971/99 and its amendments(hereinafter the “Regulation of Issuers”).Moreover, Listed Companies have to take into considerationrecommendations and communications periodically published byConsob and they must adhere to Borsa Italiana rules and instructions.Furthermore, Borsa Italiana in 2006 replaced the CorporateGovernance Code adopted in 1999, which is currently under furtherrevision. This Code contains principles and criteria on bestcorporate governance whose adoption and compliance arevoluntary, but strongly recommended to Listed Companies. If theIssuers have not implemented, in whole or in part, one or more ofsuch recommendations, they shall supply adequate information ontheir decision not to do so in their annual “report on the corporategovernance”.All companies have articles of association, which have to becompliant with mandatory rules and regulations for ListedCompanies. Such documents are approved by the shareholders andthey contain all the main provisions concerning the governance ofthe Company and its functioning (such as the shareholders anddirectors meetings, the powers of directors, etc.).Provisions contained in the shareholders’ agreements of ListedCompanies must have a relevant role in the corporate governance ofthe said companies, even though such agreements are concludedbetween shareholders and the companies themselves are not partyto them. Consequently, extracts of any agreements whose object isthe exercise of voting rights in companies with listed shares orcompanies that control them must be published, independently ofthe form in which such agreements are concluded.


The Italian corporate governance framework of Listed Companieshas been continuously and gradually adjusted and improved, alsodue to the harmonisation process implemented by EU regulationsand due to the requirements imposed by the best internationalcorporate governance practices.Among others, the most relevant corporate governance topicswhich have been recently introduced are the followings: (i) the so-called “Savings protection Law” (“Legge sulla tutela

del risparmio”, Law no. 262/2005), which contains a set ofrules whose main aim is to protect the interests of minorityshareholders. The law, for instance, establishes that:

members of the Board of Directors and of the Boardof Statutory Auditors have to be appointed solely on

Francesco Paolo Scebba

Romina Guglielmetti

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Studio Santa Maria Italy

the basis of lists of candidates;at least one of the members of the Board of Directorshas to be elected from the minority slate;the Chairman of the Board of Statutory Auditors has tobe appointed among the auditors elected by theminority shareholders;at least one member of the Board of Directors (or twoif the Board is composed of more than sevenmembers) has to satisfy the “independencerequirements”; andeach Listed Company has to appoint a managercharged with preparing the company’s financialreports (see question 5.1 below);

(ii) the transposition of the European directive on takeover bids(“OPA” Directive 2004/25/EC);

(iii) the transposition of the European market abuse directive(Directive 2003/6/EC);

(iv) the transposition of the Directive on harmonisation oftransparency requirements in relation to information aboutcompanies listed in regulated market (“Transparency”Directive, 2004/109/EC); and, finally,

(v) the transposition of the “MIFID” Directive (2004/39/EC),which is mainly focused on the negotiation of financialinstruments.

2 Shareholders


The recent Italian Corporate Law Reform (Legislative Decree No.5/2003) granted separate scope of competences, respectively, to theshareholders and to the board of directors. The company’s management is reserved exclusively to the directors,whilst shareholders maintain the right and the power to appoint thecorporate bodies and to decide the major issues of the company’slife. Shareholders in their ordinary meetings can decide about:approval of the company’s financial statements; appointment anddismissal of directors, choice of statutory auditors and auditing firm;establishing the remuneration of such bodies (unless suchremunerations have been set out in the articles of association);resolution on directors’ and statutory auditors’ liability; approval ofthe internal regulations of the shareholders’ meetings. Furthermoreshareholders in their extraordinary meetings can decide about:amendments to the articles of association; appointment, replacementand powers of the liquidators; approval of the merger/de-mergerprojects (articles of association may grant to the directors theauthority for the resolutions relating to the merger and de-merger ofcompanies wholly owned or owned for the 90%); delisting of theCompany and other matter specifically reserved to them by law orby the articles of association [see also question 2.6 below].


According to Italian civil law shareholders cannot be liable for actsor omissions of Listed Companies since their obligations are limitedto their contribution to the company’s share capital. Consequently,company’s creditors are entitled to satisfy their claims only on theassets of the company and not on the personal assets of itsshareholders.In fact, Italian law provides a complete segregation of thecompany’s assets from the ones of its shareholders.


Equity interests in the company are represented by shares which arehomogeneous (all shares belonging to the same category carryequal rights and have equal value), standardised and freelytransferable. However, articles of associations can providecategories of shares carrying different rights. The only shareswhich can be disenfranchised are named “ordinary shares”,meaning shares not having a limited voting right.Under Consolidated Financial Act, shareholders may bedisfranchised only in very few cases:a) shareholders which violated the disclosure duties set out by

Consolidated Financial Act for shareholders’ agreements(notification of the agreement to Consob and to CompanyRegister Office and publication of its extract in daily press) cannot exercise their voting rights during shareholders’ meetings;

b) in the event of violations of obligations set out for mandatorypublic offers, the voting rights attached to the share capitalheld by the entities committing said violations shall not beexercisable; and

c) if shareholders omit to comply with the notificationrequirements for major holdings, voting rights attached tolisted shares or financial instruments which have not beennotified may not be exercised [see also question 2.5 below].


Directors have the general duty to carry out the management of thecompany, in accordance with the law and the company’s articles ofassociation, with the care required by their office and by theirprofessional skills. Consequently, if directors fail to use the degreeof care required according to the above mentioned standards,causing an effective prejudice to the company, they may beconsidered jointly responsible towards shareholders. The companycan bring liability actions towards directors through a shareholders’resolution to be taken in an ordinary meeting. Such actions can alsobe brought by the board of statutory auditors with a resolution takenwith a 2/3 majority. Furthermore such kind of actions can bepromoted by minority shareholders representing at least 1/40 of theshare capital or the smaller percentage set out in the articles ofassociation. The actions mentioned above have to be initiatedwithin five years from the termination of the director’sappointment.Italian civil law provides that if an individual shareholder suffersdamages caused directly by a negligent or fraudulent action of thedirectors, he has the right to compensatory damages, within fiveyears of the act which damaged the shareholder.


Under Italian Law overtaking certain relevant thresholds could havesignificant impacts on takeover rules (which are beyond the scopeof this paper), but there are no limitations on the number ofsecurities which can be held by any shareholders.However, shareholders who exceed or fall below thresholds of 2%,5%, 7.5%, 10% - and subsequent multiples of 5% - of the votingshare capital must notify it to the Company and to Consob within fivedays from the time at which they overtook or fell below a threshold.Similar disclosure duties apply when a Listed Company holds morethan 10% of the capital of an unlisted company or a limited liabilitycompany.

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Limitations also exist for cross-holdings exceeding the threshold of2% of the capital of a Listed Company or 10% of the capital of anunlisted company or of a limited liability company. The companythat was the last to exceed the applicable threshold may not exercisethe voting rights attached to the shares in excess of the thresholdand must dispose of them within twelve months (from the date onwhich it exceeded the threshold), otherwise the suspension ofvoting rights shall apply to their entire shareholding.


Shareholders’ meetings are commonly held in the place where thecompany has its registered office, unless otherwise stated in thearticles of association. Depending on the matters to be discussed,Italian Law provides different classes of shareholders’ meetings:

ordinary meeting: it is convened, at least once a year for theapproval of the annual financial statements. Furthermore, itdecides, among other things: (i) on the appointment anddismissal of directors; (ii) on the appointment of statutoryauditors and their chairman and on their remuneration; and(iii) on the statutory auditors’ liability in case of a legal actionpursued by the company. The first time a meeting isconvened, it is duly constituted with the presence ofshareholders representing at least 50% of the company’soutstanding capital. Shareholders adopt resolutions by meansof absolute majority, unless a larger majority is required bythe company’s articles of association. The second time, themeeting is duly constituted regardless of which share of thecapital is represented by the shareholders in attendance, andresolutions are adopted by means of simple majority; andextraordinary meeting: it is convened, among other things, todecide on amendments to the articles of association; onappointment, replacement and powers of the liquidators, incase of liquidation of the Company; on capital increases,dissolution, mergers and de-mergers operations. The firsttime the meeting is convened, shareholders adopt resolutionswith a favourable vote of shareholders representing morethan the 50% of the outstanding capital, unless a largermajority is required by the company’s article of association.The second time, the meeting is regularly constituted withthe presence of more than 1/3 of outstanding voting sharecapital, and adopts resolutions with the favourable vote of atleast 2/3 of the voting capital represented.

Italian Law provides also special shareholders’ meetings fordifferent classes of shares or financial instruments, i.e. privileged orpreference shares and bonds.Formalities to convene shareholders’ meetings are provided byCorporate Governance rules and by articles of associations. Usuallythey are convened by the Chairman of the Board of Directors througha public notification, specifying when and where the meeting shall beheld and the agenda containing the list of issues to be dealt with.Shareholders who represent at least 1/10 of the company’s sharecapital may request the directors to call a meeting. Shareholdersrepresenting at least 1/5 of outstanding capital, have also the right torequest additions to the agenda, within five days of the publication ofthe above mentioned notification [see also question 2.1 above].



The management body of the company is the Board of Directors,which is composed by the number of members set out in articles ofassociations; the members are appointed by shareholders. The

Board of Directors is entrusted with the general and exclusive dutyto manage the Company. Italian Law provides that at least onemember has to be elected from the slate presented by minorityshareholders which obtained the largest number of votes.Moreover, at least one of the members of the Board (or two, if theBoard is composed of more than seven members), should satisfyindependence requirements. All members of the Board must satisfythe integrity requirements established for members of the board ofinternal auditors in the regulations issued by Minister of Justice.Further requirements can be established in articles of associations(i.e. possession of special integrity, professionalism andindependence characteristics).If a Chairman is not appointed by shareholders’ meetings, the Boardof Directors selects it from among its members. The Chairman isusually the legal representative of the company, without anyexecutive proxy. If so provided in the articles of association, theBoard can also delegate its functions to an executive committeecomposed of certain of its members (Executive Committee), or toone or more of its members (so-called executive director/s).The Board sets the content, limits and procedures for the exercise ofdelegated powers. It may also instruct the delegate bodies onspecific decisions and advocate to itself any delegated decisions.Some functions and operations cannot be delegated by the Board,specifically pertaining to: (i) the power to issue debenturesconvertible into shares; (ii) preparation and approval of draftfinancial statements; (iii) increase of corporate capital; (iv) reductionof corporate capital for losses; (v) reduction of corporate capitalbelow the legal minimum; (vi) mergers; and (vii) de-mergers.Moreover, the Corporate Governance Code recommends theappointment of internal committees with proposing and consultativefunctions, on the subject of internal dealing, remuneration andappointment of directors. Such Code recommends that thesecommittees shall be composed of at least three members, with amajority of independent directors [see also question 1.3 above].


According to the Consolidated Financial Act, rules for theappointment of directors are set out in the articles of association.Members of the Board of Directors are appointed by the ordinaryshareholders’ meeting on the basis of a list of candidates. TheCorporate Governance Code provides that, along with such lists, acurriculum vitae of each candidate to the board shall be depositedat least 15 days before the shareholders’ meeting. The directorscannot be appointed for a period exceeding three financial years,but they can be re-elected unless otherwise provided by the articlesof associations. Their mandate terminates on the date of themeeting called to approve the annual financial statements.The Italian Civil Code provides that the directors can be removed atany time by the shareholders’ meeting [see above, questions 2.6 and3.1].


Remuneration for members of the Board of Directors is decided uponby the ordinary shareholders’meeting. The remunerations of directorsprovided with special powers (usually managing directors and theChairman of the Board) are determined directly by the Board ofDirectors, after having consulted the Board of Statutory Auditors.Equity based remunerations plans (i.e. stock option plans and stockgrant plans) have to be previously approved by the shareholders’

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meeting.The amount of Directors’ fees and compensation are disclosed in theannual financial statements and in the corporate governance report.


Under Italian Law Directors are allowed to own shares in their ListedCompanies without any limitation. However, they are subject to a setof informational duties towards the company and the market.In fact, they must inform Consob and the market on anytransactions they make on the share capital exceeding the amount ofEuro 5,000.00. Moreover, transactions in securities held by directors are considered“related parties transactions” and - if relevant - they are generallysubject to the prior consent of the Board of Directors, pursuant tothe internal procedures adopted by it. Under Italian Law, ListedCompanies must adopt regulations ensuring substantial andprocedural transparency and correctness of such transactions andmake them known in the management report.The company’s statutory auditors monitor the adherence to suchregulations.


Under Italian Law, unless otherwise stated in the articles ofassociation, meetings of the Board of Directors are convened by itsChairman, who sets the agenda, coordinates the work and makessure that adequate information about the matters contained in theagenda is provided to all members of the board. After notificationto the Chairman of the Board of Directors, meetings of the Board ofDirectors may also be called by the Board of Statutory Auditors.Italian Law doesn’t establish a minimum number of annualmeetings. In this regard, the Corporate Governance Coderecommends to the Board of Directors to organise its meetings atregular intervals and to adopt an organisation and a modus operandiwhich enable it to perform its functions in an efficient manner. TheCode also recommends to independent directors to have at least onemeeting each year without the presence of the executive directors.The number of meetings of the Board of Directors (including theones participated exclusively by the independents) is disclosed inthe annual report on the corporate governance. For the validity of Board resolutions, the attendance of a majorityof the directors in office, as well as the vote of the absolute majorityof those presents, are necessary. Further rules on the functioning ofthe Board of Directors are set out in the articles of association ofeach company (i.e.: how and where meetings are to be convenedand through which modalities).


Directors are entrusted with the general power to represent thecompany and they must act within their powers. They are subjectto the general and exclusive duty to manage the company with thecare and the loyalty required by their office and by theirprofessional skills and to take all the actions required to carry outthe corporate scope in accordance with the law and the company’sarticles of association, avoiding conflicts of interests. Directors aresubject to the general duties to avoid competing with the company(they can not be appointed director or general manager of

competing company, unless expressly authorised by theshareholders’ meeting), and maintain confidential informationacquired due to their position [see above, question 2.4].


The Board of directors has the right to delegate its powers tomanaging directors (certain specific transactions, such as draftingof merger/de-merger projects can not be delegated), setting thecontent, the limits and procedures for the exercise of the delegatedpowers. In such cases, however, the Board of Directors may alwaysdecide on transactions falling within the delegation. In addition to general duties already examined, directors shallcomply with the following specific duties:

execute and duly perform all shareholders’ resolutions; on an on going basis, keep the company’s accounts properly;draft the yearly financial statements; call the shareholders’ meeting at least once per year in orderto approve the company’s financial statements; properly keep the mandatory corporate books (e.g. theshareholders ledger, the book of the resolutions of the Boardof Directors etc.);evaluate and approve related parties transactions; anddefine internal control guidelines.

Directors shall accomplish the formalities required by law inconnection with the companies’ listing and make all requiredcommunications to Consob, providing accurate and fair informationto the public; disclosing any price sensitive information pursuant tothe law and publishing the information documents required. They have the duty to report on the status of the company’smanagement within three months from the end of the first semesterof each fiscal year.The Corporate Governance Code provides for specific duties for theBoard of Directors, considered as a whole and, in particular, it shall:a) examine and approve company’s strategic, operational and financialplans and the corporate structure of the group it heads, if any; b)evaluate the adequacy of the organisational, administrative andaccounting structure of the company; c) delegate powers to themanaging directors and to the executive committee and revoke them;d) determine, after examining the proposal of the special committeeand consulting the Board of Statutory Auditors, the remuneration ofthe managing directors and of those directors which are appointed toparticular positions within the company and, if the shareholders’meeting has not already done so, determine the total sum to which themember of the board and of the executive committee are entitled; e)evaluate the general performance of the company, comparing theresults achieved with those planned; f) examine and approve inadvance transaction carried out by the issuer (and its subsidiaries)having a significant impact on the company’s profitability; and g)evaluate, at least once a year, composition and performance of theBoard of Directors and its committees [see above, question 3.6].


Under Italian Law, Listed Companies shall annually publish areport on their compliance with the Corporate Governance Code,and whether they fulfilled its provisions. As referred above,companies are not obliged to comply with such provisions, but theyare required to explain to the market the reasons why they did not doso. The company shall publish such report within 15 days prior to

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the shareholders’ meeting convened for the approval of the annualfinancial statements. The report specifically provides informationon internal functions, including on the internal committee andinternal dealing systems, and on directors’ remuneration and theirindependence [see above, questions 1.2, 3.3 and 3.5].


Companies typically stipulate insurance policies, to be coveredfrom any damages caused by their managers. The directors areallowed to stipulate insurance on their own.



Legislative Decree No. 231/2001 (the “Decree”) introduced in Italythe regulatory framework of administrative liability of legalentities. Under the Decree, companies may be held liable forcertain specific listed offences committed (or attempted) in theirinterest and/or for their benefit by: (i) individuals at the highestlevel of corporate representation, administration and management;or (ii) individuals subject to the management or oversight of one ofthe persons indicated under (i) above. In the case where one of theoffences specifically indicated by the Decree is committed, thecriminal liability of the individual who materially carried out theoffence, also entails the ‘administrative’ liability of the company. In order to benefit from specific exemption of administrativeliability, companies shall: (i) adopt and implement the appropriateorganisational, management and control models, which allow toprevent offences; and (ii) entrust an internal body with the power ofsupervising the functioning and effective compliance of thecompany with the model. The Code of Ethics represents the operational measure adopted byListed Companies in order to comply with the requirement set outunder (i) above, as part of the organisational model. It definesvalues that Listed Companies recognise and adopt in the exercise oftheir business activities.


According to Italian Corporate Governance rules, employees do nothave any specific and active role. The companies have the duty toadvise the labour organisations in case of relevant transactions, suchas mergers, de-mergers and tender offers, on which the employeeshave rights of consultation and information.

5 Transparency


The ultimate responsible for disclosure and transparency duties isthe Board of Directors. However, pursuant to the ConsolidatedFinancial Act, Listed Companies shall appoint a manager chargedwith preparing the financial reports, subject to the mandatoryopinion of the internal control body. Such manager shall attest,through a written declaration, the conformity of the company’sfinancial accounts and of the communications disclosed to the

market, verifying their compliance against relevant documents,books and accounts records.


Listed Companies shall maintain a continuous disclosure ofinformation concerning material events and circumstances and ofinside information which might have an impact on the price of theirsecurities. In addition, they are subject to disclosure of relevantparticipations, shareholders agreements, equity based remunerationplans.Periodical disclosure is required for financial statements (annual,first semester and first and third quarter). Companies have also toprovide the reports containing information related to the exercise ofvotes in shareholders’ meetings, as well as information oncompliance with the Corporate Governance Code.


Under Italian Law, Listed Companies which adopted the traditionalcorporate governance system must appoint a Board of StatutoryAuditors, having the function to supervise:

compliance with the law and the articles of association;observance of the principles of proper management;the adequacy of the Company’s organisational structure formatters within the scope of the board’s authority, theadequacy of the internal control system and theadministrative and accounting system and the reliability ofthe latter in correctly representing the Company’stransactions;the arrangements for implementing the corporate governancerules provided for in the code of conducts drawn up bymanagement companies of regulated markets or by tradeassociations that the company, by means of public disclosure,declares it complies with; andthe adequacy of the instructions imparted by the company toits subsidiaries.

The Board of Statutory Auditors shall notify to Consob anyirregularities found in the performance of its oversight activity andshall provide an annual report on the Company’s financials beforetheir approval by the Shareholders’ meeting.Furthermore, Listed Companies must appoint an externalindependent auditing firm, which shall verify: a) during thefinancial year, that company accounts are kept properly and thattransactions are reported correctly in accounting records; and b) thatthe company annual accounts and consolidated accountscorrespond to the results of the accounting records and of testsperformed by the auditor, and that the annual accounts comply withthe relevant statutory and regulatory provisions. Auditing firms shall render an opinion on the company annualaccounts and consolidated accounts in special reports. They alsoshall inform Consob and the Board of Statutory Auditors withoutdelay of any facts deemed to be censurable.


Pursuant to the Regulation of Issuers, Listed Companies mustpublish on their websites information on material events andcircumstances, disclosing corporate governance report, pressreleases related to corporate governance issues (i.e. internal dealingdisclosures), assignment of financial instruments to corporate

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officers, employees and collaborators and publication of theproposals for the appointments of the board of directors and theboard of statutory auditors, procedures provided for theparticipation and the exercise of the voting right in theshareholders’ meetings, as well as the documentation relating toitems on the agenda of the shareholders’ meetings. Usually suchinformation is contained in a specific section of the Companies’website named “investor relations”, where the relevant corporate

governance documents, such as the Articles of Association, theEthic Code, at the Committees’ Regulations are also published.

AcknowledgmentThe authors would like to acknowledge the assistance of theircolleague Marco Vigilante in the preparation of this chapter.

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Romina Guglielmetti

Studio Santa MariaLargo Toscanini, 1, 20121 MilanoItaly

Tel: +39 02 771 971Fax: +39 02 794 675Email: [email protected] URL: www.santalex.com

Romina Guglielmetti joined Santa Maria law firm in 2007. She hasgained extensive experience in capital markets and corporate law,focusing on initial public offerings counselling either offerors orunderwriters and assisting public and closely held companies inextraordinary operations, such as mergers, spin offs andrestructurings. Additionally, she has gained significant experience inthe incorporation of listed and unlisted closed end funds. She is anarbitrator appointed by Chamber of National and InternationalArbitration of Milan and has extensive experience in internationaland domestic arbitration proceedings.Before joining Studio Santa Maria, Romina Guglielmetti worked atStudio Marchetti, Studio Legale Bonelli Erede Pappalardo and - ashead of corporate affairs - at Pirelli & C. Real Estate S.p.A.(seconded from Bonelli Erede Pappalardo).Romina Guglielmetti is graduated summa cum laude at theUniversity of Parma in 1998. She was admitted to the Bar in 2001.

Francesco Paolo Scebba

Studio Santa MariaLargo Toscanini, 1, 20121 MilanoItaly

Tel: +39 02 771 971Fax: +39 02 794 675Email: [email protected] URL: www.santalex.com

Francesco Paolo Scebba joined Santa Maria law firm immediatelyafter his graduation in 2006. He has been involved in commercialand corporate law matters and has gained a significant experiencein securitisation, financing and assignment of receivablestransactions towards public entities in the health sector.His practice area is focused on legal assistance to companies onfinancing transactions and collateral agreements, merger leveragedbuy out, legal due diligence and in counselling financial banks andfinancial intermediaries on compliance, supervisory and privacyissues.Since 2007 Francesco Paolo Scebba is research fellow ofCommercial Law at the Faculty of Law of University of Milan. He is graduated summa cum laude at University of Milan, 2006 andhas completed his mandatory legal trainee period.

Santa Maria law firm was established in 1970 by Alberto Santa Maria, who is tenured professor of international lawat the University of Milan and is widely regarded as one of Italy’s pre-eminent attorneys. Based in the centre of Milan,the firm offers one of the most sophisticated international practices among Italy-based law firms.

Santa Maria law firm has consistently advised the Italian government and a wide range of important clients inconnection with all aspects of European Community law, including antitrust, state aids, international trade law, as wellas very complex corporate transactions, privatisations, mergers and acquisitions, joint ventures, restructurings andfinancings.

Moreover, Santa Maria law firm has been a pioneer in representing Italian companies in the United States market,having offered for a long time integrated Italian and U.S. legal services. The firm has currently developed an alliancewith Greenberg Traurig LLP, a U.S.-based law firm with nearly 1,800 lawyers and 31 offices in all major cities in theUnited States and worldwide.

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Chapter 15


Anderson Mori & Tomotsune

Japan



The companies covered in the answers below are the stockcompanies (kabushiki kaisha) whose securities are admitted to belisted and traded on the Tokyo Stock Exchange (“TSE”). The TSEhas three sections. The First Section of the TSE lists the securitiesof major companies which, for example, have an aggregate marketvalue in excess of JPY 50 billion at the time of listing. Over 1,700companies are listed in the First Section of the TSE. The SecondSection lists the securities of mid-sized companies (over 450companies are listed), and the Mothers Section lists the securities ofyoung, high-growth companies (nearly 200 companies are listed).


Until recently, major legislation concerning companies wasincluded in the Commercial Law, which was the primarylegislation regulating all commercial transactions (including thosesuch as transport trade or maritime commerce). In May 2006, theCompanies Act came into effect, materially amending andmodernising the regulations concerning companies under theCommercial Law and other related laws and regulations. TheCompanies Act, together with its subordinate rules, sets out thebasic principles which a company must adhere to, whether listed ornot, regarding incorporation, share issuance, corporategovernance, operations, disclosure of information, mergers andacquisitions, liquidation, etc. The Companies Act requires thatcompanies adopt articles of incorporation. Companies may chooseto override certain standard provisions contained in the CompaniesAct through their articles of incorporation, which generally includeprovisions concerning organisational structure, distribution ofmanagerial power, the total number of shares which may be issued,etc.A company conducting business which the government has theauthority to supervise must also adhere to the laws whichspecifically regulate that business (e.g., banking business (BankingLaw), trust business (Trust Business Law), insurance business(Insurance Business Law) or pharmaceutical affairs(Pharmaceutical Affairs Law), etc.).The companies listed on the TSE must also adhere to the FinancialInstruments and Exchange Law (“FIEL”) and the TSE’s SecuritiesListing Regulations, which regulate, among other things,disclosure of information by listed companies. Generally

speaking, the FIEL and the TSE’s regulations focus on protectinginvestors to a greater degree than the Companies Act.


The shares of companies listed on the TSE became paperless onJanuary 5, 2009 (“Effective Date”) based on the provision under theLaw on Book-entry Transfer of Corporate Bonds, Stocks and OtherSecurities (shasai-kabushiki-tou-no-furikae-ni-kansuru-horitsu).On the Effective Date, the physical share certificates of the listedcompanies already issued became invalid, and since then, theshareholders’ rights in all listed companies, including holding andtransfer of shares, have been managed electronically through entriesin the account books maintained by account managementinstitutions such as banks and securities companies (kouza-kanri-kikan). The paperless share system virtually eliminates the risk ofloss or theft of share certificates, and is expected to allow safer andmore efficient maintenance and trading of listed shares.It is assumed that someone who was holding a share certificate hasopened the trading account at a securities firm and has deposited theshare certificates prior to the Effective Date. However, there stillexist some shareholders for each listed company who did notdeposit their share certificates prior to the Effective Date and, thus,were not recorded in the account books as shareholders. In suchcase, information on the non-deposited share certificates arerecorded on accounts called special accounts (tokubetsu-koza), theprovisional account opened by the issuer for the purpose of securingthe rights of holders of non-deposited share certificates. To tradethe shares recorded on a special account, the shareholder must firsttransfer the share to his/her trading account since the sharesrecorded on a special account are prohibited from being traded. Totransfer the share to his/her account, the shareholder must provethat he/she legally owns such share.

2 Shareholders


The shareholders are ultimately the owners of the companies, butthey have, in principle, delegated the power to operate and managethe company to the directors (or, for a company with committees,executive officers). (For the remainder of these answers, the term“directors” shall, as the context requires, include executive officersas further described in the answer to question 3.1 below.)

Hitoshi Ishihara

Yoshimasa Dan

WWW.ICLG.CO.UK85


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Anderson Mori & Tomotsune Japan

Therefore, unless the articles of incorporation of a company requirea shareholders’ resolution for certain issues relating to theoperations and management of the company, the directors are theones who should handle the daily operations and management.However, the Companies Act reserves certain rights and powers tothe shareholders by requiring a shareholders’ resolution for certainissues.The rights and powers to which the shareholders are entitled underthe Companies Act include, among other things, the following: (a)decisions which materially effect the company’s business (such asamendment of the articles of incorporation, mergers, corporatesplits, capital reductions and dissolution of the company); (b)appointment and dismissal of directors, corporate auditors andaccounting auditors (see question 3.2 below for further details); (c)approval of financial statements (except for companies which meetcertain requirements); (d) decisions which materially affect theinterest of the shareholders (such as payment of dividends andissuance of shares or stock options at especially favourable prices);and (e) decisions which should not be left to the discretion ofdirectors (such as determination of directors’ remuneration (seequestion 3.3 below for further detail) and discharging directors’liabilities (see question 3.9 below for further detail)).As described above, the shareholders should, in general, exercisetheir rights and powers by submitting their votes at theshareholders’ meeting. However, in extreme circumstances, theshareholders are allowed to directly influence the operations andmanagement of the company before the company takes certainactions. These powers include, among others, the following: (i)shareholders who are likely to suffer damages due to the issuance ofcertain new shares may demand that the company cease issuingsuch shares; (ii) shareholders who are likely to suffer damages dueto mergers by summary method, etc. may demand that the companystop such mergers; and (iii) shareholders may demand that thedirectors stop engaging in certain acts, if such acts are in violationof the laws and regulations or the articles of incorporation, and theyare likely to cause unrecoverable detriment to the company. Pleasenote, however, that some of these rights require the shareholders tohold a certain amount of shares or to have held shares for certainperiod of time.


The shareholders are only liable for the amount of their capitalcontribution in the company. Although it is theoretically possiblefor the shareholders to be liable for the company’s conduct due tothe doctrine of “piercing the corporate veil,” it is very unlikely thatsuch doctrine would be applied in the context of listed companies.


In ordinary circumstances, a company may not disenfranchiseshareholders unless the company’s articles of incorporationspecifically provide that certain classes of shares may becompulsorily purchased by the company. However, it is possiblefor the shareholders of certain companies to be “squeezed out” inthe case of corporate restructuring such as the share exchangetransactions (kabushiki-kokan).


In cases where a company suffers damages due to one of its

directors’ misconduct, the company, in the first instance, shouldseek compensation from the responsible directors. However, sincethe company is actually managed by the directors, it may choose notto pursue such directors. Therefore, a shareholder who has held thecompany’s shares for a certain period may demand that thecompany initiate a lawsuit against such directors. If such a demandis not met, then such shareholder may initiate a lawsuit against thedirectors on behalf of the company. In case a shareholder suffers damages affecting the operation or themanagement of the company due to the wilful misconduct or by thegross negligence of the members of the management body(including the directors, the corporate auditors, etc.), theshareholder may pursue such directors directly.


Under the Foreign Exchange and Foreign Trade Act, a report mustbe made to the Minister of Finance, etc. if the holdings of foreigninvestors increase to more than 10% of the shares of a listedcompany. Further, if foreign investors wish to increase their staketo more than 10% of a company in certain industries which mayhave an impact on Japan’s national security or those producingproducts which could be used to manufacture weapons (such as theairline industry, nuclear business, utility business, titanium alloyindustry and carbon fibre industry), then a report must be made tothe Minister of Finance, etc. prior to such purchase. If the Ministerof Finance deems it necessary to restrict such increase in the stake,then the Minister of Finance may recommend or even order theamendment of the terms of the purchase or stop the purchasealtogether.There are also de facto limitations on the number of securities thatforeign investors can hold in companies of certain industries, suchas the broadcasting industry (in case more than 20% of theshareholding ratio of the company is held by foreign investors, sucha company will lose its license to broadcast) and the airtransportation industry (in case more than one third of theshareholding ratio of the company is held by foreign investors, suchcompany will not be permitted to conduct air transportationbusiness).Regarding disclosure, a shareholder in a listed company must file areport with the authorities concerning its shareholding ratio if thepercentage of ownership reaches 5%. Thereafter, a report must bemade if the shareholding ratio increases or decreases by 1% ormore. The report must be made by the shareholder itself and not thecompany. The failure to timely submit such reports or amendmentreports is subject to administrative monetary penalties. The amountof administrative monetary penalties is 1/100,000 of the totalmarket value of the subject shares.In addition to the above, though beyond the scope of thispublication, there are also insider trading rules and takeover ruleswhich limit the timing and speed for which shareholders can sell orpurchase certain shares.


There are two types of shareholder meetings. One is the ordinarygeneral meeting of shareholders, which is held annually forpurposes such as approving the financial statements, and electingthe directors and auditors. The other is the extraordinary generalmeeting of shareholders, which is held whenever material issuesarise which need to be resolved by the shareholders.



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The vast majority of shareholders’ resolutions require a vote from asimple majority of the voting rights present at the meeting, but someresolutions which concern major issues of the company require aseparate formula, such as (i) a vote from more than two thirds of thevoting rights present at the meeting, (ii) a vote from a simplemajority of the entire shareholders which should total more thantwo thirds of the voting rights present at the meeting, or (iii) a votefrom all of the shareholders.Although the default position is for the board to decide and therepresentative director to call the shareholders’ meetings, ashareholder may, by meeting certain requirements (such as theamount of shares it holds or the period of time for which it has beena shareholder), require that directors of the company convene ashareholders’ meeting. If such a request is not met within a specificamount of time, the requesting shareholder may convene a meetingon its own after obtaining court approval. A shareholder who meetscertain criteria may also require that the company include itsproposals in the agenda of the shareholders’ meeting. Further, incase a resolution is made at a shareholders’ meeting thatsubstantially fails to conform to the laws and regulations or thearticles of incorporation regarding its convocation, management, orresolution, a shareholder may initiate a lawsuit to cancel theresolution made at such shareholder meeting.



The management body of a company can be classified into twotypes, according to the structure which the company has adopted.One is the “Company with Auditors” and the other is the “Companywith Committee”.Company with AuditorsThis is the most common type of corporate structure for Japanesecompanies. Both the directors and corporate auditors are elected bythe shareholders. The directors form a board of directors and theboard of directors elects, from among these directors, arepresentative director, who has the power to represent thecompany. The daily management of the company is conducted bythe representative director (the term “president” or “chairman” isnot provided for by law, though such terms are commonly used). Inaddition, common directors may be authorised by the board torepresent certain aspects of the business. Some major decisions ofthe company prescribed by law or the articles of incorporation arerequired to be made by resolution at the board meeting or theshareholders meeting. In the case of a “Large Company” (acompany with a stated capital equal to or exceeding ¥500 million orwith total debts equal to or exceeding ¥20 billion or more), thecorporate auditors, whose duty is to audit the directors’ conduct,form a board of corporate auditors. Company with CommitteeThis is a new type of corporate structure which was introduced bylegal amendment in 2002. Only the directors are elected by theshareholders. The directors will form a board of directors and electthe members for three committees from among these directors. Thethree committees are (i) the audit committee, which conducts,among other things, the audit of the directors and executive officers,(ii) the nomination committee, which decides on proposalsregarding the election and dismissal of the directors to be submittedat the shareholders meeting, and (iii) the compensation committee,which sets compensation for the directors and executive officers.The board of directors also appoints executive officers to manage

the company by delegating certain aspects of the company’sbusiness to such executive officers. However, unlike in the case ofthe Company with Auditors, the executive officers are not requiredto be elected from among the directors who are appointed by theshareholders. If several executive officers are to be appointed, theboard of directors must elect at least one executive officer who hasthe power to represent the company (the term “chief executiveofficer” is not provided for by law, though it is commonly used). Term of the directorsIn a Company with Auditors, the length of directors’ service shallbe two years or less, whereas it shall be one year in a Company withCommittee. Even if a longer term is agreed upon in the servicecontract, such a provision will not limit a resolution at theshareholders meeting to replace the directors upon expiry of thetwo-year period.


Company with AuditorsThe directors are appointed and removed by shareholders’resolution. The representative director is appointed and removed bythe board resolution. However, if a proposal to remove a director isrejected despite that director’s misconduct, certain shareholdersmay request that the court remove such a director. Company with CommitteeThe appointment and removal of the directors who constitute theboard and the committee is the same as a Company with Auditors.On the other hand, the executive officers, including therepresentative executive officers, are appointed and removed byboard resolution.


The Companies Act provides that, for a Company with Auditors, theremuneration of directors must be approved at a shareholders’meeting. Most companies approve the maximum aggregate amountof remuneration which shall be paid to all directors and give theboard the power to decide how it should be allocated among thedirectors. The board may delegate such power to the representativedirector. With respect to a Company with Committee, theremuneration of each director and executive officer is decided bythe compensation committee.Further, the directors must disclose and obtain board approval ifthey are to engage in businesses that compete with the company’sbusiness, carry out transactions with the company, etc.


The limitation on disclosure required for the members of themanagement body to hold the securities of a company are basicallythe same as those described in question 2.5 above, though there arecertain restrictions under the FIEL which the members of themanagement body must adhere to in order to ensure that they do notviolate insider trading regulations. The number of shares held andthe stock acquisition rights of the directors must be disclosed on atimely basis and must be described in the annual securities report,etc.

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The board meeting could be called by any of the directors wheneverrequired by giving notice to all directors (and corporate auditors incase of a Company with Auditors) pursuant to the requirementsstipulated in the laws and regulations or the articles ofincorporation. Each director has one voting right, and theresolution is generally made with a simple majority of the votingrights present at the meeting. A director who has a special interestin the resolution in question cannot vote for such a resolution. Ifallowed by the articles of incorporation, the vote could be made inwriting or by electronic means by obtaining the consent of all thedirectors and corporate auditors.The Companies Act requires the representative directors and theexecutive officers to report to the board at least once every threemonths on how the business has been carried out. Thisrequirement, in turn, means that a company must hold a boardmeeting at least once every three months.


The principal duties that the directors owe to the company include,among others, the following:

Duty of Loyalty (the directors must perform their duties in aloyal manner in compliance with the laws and regulation,articles of incorporation and resolutions of the shareholdersmeetings).Duty to Report (the directors must report either to theshareholders or to the corporate auditors any facts which arelikely to cause substantial detriment to the company).Duty of Care (the directors must assume the duty toadminister the mandated business with the care of a goodmanager).Restrictions on Competition and Conflicting InterestTransactions (the directors must disclose and obtain boardapproval if they are to engage in businesses that competewith the company’s business, carry out transactions with thecompany, etc.).


The Companies Act requires a Large Company and a Companywith Committee to have the well-developed systems necessary toensure that the execution of duties by directors and executiveofficers comply with the laws and regulations, the articles ofincorporation, etc. The systems which must be developed include,among others:(i) a system to store and administer information concerning the

operation of the directors and executive officers;(ii) a system concerning risk management in case loss is

incurred;(iii) a system to ensure that the execution of duties by directors

and executive officers is efficient;(iv) a system to ensure that the execution of duties by the

employees complies with the laws and regulations and thearticles of incorporation; and

(v) a system to ensure that the audit to be conducted by thecorporate auditors is effective.


The names of the directors and executive officers and the address ofthe representative director and the representative executive officerare registered in the corporate register, which is disclosed to thepublic. Under the FIEL, listed companies must file an annualsecurities report with the local financial bureau, which is madeavailable to the public. Since the items such as the directors’position, name, birth date, background, term, and shares held aredescribed therein, such information is also disclosed to the public.In addition, under the Companies Act, a company is required todisclose the directors’ name, position at the company, otherpositions at other companies, total amount of remuneration, etc. inthe business report to be presented to the shareholders once everyfiscal year.


If the articles of incorporation of a company so provide, some of thedirectors’ liabilities to the company may be discharged to a limitedextent by board resolution. Further, even if the articles ofincorporation do not contain such a provision, some of thedirectors’ liabilities may be discharged by shareholders’ resolution,though approval of all shareholders is required to discharge thedirectors’ liability in full. Further, a company may, if allowed bythe articles of incorporation, also enter into contracts with itsoutside directors, limiting their liabilities to the company to acertain extent.Directors’ and officers’ insurance is not restricted and is thereforepermitted. Although the company can pay the insurance premiums,the payment of such premiums is construed to be a part of salarypaid to the relevant directors.



Currently, there are no laws and regulations regulating corporatesocial responsibility (“CSR”). However, many of the majorcompanies have been aware of the importance of CSR and havebeen acting accordingly by disclosing CSR reports on a voluntarybasis.


The employees of a company do not have any specific role incorporate governance.

5 Transparency


Generally speaking, the representative director or the representativeexecutive officer has the ultimate power concerning the dailymanagement of the company unless such power has beenspecifically delegated to other directors or executive officers.Therefore, the representative director or the representative



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executive officer has primary responsibility for disclosure andtransparency. However, other executives such as the directors,corporate auditors, accounting auditors, etc. also bear collectiveresponsibility to a certain extent.

5.2 What corporate governance related disclosures are required?

Among other documents, the contents of the corporate register, thebalance sheet of the company, and the annual securities report (andthe semi-annual and quarterly securities reports) are required to bedisclosed to the public. The annual securities report contains a widevariety of issues concerning the company such as the company’sapproach to corporate governance, along with its businessperformance, amount of sales and turnovers, material agreements thatwere entered into, developments and investments, distribution ofprofits, consolidated and non-consolidated financial statements, etc.Further, the listed companies are required to submit an internalcontrol report each business year to the Prime Minister laying out theinternal procedures designed to ensure (a) the effectiveness andefficiency of the business operation, (b) the credibility of the financialstatements, (c) the legal compliance of its business activities, and (d)the safeguarding of the assets.


There are two types of auditors in a company, depending on the

structure which the company has adopted (Company with Auditors orCompany with Committee). One is the accounting auditor, who shallbe a licensed accountant or accounting firm and whose main purposeis to audit the financial statements of the company. The other is thecorporate auditor, who audits the entire business of the company ifsuch company has adopted the structure of the Company withAuditors (in case of a Company with Committee, the directorsforming the audit committee assume such a role). The roles whichsuch “auditors” play relative to disclosure are those described inquestion 5.1, where the representative director or the representativeexecutive officer has primary responsibility for disclosure andtransparency, but the accounting auditor and corporate auditors alsobear collective responsibility.


There are no requirements for a company to publish corporategovernance information on its web site. However, since theFinancial Services Agency implemented the Electronic Disclosurefor Investors’ Network (“EDINET”) in May 2000, the annual, semi-annual, and quarterly securities reports of listed companies aredisclosed by the Ministry of Finance through the EDINET. Further,disclosure of certain information by listed companies, due to therequirements of the TSE’s Securities Listing Regulations asdescribed in question 1.2 above, is available through the TimelyDisclosure Network (“TDnet”), which is managed by the TSE.

Yoshimasa Dan

Anderson Mori & TomotsuneIzumi Garden Tower, 6-1, Roppongi 1-chomeMinato-ku, Tokyo 106-6036Japan

Tel: +81 3 6888 1073Fax: +81 3 6888 3073Email: [email protected]: www.andersonmoritomotsune.com

Yoshimasa Dan is a partner at Anderson Mori & Tomotsune, and hasbeen involved with many international and domestic M&Atransactions. Mr. Dan has also provided a wide range of legalservices to the clients including in the areas of corporate law,antitrust law, securities law, employment and labour law, contractlaw, tax law, etc.

Hitoshi Ishihara

Anderson Mori & TomotsuneIzumi Garden Tower, 6-1, Roppongi 1-chomeMinato-ku, Tokyo 106-6036Japan

Tel: +81 3 6888 1165Fax: +81 3 6888 3165Email: [email protected]: www.andersonmoritomotsune.com

Hitoshi Ishihara is an associate at Anderson Mori & Tomotsune, andhas provided a wide range of legal services to the clients includingin the areas of international and domestic litigations and disputeresolutions, corporate law, antitrust law, and contract law, etc.

Anderson Mori & Tomotsune is one of Japan’s premier law firms. As of January 2009, the firm has approximately 280Japanese Lawyers (bengoshi), approximately 10 lawyers qualified in foreign jurisdictions, approximately 90 otherprofessional staff including patent lawyers, immigration lawyers, foreign legal trainees, translators and paralegals andapproximately 130 other general staff members.

Anderson Mori & Tomotsune has offices in Tokyo and Beijing and it provides a full range of specialised legal servicesfor both international and domestic corporate clients. The firm is frequently involved in domestic and international legalmatters of substantial import. In particular, the firm has extensive expertise in large M&A and finance transactions,global securities offerings and other cross-border investment transactions. The firm also represents clients in complexinternational and domestic legal disputes.



Chapter 16

Bae, Kim & Lee LLC

Korea



In Korea, there are four types of companies: chusik hoesa (jointstock company); and yuhan hoesa (limited liability company);hapmyeong hoesa (general partnership company); and hapja hoesa(limited partnership company). By far the most common of these isthe joint stock company, in which shareholder liability is limited tothe capital contributions and equity interests may issue in the formof freely tradable securities. Discussion below focuses on jointstock companies, except where otherwise specified.


Most questions of corporate governance will turn on the KoreanCommercial Code (“KCC”), which is the main body of corporatelaw of Korea, and the organisational charter of the company, whichin the case of a joint stock company is its “articles of incorporation”(“AOI”). The AOI will set out the corporate structure and basicgoverning rules, such as business purposes, authorised capital andtypes of stock, composition of the board of directors (“Board”),appointment of director and the representative director, andprocedures for Board and shareholder meetings. Listed companies must comply with (i) the Financial InvestmentServices and Capital Markets Act and regulations thereunder(collectively, “FSCMA”) and (ii) disclosure rules (“KRX Rules”)adopted by the Korea Exchange (“KRX”). Among large companies, certain issues of corporate governanceimplicate rules under the Monopoly Regulations and Fair Trade Act(“MRFTA”). The MRFTA, which is the main antitrust statute ofKorea, requires, for example, Board-level review and decision-making, and/or public disclosure, of certain types of transactionswith affiliates. Joint stock companies meeting certain requirements will be subjectto the Act on Outside Audit of Joint Stock Companies (“OutsideAudit Act”), under which they must appoint an outside accountingfirm as independent auditor and also set up an internal accountingmanagement system (see question 5.3 below for more detail).


Since the late 1990s, there has been a slow but distinct trend, withimpetus from the government and NGOs, toward greater

transparency in corporate governance. This has been manifestedmainly in evolving disclosure and procedural habits of companies,rather than changes in law per se.In a different vein, the legislature passed certain amendments to theKCC in April 2009, most of which will take effect one year frompublic notice by the government (so amended the “2009 KCC”). The2009 KCC will permit certain kinds of communications between thecompany and shareholders to be done electronically (see question 2.6below), and relaxes certain restrictions upon smaller companies(having paid-in capital of less than KRW 1 billion), for example by(i) shortening the minimum notice period for convening ashareholders’ meeting from two weeks to one week, (ii) permittingshareholder resolution by unanimous written consent in lieu ofholding an actual meeting, and (iii) exempting such companies fromthe general requirement of appointing a statutory auditor (seediscussion of this Board-level position at question 3.1 below). In addition to the KCC amendments already passed, the legislatureis in the process of reviewing several highly significantamendments, such as proposals (i) to permit the squeeze-out ofminority shareholders by a controlling shareholder with a 95% orgreater stake, (ii) to adopt the doctrine of corporate opportunity, and(iii) to permit, by providing in its AOI, limitations on directorliability up to six times (three times, in case of outside director) themost recent annual remuneration of such director.

2 Shareholders


For the most part, the operation and management of a company arematters within the province of the Board and managers. Theshareholders elect the Board members and thereby ultimatelycontrol management. Aside from this, normally shareholdersexercise only a limited say in relation to the conduct of business, byvotes at shareholder meetings on such matters as the Board placeson the agenda. A range of matters will require shareholder approval(by majority or in some cases supermajority vote) under the KCCor the AOI. Under the KCC, shareholder approval is required, among otherthings, for appointment of directors, and approval of financialstatements and dividends. Further, supermajority shareholderapproval is required, among other things, for amendment to the AOI,capital reductions, dismissal of a director, and for a range of majortransactions such as mergers, spin-offs, business transfers anddissolution. Dissenting shareholder rights are triggered by a merger

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and several other types of transactions. Precise requirements incertain situations vary depending on whether the company is listed.For dissenter’s rights, see also questions 2.4, 2.6 and 3.2.


In principle, the liability of each shareholder of a joint stock companyis limited to its capital contribution, and no shareholder bears fiduciaryduty to the company. There are, however, certain exceptions:

Piercing the corporate veil: Korean courts recognise theprinciple of “piercing of the corporate veil” in very limitedcircumstances, involving situations where the shareholder isdirectly and pervasively involved in the company and thecorporate identity is but a fiction. Liability of controlling shareholder: Under the KCC, ashareholder of a company may be imputed a fiduciary dutyto the same extent as directors where (i) the shareholder, bymeans of its influence over the company, instructs a directoror executive in the conduct of the business, or (ii) theshareholder conducts company business directly in the nameof a director or executive or by using a title that implies suchauthority. The dominant shareholder in such situations maybe jointly and severally liable for damages arising from itsactions, together with any directors who were complicit. Secondary tax liability: Under Korean tax law, if a companylacks sufficient assets to pay its tax liabilities, a shareholdermay be liable for payment of a portion thereof pro rata to itsshareholding, if (i) it owns more than 50% of the shares or(b) it is found to have been directly involved in management.


A shareholder may be disenfranchised or have its voting rightsrestricted in certain occasions specified by statute. For instance, invoting for election of a statutory auditor, a shareholder with 3% ormore of the total outstanding voting shares may not vote its sharesexceeding 3%. Additionally, a shareholder who has a specialinterest in a resolution cannot exercise its voting rights with regardto that resolution. See also question 2.5 below (for limitations onvoting rights in case of violation of certain regulations). Under current law, a “squeeze-out merger” per se is not permitted.A procedure that has the indirect effect of eliminating minorityshareholdings may be possible, but typically this raises significantissues of fiduciary duty and equal treatment of shareholders.


In case of malfeasance by Board members or management, thecompany is the proper plaintiff in the first instance. However,direct shareholder action is possible in certain situations, includingthe following:

A shareholder (or group of shareholders) that owns 1% ormore of the total outstanding stock (or, in the case of a listedcompany, has owned 0.01% or more of the total outstandingstock for at least six months) may demand that the companybring an action against a director or a statutory auditor, and,if the company refuses to do so, may bring a derivative actionagainst such director or statutory auditor.A shareholder (or group of shareholders) that owns 1% ormore (or, in the case of a listed company, has for at least sixmonths owned 0.05% or more, or 0.025% or more if thelisted company has paid-in capital of KRW 100 billion) ofthe total outstanding stock can demand that a director desist

from activities that violate law or the AOI, if such activitiesmay cause irreparable damage to the company.


Limitation on acquisition of shares: In general, there is no legallimitation on acquisition of shares in a company. However, there arecertain exceptions including the following: (a) statutes regulatingcertain industries (such as banking and broadcasting) restrict theshareholding ratio of one shareholder (including its related parties)in a company so that the ownership of the company may not beconcentrated; (b) statutes regulating certain industries (such aselectric power, telecommunications, and various media segments)restrict or prohibit foreigners’ shareholdings to protect domesticindustries; (c) the KCC generally prohibits acquisition of treasuryshares and acquisition of shares in the parent company by asubsidiary; (d) the MRFTA restricts a holding company meetingcertain requirements and its domestic affiliates in their respectiveshareholdings in another company; and (e) the MRFTA prohibits acompany that belongs to a large conglomerate from acquiring sharesin its affiliates. In general, shareholders may not exercise votingrights with respect to the shares acquired in violation of the above-mentioned statutes, and may be subject to the relevant authority’sorder to dispose of such shares. See also question 3.4 below. Disclosure of acquisition of shares: Under the FSCMA, if a person,together with its related parties, comes to hold at least 5% of the totalvoting securities (i.e., voting shares and securities representing votingshares) of a listed company, it must report such shareholding to theFinancial Services Commission (“FSC”) and the KRX within fivedays after the transaction, and send copies of such report to the listedcompany. Thereafter, any increase or decrease in its shareholding by1 % or more of the total voting securities must also be reported withinfive days. Shareholders violating such disclosure requirements maynot exercise voting rights deriving from the shares exceeding 5% ofthe total voting shares and in violation of such disclosurerequirements, and may be subject to an order of the FSC to disposeof the shares in violation of such disclosure requirements. Separately, under the FSCMA, if a person (not including its relatedparties for this purpose) acquires 10% or more of the total votingshares in a listed company, or exercises de facto influence over“material matters of management” of a listed company, such personmust file a report with the KRX and the Securities and FuturesCommission within five days after such acquisition/change.Thereafter, any change in the shareholding must also be reportedwithin five days. Further, under the KCC, a company (whether listed or not) thatacquires more than 10% of the total outstanding shares of anothercompany must give notice of such fact to the issuing company. Also,under the MRFTA, a company (whether listed or not) that belongs toa large conglomerate must file a report with the Korean Fair TradeCommission with respect to its shareholdings in its affiliates.


Types of meetings: A company must hold an annual shareholders’meeting within three months after the end of the preceding fiscalyear, and may hold other shareholders’ meetings as necessary. Atthe annual shareholders’ meeting, shareholders must review andapprove the financial statements for the preceding fiscal year. Theelection of directors and the statutory auditor, and determination oftheir remuneration, are also typical matters resolved at the annualshareholders’ meeting.

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Convocation of the meeting: In principle, only the Board can callthe shareholders’ meeting. However, shareholders with 3% or more(in case of listed companies, shareholders who have held shares of1.5% or more for at least six months) of the total outstanding sharesmay demand that the Board convene an extraordinary shareholders’meeting and if the Board fails to do so, such shareholders may inperson call a shareholders’ meeting with the permission of thecompetent court. Under the KCC, a notice of a shareholders’ meeting may be giveneither in writing or by e-mail. The 2009 KCC provides that e-mailnotice is available only if the relevant shareholder consents thereto. Agenda of the meeting: The agenda of a shareholders’ meeting isalso determined by the Board. However, shareholders with 3% ormore (in case of listed companies, shareholders who have heldshares of 1% or more for at least six months, and in case of listedcompanies having paid-in capital of 100 billion or more,shareholders who have held shares of 0.5% or more for at least sixmonths) of the total outstanding voting shares may propose itemsfor inclusion in the agenda with six weeks’ prior written orelectronic notice to a director. Resolution requirements: Except as otherwise provided by the KCCor the AOI, an ordinary shareholders’ resolution may be adopted byaffirmative vote of a majority of voting shares present at suchmeeting representing at least one-fourth (1/4) of the totaloutstanding shares. For matters requiring a “special resolution,”affirmative votes of at least two-thirds (2/3) of voting shares presentat such meeting representing at least one-third (1/3) of the totaloutstanding shares of the company are required. A few corporate actions must be authorised by unanimous approvalof the shareholders including (i) release of a director or statutoryauditor from liability owed to the company, and (ii) changing thecorporate form from a joint stock company to a limited liabilitycompany (yuhan hoesa). Manner of voting: Voting rights may be exercised (i) in person, (ii)by proxy, or (iii) by submitting a written vote if the AOI so allow.The 2009 KCC provides that a shareholder may exercise its votingrights through electronic communications if the Board so allows. Awritten resolution in lieu of holding the shareholders’ meeting is notallowed except for certain small companies under the 2009 KCC. Beneficial shareholders: Under the KCC, a shareholder must beregistered on the shareholders’ registry in order to claim its rights as ashareholder. However, Korean courts have held that a company may,at its own risk, deem beneficial owners of shares (who have not beenregistered on the shareholders’ registry) as the shareholders of relevantshares, and allow such beneficial owners to exercise the rights for suchshares. Korean courts have further held that, if the company knows,or is grossly negligent in not knowing, that the person registered on theshareholders’ registry is a nominal shareholder, and the beneficialshareholder can easily show such facts, then the company must treatsuch beneficial shareholder as the owner of the relevant shares andallow him/her to exercise the rights for such shares.



All companies are managed by a single, one-tier Board. The KCCclassifies directors into two categories: inside directors and outsidedirectors. An outside director is defined as a non-standing directorwho is not affiliated with the controlling shareholder or themanagement of the company. In general, outside directors have thesame level of responsibility as that of inside directors.

The Board must consist of at least three directors. However, acompany with total paid-in capital of less than KRW 500 million(KRW 1 billion under the 2009 KCC) may have one or twodirectors. While unlisted companies are not required to electoutside directors, in case of listed companies, with limitedexceptions, at least a quarter of the Board must be outside directorswho meets certain heightened requirements under the KCC.Moreover, listed companies with assets of KRW 2 trillion or moremust have at least three outside directors representing at least halfof the total number of directors.Also at the Board level, there is normally a “statutory auditor” orsimply “auditor,” who is also appointed by the shareholders and isentitled to participate in Board meetings. Under the current KCC, acompany must appoint an auditor, or else constitute an auditcommittee among the directors. The auditor should be someoneindependent of the company’s management (and certain majorshareholders, in case of a listed company). (This individual positionshould not be confused with the accounting firm that audits thecompany’s year-end books, commonly termed the “independentauditor”.) The auditor’s duty is to monitor directors andmanagement in the performance of their duties, to monitor thecompany’s bookkeeping and to examine financial statements andother matters put before shareholders’ meetings. The auditor alsohas the authority to investigate the financial condition of thecompany. Among the directors on the Board, one will serve as the“representative director”, who normally serves as chief executiveofficer. The representative director of a company has,presumptively, plenary authority to represent the company in itsexternal affairs and day-to-day business operations. Therepresentative director is usually elected by the Board, although theAOI may provide for his election at a general shareholders’meeting. Each director has the authority and responsibility tomonitor the performance of duties by other directors including therepresentative director. The Board may establish a committee(s) to address a specific issueor serve a prescribed function as provided by the AOI. Although theBoard may delegate a portion of its authority to such committee(s),it has authority to overturn the decisions made by suchcommittee(s). Although the establishment of committees by theBoard is generally optional, listed companies with total asset ofKRW 2 trillion or more must establish an audit committee and anoutside director recommendation committee as mandatory organs.


A director is appointed by an ordinary resolution at the shareholders’meeting, and his/her term of office is determined by the AOI or at theshareholders’ meeting that elects the director; provided, however,that such term may not exceed three years. A shareholder of 3% ormore of the total outstanding voting shares (in the case of listedcompanies with total assets of KRW 2 trillion or more, a shareholderof 1% or more of the total outstanding voting shares) may demand,absent any provision to the contrary in the AOI, the company to electdirectors through cumulative voting. However, in most companies,the AOI specifically precludes the use of cumulative voting inelecting directors. Under the KCC, there is no nationality or agerestriction imposed on the appointment of a director. A director may be dismissed by a special resolution at theshareholders’ meeting at any time and without cause. However, ifa director is removed from office before the end of his/her termwithout justifiable cause, such director is entitled to request fromthe company compensation for damages incurred due to such



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removal. If a shareholders’ meeting fails to dismiss a director eventhough such director is in violation of the law or the AOI, orcommits wilful misconduct, a shareholder that owns 3% or more(or, in case of a listed company, has for at least six months owned0.5% or more, or 0.25% or more if the listed company has paid-incapital of KRW 100 billion) of the total outstanding shares may filea petition, within one month after such shareholders’ meeting, withthe competent court to dismiss such director.


The remuneration of directors is determined either by the AOI or byresolution at the shareholders’ meeting. Thus, absent any provisionin the AOI or any shareholders’ resolution on remuneration, thedirectors may not claim payment of remuneration. It is generalpractice in Korea that the AOI or shareholders’ resolutions only setthe maximum amount of the remuneration for Board members withthe Board determining the exact amount to be paid to each directorwithin the maximum amount allowed.Under the FSCMA, listed companies are required in their businessreports to disclose the total amount of remuneration paid to theirdirectors.


In general, directors are permitted to own shares in their companieswith no limit on the number of shares that may be owned.However, directors, as well as certain major shareholders, of listedcompanies, must adhere to rules against insider trading and marketmanipulation, and restrictions on short-swing profits. Under the FSCMA, a director or a statutory auditor of a listedcompany must report his/her shareholding to the KRX and theSecurities and Futures Commission within five days after he/shebecomes a director. Thereafter, any change in such shareholdingmust also be reported within five days.


Board meetings are called whenever required, and under the KCC,each director has a right to convene a Board meeting. A notice forconvocation of a meeting should be sent to each director andstatutory director at least one week prior to the meeting date.However, such period may be shortened by the AOI, or byunanimous consent of directors and the statutory auditor. A Board resolution may be adopted by the presence of a majority ofthe directors in office and the affirmative votes of a majority of thedirectors present. This voting requirement may be increased by theAOI, but may not be relaxed. In principle, directors must physically attend Board meetings, butmay also participate in resolutions by means of video conference.


Under the KCC, directors of a company owe fiduciary duties to thecompany, including a duty of care and a duty of loyalty. Directorsare required to act in good faith and in the best interests of the

company. These duties generally apply to all directors, whether ornot the director is an inside or outside director. Under Korean law,however, there is no statute that clearly stipulates in detail therequirements or standards pertaining to such duties or generally theliability of directors for corporate decisions.The prevailing understanding is, and Korean courts recognise, thatdirector liability for corporate actions, and effectively the duty ofcare, is limited by the so-called “business judgment rule”. This maybe described as a presumption that, in making corporate decisions,directors acted on an informed basis and in the honest belief that theaction was taken in the best interests of the company. The generalview among jurists in Korea is that it is inappropriate for a directorto be held liable for corporate decisions, absent specialcircumstances, such as fraud, conflict of interest or illegal conducton the part of the director. Under Korean law, if a director has breached his/her fiduciary dutyto the company, he/she may be subject to both civil and criminalliability. Only the company or a shareholder acting on behalf of thecompany (in a derivative action) can pursue a civil lawsuit againsta director for violation of fiduciary duty. A director’s civil liabilityfor violation of fiduciary duty can be extinguished by theunanimous consent of all shareholders.


Korean law does not clearly provide for specific responsibilities orfunctions of Board members in relation to corporate governance.However, Board members are responsible for, among other things,the following:

Responsibility for the management of the company:Directors make decisions on the management of thecompany through the Board meeting. As discussed, inmaking such decisions, directors bear fiduciary duties.Where they are shown to have breached their duties,directors are subject to joint and several liability for damagescaused to the company. Duty to monitor: Each director has the obligation to monitorand observe the other directors’ performance. Directors mayrequest the representative director to report the performanceof the other directors or employees to the Board. Also,executive directors must report the status of theirperformance at least once every three months to the Board.Financial reporting: Directors should prepare the financialstatements of the company and submit them to theshareholders’ meeting for their review and approval everyfiscal year.

Under the KCC, a statutory director also has the authority to auditthe performance of duties by directors (see also question 3.1 above).


Under the FSCMA, a listed company is required to submit to the FSCand the KRX, for public disclosure, its business reports on a quarterly,semi-annual and annual basis. In the reports, companies are obligatedto disclose, among other things, its business operation, financialdetails, organisation (including identification of the Board membersand executive officers), major shareholders, and transactions betweenthe company and the major shareholders or directors. Additionally, a listed company is required to disclose majormanagement events set forth in the FSCMA and KRX Regulations,within one day from the occurrence of such events.

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Civil liabilities owed by a director to the company may be releasedby the unanimous consent of all the shareholders. In addition, if noshareholders’ resolution to the contrary has been adopted withintwo years after the ordinary shareholders’ meeting at which thefinancial statements of the company were approved, the company isdeemed to have released the directors from their civil liability inrespect of the matters specifically provided in the financialstatements, unless the nature of the liability involves fraudulent orwilful misconduct. Other than the above, the KCC is silent onwhether a company may indemnify its directors. With respect to insurance for indemnification of directors’liabilities, there is no statute addressing the effectiveness of suchinsurance, and there is disagreement over the permissible extent ofsuch insurance coverage among scholars. Notwithstanding thisuncertainty, many companies in Korea purchase such insurance fortheir directors.



Despite the growing recognition of and discussion relating tocorporate social responsibility, there is as yet no legislativeframework that serves as a general guideline. Instead, individualstatutes reflecting corporate social responsibility have beenadopted. For instance, Korea has adopted numerous statutes topromote job stability and work opportunities for under-privilegedpersons, including the Social Enterprise Fostering Act, the GenderEmployment Equality Act, the Act on Protection of Temporary andPart-Time Workers, the Act on Promotion of Employment andVocational Rehabilitation of Handicapped Persons and the Act onPromotion of Employment of Elderly Persons.


In principle, employees do not have a right to participate in themanagement but may play a limited role in some instances. UnderKorean law, employers hiring 30 or more employees are required toform a labour-management council comprising of representatives ofthe employees and an equal number of managementrepresentatives. At the council, employees may discuss with theemployer regarding employee recruitment, welfare, safety andother employment-related matters, but the employer is not obligatedto adhere to the employees’ advice, or to obtain consent fromemployees in its decision making. Where applicable, a collectivebargaining agreement may require employers to obtain consentfrom labour unions in connection with certain matters regardingmanagement, such as downsizing and corporate restructuring.

5 Transparency


The responsibility for disclosure and transparency lies with theBoard, and ultimately with the individual directors.


Under the KCC, a company is required to keep its AOI, minutes ofshareholders’ meetings, shareholders’ registry, corporate bondregistry, financial statements, business reports and audit reports atits principal office and (if applicable) branch office and to makethem available for its shareholders and creditors. Under the FSCMA, a listed company is required to submit to theFSC and the KRX its audited financial statements together with itsannual business report. See also question 3.8 above.


The statutory auditor or audit committee reviews the annualfinancial statements and reports the results thereof to theshareholders’ meeting. In addition, under the Outside Audit Act, (i) a joint stock companywhose total assets for the preceding fiscal year were KRW 10 billionor more, and (ii) a listed company must have its financial statementsaudited by an outside independent auditor. Further, a listed companyis required to appoint the same accounting firm as its independentauditor for at least three consecutive years to ensure the independenceof the auditor. Under the Outside Audit Act, the independent auditoris responsible for (i) damages incurred by the company appointingsuch independent auditor (whether listed or not) arising from, or dueto, breach of its duty and (ii) damages incurred by a third party whorelies on and uses the audited financial statement arising from, or dueto, any untrue statements or omissions of any material facts in suchaudited financial statement. In addition, the FSCMA also providesthat the independent auditor is responsible for damages incurred by abona fide investor in a listed company who relies on the auditedfinancial statements of such company, and further stipulates that theamount of such damages is presumed to be the amount calculated inaccordance with criteria prescribed in the FSCMA.


In general, there is no law requiring corporate governanceinformation to be disclosed on websites. However, under the FSCMA, reports, documents or information to besubmitted to the FSC or KRX for public disclosure purposes arerequired to be prepared and submitted in electronic format through theelectronic disclosure system operated by the Financial SupervisoryService (DART: Data Analysis, Retrieval and Transfer System -http://dart.fss.or.kr), and the contents of such reports shall be disclosedto the general public on a real-time basis. Thus, in the case of listedcompanies and certain private companies, information regardingcorporate governance may be obtained through the website.



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KoreaBae, Kim & Lee LLC

Joonki Yi

Bae, Kim & Lee LLC647-15 Yoksam-dong, Kangnam-ku Seoul 135-723 Korea

Tel: +822 3404 0152Fax: +822 3404 0804Email: [email protected]: www.bkl.co.kr

Mr. Yi is a partner in the Corporate and M&A Group at Bae, Kim &Lee’s Seoul office. He is a graduate of Seoul National University(LLB 1990) and Columbia University School of Law (LLM 2001).Mr. Yi was a visiting attorney at the New York office of Skadden,Arps, Slate, Meagher & Flom LLP (2001-2002) and a legal advisorto the Ministry of Commerce, Industry and Energy (2003-2004). Inhis 14 years of corporate and M&A practice, Mr. Yi has handledmany acquisitions in Korea. He has advised buyers, sellers andother investors in a number of the major foreign takeovers in thepast decade, spanning a variety of industry sectors and includingnegotiated stock deals.

Jun Kul Yoo

Bae, Kim & Lee LLC647-15 Yoksam-dong, Kangnam-ku Seoul 135-723 Korea

Tel: +822 3404 0195Fax: +822 3404 0804Email: [email protected]: www.bkl.co.kr

Mr. Yoo is a partner in the Corporate and M&A Group at Bae, Kim &Lee’s Seoul office. A graduate of Korea University Law School (LLB1996), Mr. Yoo joined the firm in 2001. After receiving his LLM(2006) from Havard Law School, he was a visiting attorney at theNew York office of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Inthe mergers and acquisitions area, Mr. Yoo has handled a widerange of international transactions, representing buyers and sellersin a variety of foreign acquisitions, as well as advising on numeroushigh-profile business combinations.

Bae, Kim & Lee is one of the largest law firms in Asia, with over 200 attorneys and offices in Seoul, Beijing andShanghai. The firm offers expertise in every practice area of commercial interest, and serves a multinational clientelespanning a wide variety of industries. Among the oldest business law firms in Korea, Bae, Kim & Lee is dedicated toproviding highly focused, practical legal advice to the business client.

Major practice areas include: corporate and M&A; securities, banking and finance; corporate reorganisation andbankruptcy; tax; real estate; antitrust and fair trade; employment; telecommunications; intellectual property andinformation technology; white collar crime; and international arbitration and litigation.



Chapter 17

Liepa, Skopina/ BORENIUS

Latvia



The corporate entity covered in the below answers is a public jointstock company (publiska akciju sabiedriba), which is entitled tooffer to the public its shares (stocks) after receipt of the permissionof the Finance and Capital Market Commission (Finansu unkapitala tirgus komisija). Only this type of corporate entityincorporated in the jurisdiction of Latvia is entitled to offer publiclytradable shares (stocks) to public. Currently the only exchangeoperating in Latvia where shares of public joint stock companies arelisted and traded is NASDAQ OMX Riga (stock exchange).NASDAQ OMX Riga is a member of NASDAQ OMX group ofstock exchanges operating a joint trading platform in the Baltic andNordic countries.


There are two main legislative tools to govern the public joint stockcompany. The Commercial Law (Komerclikums), which providesthe general rules of incorporation, organisation and operation of thejoint stock company and is applies also to public joint stockcompanies. In addition, the Financial Instruments Market Law(Finansu instrumentu tirgus likums) provides the legal regulationfor the trade of stocks of the joint stock company to the public. Thescope of authority to control the trade of stocks to the Finance andCapital Market Commission is also defined by the mentionedFinancial Instruments Market Law and The Law on Finance andCapital Market Commission (Finansu un kapitala tirgus komisijaslikums). A company is entitled to provide its own regulation rules in itsArticles of Association as far those do not contradict therequirements of the law, particularly those provided in theCommercial Law. There are no general Codes of Conduct for the corporategovernance. NASDAQ OMX Riga (stock exchange) has issuedPrinciples of Corporate Governance and Recommendations onTheir Implementation, which the companies emitting their stockmay apply in their activity. It covers a very wide range of areasincluding board independence and remuneration, relations withshareholders and disclosure of information. These rules follow theprinciple, “comply or explain”.


Currently the main issue regarding corporate governance relates notto the above mentioned public joint stock companies, which havethe recommendations of the stock exchange, but instead to thegovernance arrangements of the state owned companies. The mosttopical issue is how to ensure their operation and governance whileimplementing reductions with regards to number and remunerationof the members of the governing organs, boards of directors andsupervisory councils, of the state owned companies. Thus, to someextent the corporate governance principles have to be implementedalso outside the publicly traded companies.

2 Shareholders


The shareholders execute their operation and management powersin the shareholders’ meeting, which is the main governing organ ofthe company. The Commercial Law provides, that only theshareholders’ meeting is entitled to take decisions in respect to:

the annual report of the company; the use of profit of the company; the election or recalling of the member of the supervisorycouncil of the company; auditor, controller or liquidator of the company; the bringing or recalling of action against the member of theboard and supervisory council or auditor; as well in respectto the appointment of the representative in actions against themember of the supervisory council; the amendments in the articles of association of thecompany; the increase or reduction of the equity capital of thecompany; the emission and conversion of the company’s securities; the remuneration of the member of the supervisory counciland auditor; the termination or continuation if the activities of thecompany; the remuneration policy of the members of the board andsupervisory council; andthe reorganisation of the company.

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The shareholders of the joint stock company are not liable for actsor omissions of the joint stock company. The liability of theshareholders is limited to their capital contributions to the company.


In certain cases, the Financial Instruments Market Law providesfor a suspension of the voting rights of the shareholders. That isapplicable in situations when the shareholders of public joint stockcompanies fail to announce their shareholding in the company whenthat reaches a certain limit. In addition, the Financial InstrumentsMarket Law contains provisions on minority squeeze-out, asituation in which the minority shareholders may be obliged to selltheir shares to the majority holder once the majority shareholderowns 95% of the shares. The Financial Instruments Market Lawalso defines the price to be paid for such shares. Also in accordanceto the Commercial Law a shareholder shall not have voting rights,if:

the decision in respect of the shareholders who are themember of the supervisory council or the board on theirstatus and action has been taken;the decision in respect of rights which the company may useagainst the shareholder has been taken; orthe decision regarding release of shareholder’s obligations orliability towards the company.


The shareholders can seek enforcement action against members ofthe management body (the board). The shareholders’ meeting mustadopt a decision on commencement of the action and authorise theperson entitled to bring the claim against the members of themanagement body (the board). The members of the board arejointly and severally liable for any such claims, however, theliability arises only in situations when the board has not acted as“careful and diligent owner” (a term borrowed from the Civil lawand explained in court practice relatively little, generally having asimilar meaning to “careful and diligent manager”). The membersof the board are not liable for any damages caused to the companyif the board has acted in good faith in accordance with lawfuldecision of the shareholders’ meeting.


The shareholders of the shares of the joint stock company areobliged to notify the company, the organiser of the market wherethe shares are traded and the Finance and Capital MarketCommission of acquisition of qualified holdings in the joint stockcompany. The notification obligation applies when theshareholders has obtained 5%, 10%, 15%, 20%, 25%, 50%, 75%(90% and 95% applies only in case if the place of origin of thecompany is Latvia) of the shares of the particular company directlyor indirectly. The notification has to be made within 4 workingdays from the acquisition. The notification has to be made alsowhen the qualified holding is diminished. The notificationobligation does not apply to investment brokerage companies orcredit institutions acquire the shares in their own name, but notplanning to exercise the voting rights in the joint stock company.


The regular annual shareholders’meetings are commonly held, whichshall take decisions in respect to the annual report and usage of theprofit; any other decisions can be made if included in the agenda aswell. The annual shareholders’ meeting is called by the board of thecompany at least 30 days prior to such meeting taking place. Theshareholders’ meeting must be announced in the official newspaper“Latvijas Vestnesis” and at least in one more newspaper. Theshareholders’ meeting is entitled to take valid decisions irrespectiveof the percentage of votes represented except otherwise provided bythe articles of association. In general the decisions are made by themajority of the votes presented at the meeting. Some decisions (forexample in respect to amendments to the articles of association) mustbe made only by a majority of at least ¾ of the votes presented at themeeting. The shareholders are entitled to acquaint themselves withthe draft decisions of the meeting as well as request informationnecessary for adoption of the decisions prior to the meeting and alsoquestion the management board during the meeting.



The public joint stock companies are managed by two-tiermanagement structures consisting of the supervisory council(Padome) and the board (Valde). The supervisory council overseesthe board between the shareholders’ meeting, but the board acts as theexecutive organ of the company. The supervisory council representsthe interests of shareholders between the shareholders’ meetings. The board manages and represents the company, and is responsiblefor the commercial activities of the company. A company shall bemanaged by all the members of the board jointly. In respect to thethird persons each members of the board have representation rights,if individual representation is not defined in the articles ofassociation.


Public joint stock company must have at least 5 but no more than20 members of the supervisory council; and at least 3 members ofthe board. The number of the members in management bodies mustspecified in the articles of association of the company. The supervisory council shall be elected by the shareholders’ meetingfor the period not exceeding 3 years. Each 5 percent of theshareholders are entitled to nominate one member to the supervisorycouncil. Voting takes place with respect to all the members of thesupervisory council and the ones obtaining most of the votes areelected to the supervisory council. The supervisory council can berecalled by the shareholders’ meeting. In case of removal orresignation the whole supervisory council has to be reelected again. The supervisory council is responsible for election of the membersof the board. The period for which the board is elected cannotexceed 3 years. The board can be recalled due to material/importantreasons, in any case including gross violations of authority, failureto perform duties, an inability to manage the company, or the causeof harm to the company, as well as loss of confidence expressed ata shareholders’ meeting. The Principles of Corporate Governanceand Recommendations on Their Implementation suggests thatboard members should not be re-elected for more than 4consecutive office terms.

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The Principles of Corporate Governance and Recommendationson Their Implementation require the joint stock companies to havespecific remuneration policies in place. The policies mustdetermine the structure and amount of remuneration and advise tolink the remuneration to the performance of the company, shareprice and similar operational indicators. The policy should alsodescribe any “parachutes” or other compensations to be granted themembers of the management bodies upon their termination. Thereare no other legislative provisions governing the setting ofremuneration. Joint stock companies are required to indicate thementioned in their reports to the NASDAQ OMX Riga. In addition, the remuneration and contracts of the members of themanagement body is influenced by the Commercial Law, whichprovides that the remuneration of the board shall be determined bythe supervisory council in accordance with the policies set by theshareholders’ meeting, while that of the supervisory council by theshareholders’ meeting.


In accordance with the Principles of Corporate Governance andRecommendations on Their Implementation the candidates of themanagement body have to disclose their shareholdings in the jointstock company when applying for the position. In addition, thereports to the NASDAQ OMX Riga submitted by the companymust disclose the shareholdings of the members of themanagements bodies obtained as remuneration for their services.


Meetings of the supervisory council can be held as necessary,however not less than once per quarter. Meetings of the supervisorycouncil are called by its chairperson. Also any member is entitledto request calling a meeting if reasons for that are provided. Thesupervisory council is entitled to make decisions if more than onehalf of the members of the supervisory council are present. Thedecisions are made by the majority of votes of membersparticipating in the meeting, except otherwise provided by articlesof association. The same applies to adoption of the board decisions.


As indicated above the members of the management bodies have toact prudently and diligently. The Commercial Law does notprovide further elaboration of this duty. However, the CommercialLaw clearly states that the board manages and represents thecompany. At the same time the Principles of CorporateGovernance and Recommendations on Their Implementationindicate that the board must perform certain tasks,“1) corporate strategies, work plan, risk control procedure,

assessment and advancement of annual budget and businessplans, ensuring control on the fulfilment of plans and theachievement of planned results;

2) selection of senior managers of the company, determinationof their remuneration and control of their work and theirreplacement, if necessary, in compliance with internal; and

3) timely and qualitative submission of reports, ensuring alsothat the internal audits are carried out and the disclosure ofinformation is controlled.”

With regards to the supervisory council the Principles of CorporateGovernance and Recommendations on Their Implementationindicate that, “supervision carried out by the supervisory councilover the work of the board shall include supervision over theachievement of the objectives set by the company, the corporatestrategy and risk management, the process of financial accounting,board’s proposals on the use of the profit of the company, and thebusiness performance of the company in compliance with therequirements of regulatory acts”.


According to the court practice, prudent and careful managerincludes the following responsibilities of the members of themanagement body:

to observe the requirements or the legal enactments andregulations; to observe the articles of association of the company; to observe the decisions of the shareholders’ meeting; to perform fiduciary duties to the company; and to perform fiduciary duties to the shareholders.


There is a legal requirement to disclose information in the annualreport concerning management body practices in respect to:

identification of the members of the management; the representative authorities of the members of the board,including the entitlement for emission and redemption of theshares; and all the agreements between the company and the member themanagement body, which provide compensation in case ofresignation or discharge.


Generally, that is not limited in any way by the law. Therefore thereare no limitation in respect of insurance in relation to themanagement body and others.



That is not governed by the applicable legislation in any way. Thecompanies are becoming more aware of the concept of thecorporate social responsibility and implement it on voluntary basisin ad hoc manner.


The employees have limited role in corporate governance of thecompany, unless they are the shareholders of the company at the



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same time. To some extent the policies of the company can beaffected by labour unions, though their practice and influence inLatvia is not as well developed as in other EU Member States.

5 Transparency


The board of the public joint stock company is responsible forpublishing information about all the corporate and other eventsconcerning the company, which can affect share price and value ofthe company. The board members are jointly responsible forensuring due and timely publication of such information.


As noted, the Principles of Corporate Governance andRecommendations on Their Implementation require the publicjoint stock companies either to ensure compliance with theprinciples. The Principles of Corporate Governance andRecommendations on Their Implementation require the board todisclose certain information relating to the financial performanceand governance of the company. Disclosure of the followinginformation is required:1) general information on the company - history of its

establishment and business, registration data, description ofindustry, main types of business;

2) report of the company (“comply or explain”) on thecompliance with the principles of corporate governance;

3) number of issued and paid financial instruments, specifyinghow many of them are included in a regulated market;

4) information on shareholders’ meetings, draft decisions to beexamined, decisions adopted - at least for the last year ofreport;

5) articles of association of the company; 6) board or supervisory council regulation or a document

equated thereto that regulates its work, as well as the

company’s remuneration policy (or a reference where it ismade available) and the shareholders’ meeting procedureregulation, if such has been adopted;

7) information on the performance of the company’s auditcommittee;

8) information on present supervisory council and boardmembers (on each individually): work experience,education, number of the Issuer’s shares owned by themember (as at the beginning of year; the information shall beupdated as required but at least annually), information onpositions in other capital companies, and the term of office ofboard and supervisory council members;

9) company’s shareholders which/who own at least 5% of thecompany’s shares; and information on changes ofshareholders;

10) Financial reports and annual reports of the company preparedin compliance with the procedure specified in legal acts andthe regulations of NASDAQ OMX Riga; and

11) Any other information to be disclosed by the company, e.g.information on any substantial events, press releases,archived information on financial and annual reports onprevious periods, etc.


Annual reports of the companies must be audited. Auditors preparereports to accompany the annual reports. The auditor shall be liableto the company and third persons for any damages caused due to theauditor’s fault. The auditor is not liable for damages resulting fromviolations of the members of the management, except if suchauditor knew or should have known about such violation, but failedto indicate this in his/her audit. Thus, any financial informationdisclosed by the company will be audited for the periods for whichthe audit is mandatory.


See the answer to question 5.2.

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Laine Skopina

Liepa, Skopina/ BORENIUS Lacplesa 20a Riga, LV 1011 Latvia

Tel: +371 67 201 800Fax: +371 67 201 801Email: [email protected]: www.borenius.lv

Education1990, Lawyer’s Qualification, University of Latvia, Riga. 1991, Post-Diploma studies, International Law Institute ofUniversity of Latvia.Bar Admission1997, Sworn Advocate at the Latvian Collegium of SwornAdvocates.SpecialisationMergers and Acquisitions.Real Estate Transactions.Labour Law.Laine is Special Projects Officer of the Real Estate Law Committeeof the International Bar Association (IBA).LanguagesLatvian, English, Russian.Laine advises both international and domestic clients as outsidegeneral counsel, providing them with legal advice on an ongoingbasis. She has also worked on several major mergers andacquisitions in Latvia. Before joining Liepa Skopi?a Borenius, Lainegained experience as a Partner at one of the major Latvian law firms,and later established her own practice. She has also worked asLegislative Assistant to the Deputy Chairman of the Parliament(Saeima) of the Republic of Latvia and to the Prime Minister of theRepublic of Latvia.

Zane Dzule

Liepa, Skopina/ BORENIUS Lacplesa 20a, Riga LV 1011 Latvia

Tel: +371 67 201 800Fax: +371 67 201 801Email: [email protected]: www.borenius.lv

Education2003, Lawyer’s Qualification, Turiba School of BusinessAdministration, Riga. 2006, Master’s Degree in European Studies, Faculty of Economicsand Management, University of Latvia, Riga.SpecialisationResidence and Work Permits. Contractual Law and Commercial Law. E-commerce Law.LanguagesLatvian, English, Russian.

Attorneys at law Liepa, Skopina/ BORENIUS is one of the leading full service business law firms in Latvia. It is a partof Borenius Group law offices which are represented in Baltics and Finland. In Latvia represented by sworn advocates,assistants of sworn advocates, lawyers and paralegals – 24 in total. Liepa, Skopina/ Borenius is known as law Officeof high knowledge, quality of work and ethics.

Liepa, Skopina/ Borenius is providing extensive international law service advising in latvian, english, russian andgerman.

Firm has an extensive experience assisting international clients on their transactions in Latvia and Latvian clients ontheir operation abroad.

Cooperation between the law offices of the Borenius Group is of major importance for the daily activities of the company.

The Group is represented in Finland (Borenius & Komppinen), Estonia (Luiga Mody Haal Borenius) and Lithuania

(Regija Borenius), and employs 150 lawyers providing professional legal services to our clients.


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Chapter 18


Bernotas & Dominas Glimstedt

Lithuania



According to Lithuanian law, only public limited liabilitycompanies (akcines bendroves, abbreviated ‘AB’) can issuesecurities which can be traded publicly on regulated markets.Therefore, issues related to public limited liability companies(hereinafter - the companies) are covered in the below answers.


The main general sources of law regulating corporate governanceissues are the Civil Code which contains certain basic rules withrespect to legal entities, and the Companies Act, which sets out therules for incorporation, corporate governance, activities, rights ofshareholders and other issues with respect to public limited liabilitycompanies and private limited liability companies.Specific rules applicable to listed companies are contained in theSecurities Act, Act on Markets in Financial Instruments and otherlegal acts, especially those adopted by the Securities Commission.Listed companies must adhere to the Corporate Governance Codefor the Companies Listed on the Vilnius Stock Exchange (the CGC)on the basis of the comply-or-explain principle.


In Lithuania, almost all listed companies have controllingshareholders. Thus issues entrenched in the dispersion ofownership (tension between ownership and actual control) do notconstitute a serious issue in the Lithuanian corporate governancepractice. Naturally, the protection of minority shareholders andinvestors against the opportunism of majority shareholders anddirectly controlled management would define the field of play. In this regard, the CGC adopted in 2004 enhances the regulation ofcorporate governance with such novelties as independent directors,disclosure of and vote on directors’ remuneration statements, etc. Itcan be noted, however, that the CGC is obeyed by the companiesmore on an ‘explain’ and not the ‘comply’ basis which can bederived from the fact that the mandatory rule of ‘comply-or-explain’ first became applicable to the annual reports for the year2006 only.Issues such as the pricing in minority buy-out and insider dealingare most frequently dealt with in courts and the media. However,

European and world-wide trends of indirect shareholders’ rights ordirectors’ remuneration and liability are discussed along withcertain reflections thereon in the law. Currently, a draft amendmentto the Companies Act was prepared to transpose the Directive2007/36/EC on the exercise of certain rights of shareholders inlisted companies.During 2008 some amendments were introduced to major lawsapplicable to corporate governance. These include tightened rulesfor adopting board decisions, codified liability of a CEO tocreditors for failure to timely initiate bankruptcy proceedings in theinsolvency circumstances, and others.

2 Shareholders


The Companies Act lists exclusive powers of a General Meeting ofshareholders (GM). It is a corporate body which makes the mostimportant decisions in the company’s life. Such decisions includeamendments to the articles of association, election and removal ofmanagement bodies, appointment of auditors, control over convertibledebentures issuance and new shares issuance, increase or reduction ofthe authorised capital, approval of annual accounts, formation and useof reserves, profit/loss appropriation, purchase by the company of itsown shares, company’s transformation, reorganisation or liquidation.Although the Companies Act provides for a possibility to extendpowers of shareholders in the articles of association, it is prohibitedto take over the statutory powers of other corporate bodies orassume such powers which are in essence the managementfunctions. However, the articles of association may provide for theso-called ‘5 per cent rule’. According to this rule the followingmajor transactions of a company are subject to the approval by theGM: (1) investment, disposal of or lease of the tangible long-termassets with the book value of over 1/20 of the authorised capital ofthe company; (2) pledge or mortgage of the tangible long-termassets with the book value of over 1/20 of the authorised capital ofthe company; (3) surety or guarantee for the discharge ofobligations of third persons exceeding 1/20 of the authorised capitalof the company; and (4) acquisition of the tangible long-term assetsat the price exceeding 1/20 of the authorised capital of the company.There are also specific rights allowing the shareholders with at least10 per cent of shares in the company to restrain the managementand intervene with the operating decisions. Such minorityshareholders have the right to initiate the investigation whether alegal person or legal person’s management acted in a proper way.

Andrius Ivanauskas

Gediminas Dominas

ICLG TO: CORPORATE GOVERNANCE 2009

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Bernotas & Dominas Glimstedt Lithuania

The investigation may be initiated by filing an application to thecourt who, upon accepting the application, would appoint theexperts to conduct the investigation. After consideration of theexperts’ report and recommendations the court may make a decisionto: (1) revoke the decisions taken by the management; (2) suspendtemporarily the powers of directors or exclude a person from themanagement body; (3) appoint provisional directors; (4) authorisenon-implementation of certain provisions of incorporationdocuments; (5) oblige the making of amendments to certainprovisions of incorporation documents; (6) transfer the legalperson’s right to vote to another person; (7) oblige a legal person totake or not to take certain actions; and (8) liquidate a legal personand appoint a liquidator.


A rule of thumb is that the shareholders only have the obligation topay the subscription price for the shares held and they are notfurther liable for the obligations of the company. However, theCivil Code provides that a member of a legal entity is, in asubsidiary manner, liable for the obligations of the legal entitywhere the legal entity fails to perform his obligations due to theactions by that member taken in bad faith. Probably in cases liketunnelling or self-dealing shareholders may be held liable againstthe creditors of the company.


For reasons of comparison only, it is worthy to note that shareholdershaving more than 1/3 of all shares in a closely held company(uzdaroji akcine bendrove) have the right to file an application to thecourt with the request that shares of another shareholder be sold tothe applying shareholder in case it is proved that actions of anothershareholder contradict the goals of the company’s activities andwhere there are no grounds to expect any changes in such actions.However, such kind of a right is not available for the shareholders inan openly held company discussed herein.On the other hand, shareholders in listed companies, holding 95 percent of voting rights in a company, have a right to buy-out theremaining 5 per cent interest in the company. Minorityshareholders have a corresponding put option.


Under the Civil Code, any member of a legal entity has the right tofile a claim with the court requesting to prohibit the management ofthat legal entity to enter into contracts which contravene the goalsof the activities of the legal entity or overstep the powers of amanagement body of the legal entity.Under the Companies Act, any shareholder has the right to file aclaim with the court for reimbursement of damage to the companyresulting from nonfeasance or malfeasance by the CEO or boardmembers of their obligations prescribed by laws and the articles ofassociation of the company. The basis for a claim might be a breachof either specific obligations of the management and/or generalobligations (see questions 3.6 and 3.7).Lithuanian civil procedure law does not know the concept of classactions. However, following the general rule of torts, each andevery shareholder has the right to claim damages incurred due tofailure by directors to perform their obligations.The 10 per cent stake holders may also initiate the judicial

investigation of the company (see question 2.1).


Generally, there are no restrictions on the investors’ ability to buysecurities issued by a company or on the speed with which theinvestors can build up their shareholdings. Upon acquisition ortransfer of shareholdings representing 5, 10, 15, 20, 25, 30, 50, 75and 95 per cent of voting rights, the selling and buying shareholdersmust notify the Securities Commission and the company.Upon acquisition of a 40 per cent voting stake in a company, ashareholder’s voting rights exceeding a 40 per cent threshold aresuspended until the Securities Commission approves theshareholder’s mandatory take over bid.


GMs are to be called by the board or the CEO (the latter is entitledto call the GM in case the board is not formed or fails to convenethe GM when it is obliged to do so). The right to initiate the convention of the GM belongs to thesupervisory council, the board and shareholders holding 10 per centof voting rights in the company (unless the articles of associationprovide for a lower threshold for the shareholders to initiate theMeeting). If after proper expression of the initiative to call theMeeting, the board (or the CEO) does not call the Meeting,shareholders having more than 50 per cent of the voting rights maycall the GM themselves or the initiators can request a court toconvene the GM. A court may also convene the GM upon requestof at least one shareholder of the company if the annual GM was notcalled within 4 months from the end of the financial year.The agenda of a GM is to be formed by the corporate bodies callingthe GM. Shareholders may propose the agenda items in case theyhold at least 10 per cent of the voting rights (unless the articles ofassociation provide for a lower threshold). However, only itemsproposed by the initiators of the convention of the GM must bemandatorily included in the agenda.Within 4 months from the end of financial year, the annual GMmust be held in every company. Such annual GMs usually makedecisions on profit/loss appropriation, approval of annual report andaccounts and auditor’s report, as well as other current affairs. TheCGC recommends that annual GMs vote on the remunerationstatement containing information on the remuneration schemes ofthe directors.The Companies Act provides for certain cases when extraordinaryGMs must be convened, e.g. when assets of a company fall belowhalf of the authorised capital of the company, management bodiesappointed by the GM lack members to constitute a statutoryminimum, or the convention of the GM is requested by competentcorporate bodies (for details see question 2.5). If consent of the holders of a certain class of shares is necessary formaking a decision, such consent is given by a meeting of theholders of that class of shares.Participation of shareholders representing at least 1/2 of the votingrights is a pre-requisite for the GM (either annual or extraordinary,or meeting of holders of certain class of shares) to be valid. In casethe quorum is not present a repeat GM must be convened, whichmay only make decisions included in the agenda of the meeting thathas not been held. In the repeat GM the quorum requirement is notapplied.

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Resolutions of GMs are usually adopted by a simple majority voteon a basis of one-share-one-vote principle. A qualified majority ofat least 2/3 of votes (which may be increased by the articles ofassociation) is necessary for certain important decisions, such asappropriation of profit/loss, increase of authorised capital,reorganisation of the company, etc.The Companies Act allows the shareholders to vote in GMs bymeans of telecommunication terminal equipment provided thecommunications are protected and there are means for verifying thesignature. The draft amendment to the Companies Act and the CGCin turn recommends that such means are implemented incompanies. However, electronic communication is not common yet.According to the Companies Act, the owner of a book-entry share(shareholder) is a person in whose name a personal securitiesaccount has been opened (save for the exceptions laid down in thelaws). Therefore, only the extract from the personal securitiesaccount may evidence a person’s ownership rights and prove his orher status as a shareholder towards the company. The Securities Act holds that a shareholder is either a person havingacquired shares in his own name and at his own cost or a personhaving acquired shares in his own name but for the benefit of anotherperson. Thus, technically, indirect shareholders could hardly invoketheir shareholder rights towards the company. However, the Act onMarkets in Financial Instruments provides that personal securitiesaccounts must be opened in the name of the owners of the securitiessave for certain exceptions. One such exception provides for apossibility to open omnibus accounts, i.e. accounts of customers ofthe managers of accounts registered in foreign countries may beopened in the name of the managers of the accounts indicating thatthey act as managers of accounts and an account is opened for thebenefit of the customers. However, on demand of the SecuritiesCommission or the Central Securities Depository of Lithuania, suchmanagers must disclose the beneficiaries.The rights of indirect shareholders should be enhanced with theimplementation of the Directive 2007/36/EC on the exercise ofcertain rights of shareholders in listed companies.



The Companies Act provides that a company is to have at least onemanagement body - the Head of the company (bendroves vadovas),which is sometimes referred to as a managing director, (general)manager or the CEO. The corporate structure may be extended inthe articles of association with the board of the company (valdyba)as the collective management body and/or the supervisory council(stebetoju taryba) as a collective body of supervisors of themanagement bodies and advisers to the shareholders (some,including the CGC, would call them non-executive directors). Thesupervisory council does not constitute a management body of thecompany as contrasted to supervisory bodies; however, for thepurpose of this writing, reference to management bodies willinclude the supervisory council. Members of any managementbody are referred to as directors.Whereas the CEO is responsible for the day-to-day management of thecompany, the board is the central corporate body for adoption of majormanagement decisions, including approval of the company’s strategy.Statutory functions of the supervisory council are of an advisorynature. No real management functions stricta sensu are possible toassign to it. Notably, the supervisory council does not play anyconsiderable role in adoption of the company’s operating strategy.

In case the board is not formed in the company, all major managementfunctions are to be carried out by the CEO. Notwithstanding thepresence of the board, only the CEO has signatory powers on behalfof the company in third party transactions unless the rule of jointrepresentation is established (the latter being quite unpractical andrarely provided in the articles of association). The CEO may take aposition of a member or even a chairman of the board.The apparent flexibility of the corporate governance structure (nocollective bodies are mandatory), as well as its unbalanced rigour as tothe separation of functions (when more management bodies areformed) is somewhat mitigated and developed by the CGC. The CGCtakes a practical and functional approach recommending companies tohave at least one collective body (preferably the supervisory council),if not both. If only one collective body is established, it should focuson proper supervision of the CEO. The collective body should have asufficient number of independent directors. Such number is notdefined. The CGC further recommends forming at least nomination,remuneration and audit committees within the collective body, theirfunctions being self-evident of their titles.


Generally, no restrictions as to the age or nationality are applicableto the members of corporate bodies. Members of the supervisorycouncil may be legal and natural persons who are not members ofthe management bodies of the company, its parent company or asubsidiary company. The number of members of the supervisorycouncil is set by the articles of association and may vary between 3and 15. The supervisory body is elected for a term established inthe articles which cannot exceed 4 years. The length of tenure inoffice for an individual member is not limited. Members of thesupervisory council are elected by a cumulative vote in the GM andcan be revoked in corpore or each individually.The articles of association set out the number of the board members(at least 3) and their tenure of office (not more than 4 years, re-appointment possible). Only natural persons can be board membersto be elected by the supervisory council by a simple majority voteand removed by a 2/3 majority vote. In case the supervisory councilis not formed in the company, the board is elected by a cumulativevote conducted in the GM.The CEO is elected by the board or the supervisory council whenthe board is not formed, or the GM in case neither the board nor thesupervisory council is established under the articles of association.Only a natural person can take a position of the CEO.As mentioned under question 3.1, the CGC recommends thatcollective bodies should contain a sufficient number of independentdirectors and establishes the criteria of dependence, such as currentor previous management or employment position in the company,additional remuneration save for the usual director’s salary, being acontrolling shareholder, current or past major business relationswith the company, currently or previously taking a management oremployment position at the company’s auditor, being a director formore than 12 years, or being a relative of other directors. The CGCalso recommends forming a nomination committee within acollective management body who would constantly consider andgive recommendations as to the appointment and removal ofindividual members of management bodies.

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The Companies Act contains few rules as to the directors’remuneration. Starting with the CEO, his or her remuneration is setby the appointing body, i.e. the GM, supervisory council or theboard. As to the members of the supervisory council and the board,the law provides merely that such directors may be remuneratedwith bonuses and their total amount (together with employeepremiums) is to be approved by the GM when adopting decisionson profit distribution. The Code of Corporate Governance provides detailedrecommendations as to the remuneration of the members ofmanagement bodies. First, there should be formed a remunerationcommittee which would constantly consider the collective andindividual remuneration policies and give relevant proposals to themanagement bodies and the GM. Second, the CGC containsrecommendations as to the remuneration of members of collectivebodies which could be grouped into two parts:

disclosure measures: the details of the remunerationschemes, including proportions of variable and fixed parts,share options, pension plans, etc. to be applicable in thefuture should be disclosed publicly; such remunerationstatements should include the past remuneration packageswith exact numbers received by individual directors; andapproval measures: remuneration in shares schemes (but notparticular packages for individual directors) should beapproved by the GM; the remuneration statements referred toin the previous paragraph should be put on mandatory oradvisory vote of GM.

In summary, the CGC puts an emphasis on the disclosure ofremuneration packages and approval by the shareholders ofremuneration schemes but not individual remuneration packages.


Lithuanian law does not prohibit directors to hold securities issuedby the company. Of course, directors are under expandedsurveillance by the Securities Commission due to possiblemanipulations in the securities market and cases of insider trading.The Act on Markets in Financial Instruments provides that membersof the management bodies of a company and their closely relatedpersons must within 4 trading days notify the SecuritiesCommission and the company on the transactions made withrespect to the securities issued by the company or their derivatives.


Meetings of the supervisory council are called by the chairman or bythe decision of 1/3 of members of the supervisory council. Themeeting can take decisions if more than half of the members arepresent (including those who voted in advance). The decisions aredeemed to be taken if more than half of members present at themeeting vote in favour (chairman’s vote is decisive in case of a draw)unless the articles of association provide for a larger majority to benecessary to adopt decisions. Further details of working procedures ofthe supervisory council are to be provided in its working regulations.Meetings of the board can be initiated by any board member. Themeeting can adopt decisions in case more than 2/3 of members arepresent (including those who voted in advance). The decisions are

deemed to be taken in case more than half of members present at themeeting (as from 1 July 2009 - more than half of all memberselected) vote in favour (the chairman’s vote is decisive) but thearticles of association may request for a larger majority. A boardmember cannot vote on issues related to its responsibilities in thecompany or activities in the board. The CEO must be invited intoevery board meeting and provided with all information on theagenda’s issues.The CGC recommends for the supervisory councils to meet at leastonce a quarter and for the board - at least every month (unless thesupervisory council is not formed and the board plays a supervisoryrole, in the latter case the meetings every quarter beingrecommended).The CGC promotes the informed decisions by recommendingproviding the directors with information relevant to the topics onthe agenda in advance. The chairmen of the management bodies arecalled to co-ordinate the schedule of their presided bodies’ meetingsand the supervisory councils are encouraged to invite to theirmeetings the board members when it comes to their revocation,responsibility or remuneration.


The general duties of the members of the management bodies of alegal person are dealt with in the Civil Code. Firstly, it is requiredthat directors act with good faith (fairness) and prudence(reasonableness) towards the legal person and other members of themanagement bodies. According to the corporate law doctrine andcase law, such fiduciary duties are imputed with both subjective andobjective standards of care of a prudent manager. Further, the CivilCode distinguishes a general duty of loyalty and confidentialitytowards the legal person.Directors are also obliged to avoid a situation where their personalinterests are contrary or may be contrary to the interests of a legalentity and to disclose such circumstances to a body of the legal entity.Directors are not allowed to commingle the property of a legal entitywith their own property and, without the consent of shareholders, usethe property or the information, which he obtains in the capacity of adirector, for his personal gain or third party’s gain.The case law is not overwhelming in the field of liability ofcorporate directors thus it is not sufficiently clear whether the courtswould apply different standards of care or different types of liabilityto members of different management bodies.The Civil Code provides that in case a director fails to properlyfulfil his or her general duties, he or she must indemnify the legalperson for any damage incurred unless other laws, incorporationdocuments, or an agreement provide otherwise. The latterexception would imply that director’s liability may be at leastlimited by an agreement between the legal person and the director.Under the amendment of the Bankruptcy Act introduced in July2008 the creditors are entitled to claim damages directly from adirector who failed to timely file for bankruptcy of a company.


In general, the CEO organises day-to-day activities of the companyand represents it in relations with third parties, including stateauthorities. The CEO is inter alia responsible for drawing up of thefinancial statements, submission of information and documents toother corporate bodies and individual shareholders, disclosure of

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information through the Legal Entities’ Register, SecuritiesCommission and other state authorities, etc. The CEO substitutesthe board in case the latter is not formed in the company. In casethe board is formed, the CEO can act on behalf of the company inmajor transactions (those which are to be decided by the board) ifrelevant decisions of the board are taken. However, such restrictionon the CEO cannot be used against fair third parties (ultra viresactions are binding upon the company).The board is a company’s collective body mainly involved in strategicmanagement. The board considers and approves the company’soperating strategy, annual report of the company, managementstructure of the company and the positions of employees, regulationsof branches and statutes, etc. The board adopts decisions inter alia toestablish or acquire interest in other entities, to open branches orrepresentative offices, and the ‘5 per cent decisions’ (see question 2.1),and similar major decisions. The functions of the board may beextended to more specific areas by articles of association.The supervisory council is involved in the supervision of the boardand the CEO and should advise and give relevant proposals to theshareholders as to the strategy, annual reports, profit distributionand the activities of the board and the CEO. The supervisorycouncil also reviews the decisions of the board and the CEO andgives proposals to revoke decisions which are contrary to the laws,articles and GMs’ decisions.As mentioned under question 3.1, the CGC recommends enhancingthe checks and balances system within the corporate governancestructure of the company by introducing independent directors, anaudit committee within the collective body of the company andother measures.


The Securities Act validates the “comply-or-explain” principle byobliging the companies to include a notification in the annual reportthat the company complies with the CGC, or, in the event the CGCor its certain provisions are not complied with, to specify in thenotification which provisions are not complied with and for whatreasons. The Securities Commission requires the compliancereports along with all explanations of non-compliance to bepresented in a table format.


As mentioned under question 3.6, the liability for breach of generalfiduciary duties of directors may be limited by agreement. Itremains unclear whether such liability can be waived completely.The companies tend to use the civil liability insurance to protectmembers of their management bodies from such risks.



The Companies Act provides that the management bodies must actonly for the benefit of the company and its shareholders. However,two things must be borne in mind. First, the discussion on corporatesocial responsibility is emerging in public, including in the contexts ofLithuanian media and state officials. Second, obeying certainpractices of CSR might not contradict the “interests of the company”

and, in certain cases (especially from the marketing perspective), mayeven be beneficial to the company and its shareholders.The CGC extends the wording of the Companies Act. The CGC setsout as one of its objectives the enhancement of confidence ofstakeholders in the companies and their governance framework. Itfurther provides that the company’s management bodies should ensurethat the rights and interests of persons other than the company’sshareholders (e.g. employees, creditors, suppliers, clients, localcommunity), participating in or connected with the company’soperation, are duly respected. Finally, the CGC recognises theimportance of the CSR by devoting the whole section of regulation onthe role of stakeholders in corporate governance. However, thereference to the stakeholders is somewhat declaratory and basicallyconfined to paying respect to the stakeholders’ rights alreadyestablished in other laws, such as employee protection and possibleparticipation in share capital of the company, creditors’ involvement ininsolvency proceedings, etc. Still, in practice managers of companiestend to declare their respect to CSR values and publish information onthe relevant projects implemented by the company.


Under Lithuanian corporate law employees do not have anyparticular rights within the framework of corporate governance.This excludes the employees’ role in certain specific situationswhich are dealt with by labour laws.

5 Transparency


Under the Companies Act the CEO is responsible for thesubmission of the documents of the company to the SecuritiesCommission. The Securities Act regulates the disclosure of periodic information inmore detail. The company, its CEO, management and supervisorybodies are responsible for the accurateness and completeness of suchinformation. Any periodic information disclosed should particularlybe accompanied with disclosure of other persons responsible for theaccurateness and completeness of information.


The Securities Act implements EC transparency directive andestablishes obligation for the companies to disclose periodicalinformation, including annual information with audited accountsand interim information in a form of quarterly financial accountsand half-year financial accounts. As mentioned under question 3.8above, the annual information must include notification oncompliance with the CGC. A company must further disclose allmaterial events which are likely to include information on changesin the composition of management bodies of the company.Before making available its securities to be traded at the regulatedmarkets, the company is to provide a prospectus which mustcontain certain information on the company’s corporate governancestructure and practices as well.


All listed companies must have their annual accounts audited by an

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independent auditor. The auditor’s report is to be submitted to thecompany and the Securities Commission; however, only theauditor’s opinion must be made available to the public. In caseinterim financial accounts are audited, the auditor’s opinion must bepublished along with interim accounts.The CGC recommends that the auditor is nominated to the GM bythe supervisory council or, in case the latter is not formed, theboard. The GM should be notified on the level of fees paid to theauditor for non-audit services rendered by the auditor.The auditor opinion would not have much influence in assessment ofthe corporate governance practices in the company, since the law doesnot require the auditors to certify company’s notification oncompliance with the CGC or other issues directly related to thecorporate governance (save for general compliance with financial law).


Lithuanian mandatory laws do not require publishing on thewebsites any information related to the company’s corporategovernance. However, appropriate requirements are to beintroduced with the implementation of Directive 2007/36/EC on theexercise of certain rights of shareholders.The CGC already encourages using internet for the sake oftransparency and recommends updating the websites with at leastthe following information: (1) documents and draft decisions forGMs, including annual reports, and minutes of GMs (save forconfidential information); (2) director’s remuneration statement andrelated information; (3) material events; (4) the company’sprospectuses, annual and interim accounts; and (5) changes in thecompany’s share price.

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Gediminas Dominas

Bernotas & Dominas Glimstedt4 Jogailos street 01116 Vilnius Lithuania

Tel: +370 5 269 0700Fax: +370 5 269 0701Email: [email protected] URL: www.glimstedt.lt

Gediminas Dominas is a partner and founder of Bernotas & DominasGlimstedt. He graduated from Vilnius University (1994), obtainedto LLM in Banking and Finance from the University of London,Queen Mary and Westfield College (1997). He also studied EU lawand international economic law in the University of Groningen (theNetherlands) (1993). Gediminas Dominas practices in mergers andacquisitions, debt finance and capital markets. He worked on anumber of prominent transactions in Lithuania, including large-scaleprivatisation deals, Eurobond issues, IPO’s etc. Gediminas is alsoknown for his arbitration practice acting as arbitrator or party’scounsel. He is an author of a number of publications on corporateand financial law issues, as well as international arbitration.

Andrius Ivanauskas

Bernotas & Dominas Glimstedt4 Jogailos street 01116 Vilnius Lithuania

Tel: +370 5 269 0700Fax: +370 5 269 0701Email: [email protected] URL: www.glimstedt.lt

Andrius Ivanauskas joined Bernotas & Dominas Glimstedt in 2004during his studies Vilnius University Faculty of Law. After obtaininga master of law diploma he practiced as a corporate lawyer and hasbeen constantly joining the firm’s teams in M&A and finance dealsand advising clients on corporate governance and capital issues.Afterwards he spent one academic year in Amsterdam Universitywhere he improved his expertise in M&A and finance related fieldssuch as European and comparative contract law, competition lawand corporate law and was granted with LL.M. diploma cum laudein European Private Law. Currently Andrius Ivanauskas is full timeinvolved in corporate, finance, and competition law practice.

Bernotas & Dominas Glimstedt is one of the leading law firms in Lithuania. It was formed in 1997 as an alliancebetween a Lithuanian law firm and one of the biggest Swedish law firms. Since then the firm expanded into Latvia andEstonia and currently is one of the leading alliances in the Baltic region.

The firm has substantial experience in working with international clients. It is a full service business law firm. Itprovides advice and assistance on matters of corporate law, banking, finance and capital markets, competition law, PPP,public procurement, public services, administrative law and litigation, labour law, real estate, construction,telecommunications, pharmaceuticals, insurance and other.

Contact details:Bernotas & Dominas GlimstedtJogailos g. 4LT-01116 Vilnius, LietuvaTel. +370 5 269 0700Fax. +370 5 269 0701Email: [email protected] www.glimstedt.lt

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Chapter 19




Corporate entities which are discussed in this chapter are companieslisted on the official list of the Luxembourg Stock Exchange(“Luxembourg Stock Exchange” or “LSE”) and either admitted totrading on the regulated market of the LSE (hereafter “LSE listedcompanies”) or admitted to trading on the multilateral trading facilityoperated by the Luxembourg Stock Exchange (designated as “EuroMTF”) (hereafter “Euro MTF traded companies” and together withLSE listed companies, “Listed Companies”). The LSE is a main market on the EU list of regulated markets withinthe scope of the prospectus directive EC/71/2003 and offers aEuropean passport (mutual recognition of listing and public offerprospectuses throughout the EU). The Euro MTF is a more lightlyregulated market which satisfies the needs of those issuers which donot seek a gateway to other European markets or do not preparefinancial information in accordance with IFRS or equivalentaccounting standards. Luxembourg companies which are listed on the LSE, Euro MTF oron a foreign regulated market or multilateral trading facility will, inalmost all cases, be organised in the form of a société anonyme(“S.A.”). Luxembourg company law allows sufficient flexibility toorganise the S.A. in a manner that it can be listed on all mainforeign markets. Luxembourg S.A.s are commonly listed andtraded on various EU and US markets. A more seldom used formof capital company, the société en commandite par actions(“S.C.A.”), a partnership limited by shares, may also see its limitedpartner shares listed and traded on such markets.Other corporate forms such as the société à responsabilité limitée(“S.à r.l.”) although frequently used in international acquisitions arenot relevant for the purpose of this review as they may not offer theirsecurities to the public. S.à r.l.s may therefore not be listed.

1.2 What are the main legislative, regulatory and other corporategovernance sources?

The primary source of corporate governance applicable to S.A.s andS.C.A.s is the law of 10 August 1915 on commercial companies asamended (the “Company Law”). A bill of law is currently pendingwith the goal to modernise the Company Law (ParliamentaryDocument n° 5730). These changes are not expected to come intoforce before 2009 / 2010. This contribution does therefore not includeanticipated changes to the Company Law. The company’s articles of association constitute another important

source of corporate governance rules governing inter alia shareholderrights or the decision taking process within a company at board andshareholder level. The articles of association reflect the contractbetween the shareholders and, subject to Company Law, also regulateto certain extent the relationship towards third parties. The articles of association may contain rules on matters not providedfor under Company Law or where Company Law allows options to betaken. In that context it will be possible (subject to a limited numberof mandatory provision of the Company Law) for Luxembourgcompanies listed on foreign markets to introduce foreign governancerules in their articles of association. Another important source of corporate governance for ListedCompanies is the corporate governance guidelines for ListedCompanies published by the Luxembourg Stock Exchange and knownas the “Ten Principles of Corporate Governance” (the “Ten Principlesof Corporate Governance”). These rules are recommendations whichapply on a “comply or explain” basis allowing companies to deviatetherefrom when circumstances so justify. The internal rules andregulations of the LSE (the “Internal Rules”) also contain a certainnumber of disclosure rules which are primarily derived from thetransparency directive and apply to both the LSE listed companies andthe Euro MTF traded companies. LSE listed companies are further subject to a number of laws andregulations implementing EU legislation relating to prospectusrequirements, transparency requirements and market abuse. The mainlaws are:(i) the law of 10th July 2005 relating to prospectuses for securities

(implementing EC Directive 71/2003) (the “Prospectus Law”);(ii) the law of 9th May 2006 on market abuse implementing EC

Directive 6/2003, EC Directive 124/2003, EC Directive125/2003 and 72/2004 (the “Market Abuse Law”); and

(iii) the law of 11th January 2008 on transparency obligations(implementing EC Directive 109/2004) (the “TransparencyLaw”).

Euro MTF traded companies are not subject to the above rulesderiving from the Prospectus Law or the Transparency Law but arebound to the rules on insider trading set out in the Market Abuse Law.Additional rules and regulations applicable to LSE listed companiesresult from various circulars and other publications of the Commissionfor the Supervision of the Financial Sector (“CSSF”).


Corporate governance rules applicable to Listed Companiessubstantially evolved in recent years inter alia driven by the

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Luxembourg

Philippe Prussen

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initiative of the Luxembourg Stock Exchange to introduce the TenPrinciples of Corporate Governance and by the implementationinto Luxembourg law of the public takeover directive. Topicalissues include disclosures to be made to shareholders at generalmeetings, the role of audit committees and requirements fordelisting. In addition, Luxembourg Company Law has over theyears been modernised on several aspects including in particularthe introduction of the two-tier management structure for S.A.s.

2 Shareholders

2.1 What rights and powers do shareholders have in theoperation and management of the corporateentity/entities?

Article 53 of the Company Law provides that the board of directorshas the most extensive powers to perform all actions to realise thecorporate object with the exception of those reserved by law or thearticles of association to the shareholders’ meeting. Among thoseactions reserved by law to the shareholders’ meeting are allamendments to the articles of incorporation, including, inparticular, increases or reductions of share capital, changes of theobject clause, mergers or demergers and liquidation.The management of a company is thus reserved by law to the boardof directors of such company. Shareholders who would beinvolved in the management of the company could be declared defacto managers and would be liable under the same circumstancesas directors.Shareholders do however control appointments of directors.Indeed the members of the board of directors are appointed by amajority decision of the shareholders’ meeting (50% + 1).Luxembourg Company Law does not provide for a proportionaterepresentation on the board but the articles of incorporation couldintroduce such rules to achieve such representation for a givencompany. Shareholders control the board of directors mainly at the annualgeneral meeting by being able to ask questions on all aspects of theaccounts and the management during the year and not grantingthem the discharge. Certain matters have to be specificallyreported on at shareholders’ meetings including transactionsresolved upon by the board of directors where a director had apersonal conflict of interest or details on the remuneration of themanaging director.Finally, it should be noted that shareholders holding together 10%of the share capital of a company may require the board of directorsto convene a shareholders’ meeting with such agenda as theshareholders may require (see question 2.6 below).


The responsibility of shareholders of an S.A. is, in principle,limited to their amount of their contribution to the share capital andshare premium. It is only in limited circumstances that courts would lift thecorporate veil and impose further liability on the shareholders.This can include certain instances in particular as part ofbankruptcy procedures where shareholders have acted fraudulentlymainly where the company is considered to be a mere sham or ininstances where shareholders have de facto managed the company.


There are only limited exceptions where shareholders can bedisenfranchised in Luxembourg. In particular where shareholders of LSE listed companies havefailed to declare their shareholdings when crossing certainthresholds (see question 2.5 above), shares held in excess of thereportable threshold are automatically deprived from voting rights.A further example is upon a takeover of an LSE listed companywhere 95% of the shares have been acquired by a bidder, theremaining 5% may be compulsorily purchased by that bidder. In addition, the articles of association of Listed Companies mayinclude provisions that shares held in contravention withshareholder restrictions (for example prohibition for US persons tohold shares or prohibition to hold shares above a limited percentageof shares) may be compulsorily redeemed by the company or by athird party designated by the company.


The potential liability of directors of a Luxembourg company isruled by articles 58 and 59 of Company Law as well as commoncivil liability. The directors are liable to the company for the execution of themandate given to them and for any misconduct in the managementof the company’s affairs.They are jointly and severally liable both towards the company andany third parties for damages resulting from the violation of theCompany Law or the articles of association of the company.The liability for mismanagement is vis-à-vis the company.Luxembourg’s corporate law (unlike current Belgian and Frenchlaw) does not offer an individual shareholder, or a group ofshareholders, the right to commence a legal action against adirector to obtain compensation for damages caused to their owncompany. The claim that may be initiated against directors liablefor misconduct in management is an actio mandati. An immediateconsequence thereof is that it only belongs to the principal, i.e. thecompany and not to the shareholders individually. Article 63 of theCompany Law reserves to the shareholders’ meeting the power todirect the board of directors of a company to seek redress forcompany injuries caused by a director. The directors are jointly responsible for damages arising from anyviolation of laws or statutes. Unlike the general liability action formismanagement, this action applies to all damages, either to thecompany or to a third party, which thus includes an individualshareholder.The fact still remains however that only the company - and not ashareholder - can sue a director for damages inflicted upon it (i.e.the company).A shareholder, like any other third party, may only take action basedupon damages uniquely suffered by the shareholder - which remainseparate from those that may be caused to the company as a whole.In addition to actions specifically drawn from Company Law,shareholders could initiate a liability action on the basis of generalprinciples of liability set out in the civil code (i.e. article 1382 of theCivil Code who obliges any person to indemnify a third party forany damages caused by their own fault). Shareholders in any suchaction, as for an action based on the violation of law or of thearticles of association, would need to evidence a prejudice whichthey suffered and which is different from the damages caused by thecompany itself.

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There are no statutory limitations as to how many shares ashareholder can hold. However the articles of association of Listed Companies maycontain limitations on certain types of shareholders (e.g. companiesare frequently prohibiting that their shares are held by US persons)or certain thresholds of shares (e.g. no shareholder may holdbeyond a certain percentage of the shares in issue). In addition, for LSE listed companies there are certain disclosurerequirements under the provisions of the Transparency Law, and inthe particular case of directors, under the Market Abuse Law asdiscussed under question 3.4 below. The Transparency Law requires that shareholders declare theirshareholdings as soon as the thresholds of 5%, 10%, 15%, 20%,25%, 331/3%, 50% and 662/3% are reached. Failing suchnotification, the voting rights exceeding the relevant threshold thatshould have been reported on are suspended. The Internal Rules doalso contain similar disclosure requirements for Euro MTF TradedCompanies where the company concerned is required to publishany changes in the structure of its shareholdings when thethresholds of 10%, 20%, 331/3%, 50% and 662/3% are reachedwithin nine days after having knowledge of acquisition or sales bya shareholder crossing such thresholds.It should be noted that under Luxembourg takeover legislation amandatory take-over bid will have to be made when the thresholdof 331/3% of the voting rights is reached following an acquisition(takeover rules are, however, beyond the scope of this publication).


Concerning the various kinds of shareholder meetings, onegenerally distinguishes between the ordinary/annual generalmeeting and the extraordinary general meetings.Article 70 of the Company Law provides that each year the annualgeneral shareholder meeting is held at the place and at the timespecified in the articles of association. The annual general meetingresolves upon the annual accounts, the discharge to be given to themembers of the board of directors and the statutory auditors andstatutory appointments. The board may convene any other extraordinary shareholders’meeting to decide on matters such as amendments to the articles ofassociation, creation of an authorised share capital, etc. Such extraordinary general shareholder meetings are convened inaccordance with article 67-1 of Company Law. They maydeliberate if, upon first call, at least 50% of the shares in issue arepresent or represented. Failing such presence quorum theshareholders’ meeting may be reconvened with the same agenda inwhich case no minimum quorum is required. Decisions at suchmeetings are taken with a two thirds majority, save that a change ofnationality (i.e. a transfer of the company from Luxembourg intoanother jurisdiction) requires unanimous consent of allshareholders. This increased majority does not apply to theEuropean Company which may freely transfer its registered officethrough the EU. Decisions requiring such two thirds majority include increases orreductions of share capital, mergers and demergers as well asliquidations. The articles of association could increase such quorum and majorityrequirements, but this is uncommon for Listed Companies.

Concerning the convening of such meetings and the possibility forshareholders to put resolutions, Article 70 of Company Law statesthe board of directors is required to convene a shareholders’meeting if shareholders representing together 10% of the sharecapital so require with the agenda proposed by the relevantshareholders. Under Company Law it is further provided thatshareholders representing 10% of the share capital can require anitem to be added to the agenda of a convened meeting. Recommendation 10.7 of the Ten Principles of CorporateGovernance requires that a shareholder holding at least 5% of thecompany’s share capital should be able to submit proposals to theboard concerning the agenda for the annual general meeting. ManyListed Companies (but not all) have therefore, in their corporategovernance charter, lowered the percentage to 5%.With regard to participation at a shareholder meeting, article 67 (3)of Company Law provides for the possibility to include in thearticles of association that shareholders may participate inshareholder meetings by videoconference or by any other means oftelecommunications permitting the identification of theshareholders.The Transparency Law permits LSE listed companies to provideinformation to their shareholders by electronic means only provideda prior decision in that respect is taken by a shareholders’ meetingconfirming that certain minimum requirements are met.Shareholders participating in shareholder meetings may also askquestions to the board of directors with regard to the items on theagenda as mentioned under question 2.1 above.



An S.A. is managed in case of a one tier management structure bya board of directors or in case of a two-tier management structureby a management board (directoire) acting under the supervision ofa supervisory board (conseil de surveillance).The board of directors has the most extensive powers to perform allacts of management and administration to realise the corporateobject. According to article 60 bis-7 of the Company Law the sameapplies to the management board in a two-tier structure. Except for single shareholder S.A.s where there may be a soledirector, the board of directors must be composed of at least threemembers. Although the Company Law does not foresee amaximum, the Ten Principles of Corporate Governance recommenda maximum of 16 members for Listed Companies. The board willact as a collegiate body and decisions will be taken afterdeliberation among its members (if provided for in the articles ofassociation, written decision may be taken if signed unanimouslyby all directors in office). Specific rules on conflicts of interests atboard level are described in question 3.7 below. Article 60 ofCompany Law provides that the board may delegate the dailymanagement to one or more of its members or executives or otheragents which may be shareholders or not. The board of directorsmay also grant delegations for any specific tasks to third parties orboard committees. The Ten Principles of Corporate Governance recommend that theboard of directors should establish organisational and proceduralprinciples to govern executive management which should beentrusted with day-to-day management of the company. For Listed Companies, the Ten Principles of Corporate Governancefurther recommend the creation of an audit committee (responsible


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for monitoring financial reporting, internal control and riskmanagement), a nomination committee (responsible for leading theprocess to appointments of directors) and remuneration committee(responsible for recommendations of the remuneration policy) fordirectors and management.


Article 51 of Company Law provides that the directors areappointed by a majority decision of the general meeting ofshareholders for a period determined by such general meeting(maximum six years). Directors may be re-elected.In case of a vacancy, the board may provisionally appoint a memberto the board whose appointment shall be confirmed at the firstgeneral meeting after such appointment. Each board member maybe revoked by the general meeting of shareholders ad nutum i.e. atany time and without motives. The board of directors will, under the same principles, appoint theexecutive management in charge of day-to-day management of thecompany.There is no age limit under Company Law for directors but,sometimes, such limit is introduced through specific provisions ofthe articles of association.


Members of the board of directors are considered as “agents”(mandataires) of the company. Their remuneration is decided bythe general meeting of shareholders. In practice, the board ofdirectors submits a proposal for the remuneration (which proposalwill normally be made by the remunerations committee) to theannual shareholders’ meeting.Executive directors or managers will generally also have anemployment contract with their company. The courts have,however, been more restrictive for the chief executive officer as itis considered that there is not necessarily a subordination and,hence, there could be no employment contract. If day-to-daymanagement has been delegated to a director (rather than a personoutside of the board), the Company Law requires that a report bemade to the annual shareholders’ meeting on the total remunerationand benefits allocated to the managing director. In respect of Listed Companies, the Ten Principles of CorporateGovernance contain detailed recommendations on remunerations ofdirectors and managers, criteria for bonus and share option schemesand requirements for transparency. The total amount of direct andindirect remuneration received by directors and executive managersshould be disclosed in the annual report (with a distinction on fixedand variable components and stock options).


For LSE listed companies article 17 of the Market Abuse Lawrequires that persons discharging managerial responsibilities andany persons closely associated to them, notify the CSSF and thecompany of any dealings in the securities of the company. Inaddition the major shareholder notification requirements set outunder question 2.5 above apply.

There are however no statutory limitations in relation to the numberof securities, i.e. shares a director can hold.No specific limitations or disclosure rules exist for Euro MTFcompanies. With regards to limitations on members of the management bodyhaving personal dealings with their companies, under CompanyLaw as set out under question 3.7 below, directors who enter intotransactions with their companies in which they have a personalinterest may not participate in the deliberation and vote by the boardof directors and a special report must be made on the transactionconcerned to the next following general meeting of shareholders. In addition, the Ten Principles of Corporate Governance provide ina guideline that each director shall inform the chairman of the boardof any other directorship (office or responsibility includedexecutive positions) that it takes up outside the company during theterm of his directorship. In any event directors, which by the natureof their relationship with the company may have access to insideinformation, should in any event take a prudent approach whiledealing with shares in the company in light of the provisions of theMarket Abuse Law.


The process for meetings is generally set in the company’s internaldocuments, such as board rules, or in the articles of association. Incase the company would not have set any rules, article 60 of theCompany Law sets as a general principle that the board of directorsshall form a collegiate body which shall deliberate in accordancewith the articles of association and, in the absence of provisions inthat respect, in accordance with ordinary rules for deliberatingassemblies.If the articles do not provide for any other specific rules with regardto quorum and voting rights of directors, article 64 bis of CompanyLaw provides that the presence quorum is of at least half of themembers of the board of directors and decisions are taken by amajority vote of those directors present or represented. Unlessotherwise specified, the chairman has a casting vote. Directors mayparticipate in such meetings by video-conference or telephoneconference if the internal rules so allow.


The board of directors is elected as a collegiate body by theshareholders, and the members of the board are duty bound, untiltheir replacement to manage the affairs of the company isappointed. This means that they have to consider the business to bepursued by the company, take the relevant management decisionsand the appropriate steps to have such decisions implemented. Theduty to manage and, in connection with any duties delegated by theboard, to supervise other persons who may be in charge of carryingout the affairs of the company (in particular the executives in chargeof daily management) has been stressed by the Luxembourg courts.The company must be managed in its best corporate interest andwith the purpose to fulfil the object of the company as stated in itsarticles of association. The corporate interest is not the same as, andis not limited to, the combined interests of the shareholders but it isconsidered that the corporate interest is foremost the interest of thecompany and its shareholders as a whole which may be differentfrom the interest of its shareholders or even the majority of itsshareholders. Shareholders’ interests as a whole can generally betaken into account by the board who may also consider interests of




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other stakeholders which include employees, business partners andthe communities in which the company operates.The specific duties of the board are only partially defined by law.The following is an indicative list of specific duties of a board ofdirectors under Company Law which it cannot delegate:

approval of non-consolidated and consolidated financialstatements for publication and submission to the annualgeneral shareholders’ meeting;adoption of the non-consolidated and consolidatedmanagement reports for publication and submission to theannual general shareholders’ meeting;convening of the annual general shareholders’ meeting on thedate provided in the articles of association;convening of a shareholders’ meeting at the request ofshareholders representing 10% of the share capital;addition of an agenda item to any general meeting at therequest of shareholders representing 10% of the capital;adjournment of a shareholders’ meeting in session at therequest of shareholders representing 20% of the sharecapital;reporting on any purchase of own shares in the annual report;andreporting to the general meeting of shareholders on anytransaction approved by the board of directors where adirector had a personal conflict of interest.

Other rights and duties exist in circumstances of particular actionsby the company, such as an increase of the share capital againstcontribution in kind, the vote of an authorised capital or the removalof preferential subscription rights, the vote of an authorisation torepurchase shares, the decision to pay an interim dividend or inconnection with corporate reorganisations such as mergers ordivisions.Directors of LSE listed companies have many other specific dutiesunder the transparency law or the market abuse law as well as theLSE regulations and the Ten Principles of Corporate Governance. Liability regimeDirectors may incur liability either towards the company or towardsthird parties. The general principles are set out under question 2.4above. Under normal circumstances, the expected behaviour of a directoris that of a normal prudent person acting in a like position andhaving the benefit, when making a decision, of the same knowledgeand information as the directors.Pursuant to Company Law following the approval of the annualaccounts and the consolidated accounts, the general meeting ofshareholders must decide on whether to grant discharge to thedirectors in respect of the performance of their duties during theyear under review. This discharge will cover all the actions of the board of directors tothe extent they are appropriately disclosed in the annual report andaccounts. The discharge does not operate for any facts or mattersthat were not appropriately disclosed. If voted, the discharge isonly valid vis-à-vis the company but does not release the board ofdirectors from any liability towards third parties includingshareholders in respect of damage specifically suffered by them(see question 2.4 above).


The chairman of the board of directors of Listed Companies has

specific duties in respect of corporate governance in order to ensurethat procedures for preparing holding and taking decisions at boardmeetings are correctly applied. Such duty is expressed as a generalrecommendation in the Ten Principles of Corporate Governanceand is not as such enshrined into Company Law. For directors generally they need to devote the necessary time andattention to their duties and allow sufficient time to properlydischarge their function. In accordance with article 57 of the Company Law, each directorhas to take care to avoid any direct or indirect conflict of interestwith the company. In case of conflict of interest he should informthe board as they arise and will have to refrain from deliberatingand voting on the relevant issue. Any abstention from vote as aresult of a conflict of interest will be noted in the minutes of themeeting and disclosed to the next following general meeting ofshareholders. The Ten Principles of Corporate Governance put specific weight onthe duty of board members in the areas of financial reporting,internal control and risk management. The most visible is therequirement to create an audit committee who should assist theboard in the discharge of these liabilities and monitor the reliabilityand integrity of the financial information provided by the companyas well as its internal control and risk management systems.


The Company Law does not require any specific disclosuresregarding management body practices except for the disclosure tothe annual general meeting of the total remuneration paid to themanaging director (see question 3.3 above). For Listed Companies,however, the Ten Principles of Corporate Governance require thatthe company sets up a corporate governance charter which will setout board practices and contain requirements for the board toregularly carry out an evaluation of its performance, examine itscomposition, organisation and effectiveness as a collective body. Further, the Ten Principles of Corporate Governance recommendthat each year Listed Companies disclose in a specific corporategovernance chapter of its annual report all the main aspects of itscorporate governance during the relevant financial year (includingin particular any departure by the company from therecommendations set out in the Ten Principles of CorporateGovernance).


Directors and officers insurance are permitted, and for ListedCompanies, are normal practice. In addition, directors may benefitfrom indemnities either from other group companies (such as theparent) or from the company itself. From the latter case, however,the indemnity would not be valid if it would disapply the rules ofliability of directors as set out under Company Law. In particularan indemnity by the company could not cover a director for grossnegligence or wilful misconduct in respect of which limitations ofliability are not recognised under Luxembourg law. Further theindemnity (and the D&O insurance) could not cover fraud or anycriminal penalties.


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There are no legal requirements or regulations with regard tocorporate social responsibility. Certain companies have taken somecommitments in that respect which do however not have a legalbasis and are driven by market practice only.


Employees play no direct role in corporate governance except inlarge companies which have employee representatives on the board.

5 Transparency


In respect of LSE listed companies, the responsibility for theinformation in ongoing financial disclosure (annual, semi-annualand interim accounts) as well as for disclosure on share capitalpursuant to the Transparency Law lies with the issuer, i.e. thecorporate entity (rather than the board of directors or its membersindividually). Annual and semi-annual accounts shall howevercomprise a statement by the persons responsible within thecompany whose names and functions shall be indicated to the effectthat to the best of their knowledge the relevant financial informationhas been prepared in the applicable accounting standards and givesa true and fair view.


Company Law imposes on all companies to prepare and publishannual accounts on an unconsolidated basis and, if applicable, on aconsolidated basis. LSE listed companies must prepare accounts inaccordance with IFRS. The accounts shall include a management

report containing a business review for the relevant financial year. For LSE listed companies, the transparency requirements impose,in addition, the publication of semi-annual accounts as well asquarterly accounts (or interim management statements) as well aspublications regarding changes in share capital and shareholdings.The Market Abuse Law requires disclosure on directors’ dealings inshares of the LSE listed companies as well as publications inrespect of price-sensitive information for all Listed Companies. The Ten Principles of Corporate Governance recommend furtherdisclosure specifically targeted to allow shareholders to assess dueapplication of corporate governance rules within the ListedCompanies (see question 3.8 above).


Company Law requires all companies to have their accountsaudited except for small type companies. LSE listed companiesmust anyhow appoint auditors who report on an annual basis. The audit report has to be sent to shareholders together with themanagement report and the financial statements ahead of the annualgeneral meeting. Half-yearly reports or quarterly reports (orinterim management statements) do not have to be audited.


The Transparency Law requires LSE listed companies to makeavailable on websites information on the company’s share capital aswell as any regulated information. Regulated informationcomprises any financial reporting (annual, semi-annual andquarterly financial statements) as well as notification on sharecapital and shareholdings. The Market Abuse Law requires insideinformation to be published. All such information should be published on websites of thecompany and of the Luxembourg Stock Exchange. The websiteshould also make available the corporate governance charter. Inpractice, Listed Companies publish on their websites not onlyregulated information but also press releases and make theinformation available for the past years.




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Philippe Prussen became a member of the Luxembourg bar in 2004and joined Elvinger, Hoss & Prussen the same year. He is maître en droit from the University of Aix-Marseille III andholds an LL.M in Innovation, Technology and the Law of theUniversity of Edinburgh. He is fluent in English, French, German and Luxembourgish.

Philippe Prussen

Elvinger Hoss & Prussen2, place Winston ChurchillB.P. 425L-2014 Luxembourg

Tel: +352 44 6644 2560Fax: +352 44 2255Email: [email protected]: www.ehp.lu


Pit Reckinger

Elvinger Hoss & Prussen2, place Winston ChurchillB.P. 425L-2014 Luxembourg

Tel: +352 44 6644 2411Fax: +352 44 2255Email: [email protected]: www.ehp.lu

Pit Reckinger became a member of the Luxembourg bar in 1990.He has worked with “Linklaters & Paines” (London) in 1990/1991.He is a partner in the corporate, banking and finance group ofElvinger, Hoss & Prussen since 1994.He advises banks, large corporates and funds in corporate andcapital market transactions as well as on a continuous basis forcorporate housekeeping and compliance matters. His areas ofexpertise focus specifically on mergers and acquisition, shareholdersagreements and financing documents, bond and equity listings,bank secrecy, aspects of money laundering and compliance issuesfor banks and corporate. He is fluent in French, German, English and Luxembourgish.

Elvinger, Hoss & Prussen is a leading Luxembourg law firm with strong practices in corporate, corporate finance,mergers and acquisitions, banking, general commercial, insolvency, insurance, investment and pension funds, privateequity structures, European law, securitisation, intellectual property, administrative law and tax law.

The firm provides high level legal services, both in terms of legal advice and litigation as well as arbitration to local andinternational financial and industrial groups and financial institutions, Luxembourg investment funds and their serviceproviders.

Partners of the firm participate at industry and governmental level in the development of the legal and regulatoryenvironment of the financial services sector in Luxembourg.

Elvinger, Hoss & Prussen has deliberately chosen to be an independent non-affiliated organisation, carrying its activitiesin and from Luxembourg in strong collaboration, in each country or financial centre with correspondents who are, inthe relevant field of law, considered to be the most competent.



Chapter 20



Officially Listed Companies together with Public InterestCompanies will be discussed in the answers to follow. Theseentities are governed by different rules and guidelines. OfficiallyListed Companies are governed by the Listing Rules, under whichtheir securities are admitted to listing or trading by the ListingAuthority on a regulated market (hereinafter referred to as ‘Listedcompanies’). Public Interest Companies are governed by theCorporate Governance Guidelines of Public Interest Companiesand such companies can take the form of any of the following threetypes of companies:(i) a regulated company, which may take the form of a large

private company or a public company but excludingcollective investment schemes, companies which do not holdor control clients' money or companies already having anobligation to segregate clients' funds in separate accounts.Regulated companies are those companies authorised toprovide either a financial service or a utility service;

(ii) a company having issued debt securities to the public, whichsecurities are not admitted to listing on a Regulated Market;or

(iii) a limited liability company being an entity owned by thegovernment.

The latter form of companies are considered to have a publicpurpose since the business carried out by Public Interest Companiesaffects a considerable sector of society. It is therefore expected bythe Malta Financial Services Authority (MFSA) that suchcompanies act in the general interest of society and not only in theinterests of their shareholders. The sole regulator for Financial Services is the MFSA. Whereasbefore the Malta Stock Exchange (MSE) was both the operator andthe regulator of the local capital market, now it is no longer theregulator which role has been assumed by the MFSA. Yet, the rulesfor admissibility of securities to trading on the MSE are stilldetermined by the MSE, being the sole regulated market under theFinancial Markets Act.


All companies are regulated by the Companies Act 1995 (the CA).The CA provides for the relationship between directors andshareholders of companies, statutory reports including directors’reports and annual audited financial statements, and the Articles of

Association which every company must have, stipulating theinternal procedures and regulations for a company and thus can beconsidered as a corporate governance source. Listed companies have to comply with the Financial Markets Act1991 - the MFSA assumed the role of Listing Authority under thisAct, which sets out its constitution and functions. The ListingAuthority has in turn issued the Listing Rules providing for therequirements to be satisfied by a company with regard to corporategovernance. Hence, Listed Companies not only have to abide bythe rules in the CA and the articles of association, but also by thoseimposed by the Listing Rules.The Code of Principles of Good Corporate Governance (the Code)- the Code is incorporated in the Listing Rules, applying tocompanies having securities admitted to a regulated market,excluding Collective Investment Schemes. The Principles set out inthe Code are not of a mandatory nature, although companies are“urged” to adopt the said Principles. Furthermore, the Listing Rulesrequire the Board of Directors to include in their annual reports astatement of compliance providing an explanation of the extent towhich they have adopted the Principles. This statement should befurther confirmed by the auditor’s report. The adoption of thesePrinciples is intended to: (i) provide more transparent governancestructures and improve relations within the market which shouldenhance market integrity and confidence; (ii) ensure propertransparency and disclosure of all dealings or transactions involvingthe Board, any director, senior managers or Officers in a position oftrust or other related party; and (iii) protect shareholders from thepotential abuse of those entrusted with the direction andmanagement of the Company by the setting up of structures thatimprove accountability to them.In relation to Public Interest Companies, the Corporate GovernanceGuidelines of Public Interest Companies (the Guidelines) apply -the Guidelines were published by the MFSA in 2006 and have thestatus of recommendations. Unlike the Code, under the Guidelinesthere is no obligation on the Board of Directors and/or the auditorsto provide/confirm a statement of compliance. The Guidelines areintended to encourage the adoption of best practice in corporategovernance, making the fulfilment of duties of managers anddirectors simpler. The Guidelines assist managers and directors inthe further development and growth of the companies and to ensurepublic confidence in the activities of the companies by themdirected. Another aim of the Guidelines is to fortify the relationshipbetween investors and the persons entrusted with the direction ofthe companies.

Dr. Pierre Mifsud

Dr. Tonio Ellul

EMD Advocates

Malta




The publishing of the Guidelines only some years ago and thefrequent revisions of the Code illustrate that corporate governanceis topical in Malta. Yet, the topic has so far been limited to ListedCompanies and Public Interest Companies, excluding other formsof companies. With the always growing awareness on corporategovernance, further developments will certainly take place withinthis area of Maltese law, mostly as a consequence of anydevelopments in the European Union.

2 Shareholders


The CA requires certain powers to be exercised by the members ofthe company in a general meeting, such as changes to thecompany’s Memorandum or Articles of Association (subject tominor exceptions). The CA provides that the business of a companyshall be managed by the directors who may exercise all such powersas are not by the CA or by the Memorandum or Articles ofAssociation of the company, required to be exercised by thecompany in a general meeting. Further rights are granted to the shareholders under the ListingRules, such as the general rule that the shareholders of a ListedCompany must approve by ordinary resolution in a generalmeeting, the grant to a director or employee of the issuer or of anyof the latter’s subsidiary undertakings of an option to subscribe forshares in the capital of the issuer or of any of its subsidiaryundertakings if the price per share is less than the market value ofthe said shares determined in accordance with the Listing Rules.


As a general rule, under Maltese law an essential element of alimited liability company is that it acquires a juridical personalityseparate from that of its shareholders. Hence, it is the company thathas assets and liabilities and not the shareholders themselves. Theliability of the shareholders is therefore limited, to the extent thatthey will only be held liable to pay up any unpaid balance on theissued shares of the company, if any. The separate juridical personality of the company does have itslimitations. Under Maltese law, the Courts are empowered to liftthe corporate veil in certain circumstances and hold the membersliable for debts incurred by the company. The corporate veil will belifted in scenarios including fraudulent trading, wrongful tradingand premature trading, that is, trading before the actual registrationof the company.


Shareholders may be disenfranchised if they fail to pay any call orinstalment of a call on a day appointed for payment. This isconsidered as an extreme measure, resulting in the shares beingforfeited or surrendered. Similarly, in the case of a takeover, the Listing Rules provide thatwhere the offeror has acquired, or has firmly contracted to acquireor holds at least ninety per cent of the securities carrying votingrights of the offeree company and ninety percent of the voting rights

comprised in the said bid relating to the offeree company or in theofferee company as the case may be, the offeror has the right toacquire the remaining securities in the offeree company at a fairprice.


On the basis of the Proper Plaintiff rule, any claims for wrongssuffered by the company should be brought forward by thecompany itself and not by its shareholders. However, failure by themanagement to cause the company to take the necessary actions,whether negligently or intentionally, can give rise to consequencesunder Maltese legislation. One of the available inroads is based on the unfair prejudice rule.Any member complaining that the affairs of the company are beingconducted in an unfairly discriminatory, unfairly prejudicial oroppressive manner to a member/s or in any way contrary to thegeneral interest of the members, may request the Court to give anorder as it may deem fit. The Court may make an order regulatingthe conduct of the company’s affairs in the future or requiring thecompany to act upon the omission the applicant complained of,amongst others. A derivative action is also possible when no other remedy isavailable to the complaining shareholder. This would require theplaintiff to prove fraud against the minority shareholders and tofurther prove that the persons in control of the company preventedthe company from instituting legal proceedings in its own name.


There is no limitation with regard to the number of securities ashareholder can hold, in the CA. A limitation is however providedfor in the Listing Rules with regard to shareholders acquiring ordisposing of shares to which voting rights are attached. Where suchproportion reaches, exceeds or falls below certain thresholds, boththe issuer and the Listing Authority are to be notified of theproportion of voting rights of the issuer held by the shareholderafter the said acquisition or disposal.


Companies are required to hold an annual general meeting. Othermeetings may be held during the year, which are considered to beextraordinary general meetings. All the members of the companyare to be notified of any general meeting and will be given thepossibility to appoint a proxy. The proxy need not be any othermember of the company. Decisions at general meetings are takenby either ordinary or extraordinary resolutions. Ordinaryresolutions require a simple majority of the members present at themeeting or such other higher percentage as the Memorandum orArticles of Association of the company may prescribe. A higherproportion of votes would generally be required in the case ofextraordinary resolutions. However, the percentage of votesrequired for extraordinary resolutions may vary according to theMemorandum or Articles of Association of the company. A member or members of the company holding between them notless than one-tenth of the issued paid up share capital carryingvoting rights at the date of the request, may request the conveningof an extraordinary general meeting of the members of thecompany. The directors must call the meeting within twenty-one

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days from the date of deposit of the requisition. Where the directorsfail to call the meeting within the time stipulated, the member ormembers requesting the meeting may convene it themselves withinthree months from the date of the deposit of the requisition.Unless otherwise provided in its Articles of Association, a companyregistered in Malta only recognises the rights of the registeredholder of securities, even though such securities may be held by anominee or trustee as the case may be. The Articles of Association of the company may also cater forelectronic communications to shareholders. Similarly, the ListingRules allow information to be posted on the company’s website aslong as the shareholders have been provided by post with the detailsnecessary to access such information and informed that suchinformation is available in written format upon request.



The company’s business is managed by the board of directors. Thenumber of directors is stipulated in the Memorandum ofAssociation of the company. However, the CA requires publiccompanies to have a board of directors composed of not less thantwo directors. The role of directors may be of either an executiveor a non-executive nature. Directors of companies are jointly and severally personally liable indamages for any breach of duty. However, if one or more directorsare entrusted with a specific duty, only such director or directorswill be held liable in damages for any breach of the said duty. The CA imposes no specific qualification requirements fordirectors. The Code on the other hand requires that directors be fitand proper to direct the business of the company. Thus, for adirector to be fit to hold such office, one must be honest, competentand solvent. The Code, and similarly the Guidelines, suggest thatone-third of the board of directors of Listed Companies and/orPublic Interest Companies are to be non-executive with the majorityof which being independent. This is necessary to establish adesirable balance, limiting the possibility of an individual or smallgroup of individuals from dominating the decision making processof the board of directors.


An ordinary resolution of the general meeting of the company willsuffice for the appointment of any director other than the firstdirector, who is generally appointed by virtue of the Memorandumof Association of the company. The Memorandum or Articles ofAssociation of the company may establish different requirementsfor the appointment of subsequent directors. Similarly, a director may be removed by a resolution taken at ageneral meeting of the company and passed by a member ormembers having the right to attend and vote, holding in theaggregate more than fifty percent in nominal value of the sharesrepresented and entitled to vote at the general meeting,notwithstanding any agreement with the director in question theMemorandum and Articles of Association providing otherwise.Also, a director may resign before the expiration of his/her term ofoffice.When a member intends to forward a resolution for the removal ofa director, the CA requires the company to inform the director inquestion, who will in turn be given the right to be heard at the same

general meeting convened for his removal from office. Similarly,the Code and the Guidelines provide that the appointment andremoval of directors should be in the hands of the members of thecompany as long as such process is transparent and the generalmeeting convened for such purpose is properly constituted.


Under the CA the general meeting of the company is to establish theremuneration of the directors from time to time. The CA makes nodistinction whatsoever between the remuneration of executive andnon-executive members of the board of directors. The CA imposes a duty on directors, who may in any way beinterested whether directly or indirectly, in a contract or proposedcontract with the company, to disclose the nature of their interest tothe other directors. The Listing Rules provide that copies of the service contracts ofdirectors must be made available to any person requesting theinspection thereof. The contract is to contain details of the salaryand any other benefits to which the director may be entitled. Inaddition, the Code recommends the use of transparent proceduresfor developing policies on executive remuneration packages ofindividual directors in order to guarantee transparency.Remuneration committees should be set-up consisting ofindependent and non-executive directors having no personalfinancial interest other than as shareholders of the company.


Unless fixed by the members of the company in a general meeting,there shall be no shareholding qualification for directors. Althoughunder the CA directors are free to hold any number of shares in theircompanies, the Listing Rules state that a director or senior officer ofa Listed Company shall not deal directly or indirectly in any of thesecurities of the issuer in which he holds such office:(i) when in possession of unpublished price-sensitive

information in relation to the said securities;(ii) prior to the publication of matters of an exceptional nature

involving unpublished price-sensitive information on themarket price of the securities of the issuer;

(iii) on considerations of a short term nature;(iv) when no written notice is given in advance to the chairman

or director or directors designated for this purpose; or(v) during such other period as may be established by the Listing

Authority from time to time.Notwithstanding the illustrated situations, the Listing Authoritymay approve of such dealings in exceptional circumstances. Inaddition, the Code and the Guidelines provide that directors holdingshares in Listed Companies and/or Public Interest Companies are todeclare their interest in the said companies in the annual report ofthe companies. It must be noted that directors dealing in shares ofListed Companies may only do so in compliance with theprovisions dealing with insider dealing under the Prevention ofFinancial Markets Abuse Act in line with the respective Directiveissued by the European Union.

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The company’s Articles of Association generally provide for theprocedure to be adopted for convening board meetings and for thegiving of notice thereof. There is no requirement as to theminimum number of board meetings that should be convened. Theboard is however expected to meet at sufficient intervals for theeffective discharge of their duties. The Code, as well as theGuidelines, recommend meetings to be convened not less than onceevery quarter and to establish procedures to stipulate the frequency,purpose and duration of the meetings of the board of directors. TheListing Rules additionally require the number of meetings called bythe board of directors and the attendance to be recorded accordinglyin the annual report of the Listed Companies. Both the Code and the Guidelines state that notice of forthcomingmeetings together with supporting materials should be circulatedprior to the meeting, giving the directors enough time to considerthe information relevant to the meeting convened.


The CA makes no distinction between executive and non-executivedirectors, and lists the general duties of directors by way ofexample. In particular, directors are required to act honestly and ingood faith and in the best interests of the company. Also, it isessential for directors to promote the well-being of the company.The Memorandum and Articles of Association may impose furtherspecific duties on the directors of the company.


Unless the matter is to be exercised by the company in generalmeeting, the CA provides that the directors may exercise all powersof the company. Both the Code and the Guidelines specificallyprovide for the responsibility of the board to execute the four basicroles of corporate governance: accountability; monitoring; strategyformation; and policy development. The CA requires the directors to prepare a directors’ report for eachand every accounting period.


The CA requires disclosures, such as the directors’ report, to bemade by the board of directors to the general meeting and also tothe Registrar of Companies. Moreover, the Listing Rules imposesfurther disclosures to be made in the relevant market, namely theinterests of the directors and connected persons, an explanation ofthe extent to which the principles of the Code have been adopted,and also transactions by directors and officers of the issuer. The above-mentioned disclosures are intended to enhancetransparency in the functioning of the board of directors. The Codeadditionally requires the board to undertake a rigorous and formalannual evaluation of the performance of the directors bothindividually and as a board.


As illustrated earlier, the directors are held jointly and severallyliable for any damages arising out of breach of duties, unless suchduty has been entrusted to one or more directors. However, the CAallows for the provision of insurance by the company for any of itsofficers against any liability which, by virtue of any rule of law,would attach to him/her in respect of negligence, default or breachof duty or otherwise of which he/she may be guilty in relation to thecompany. However, it is generally accepted in practice thatinsurance does not cover claims resulting from dishonesty, fraud ormalicious conduct of the directors or officers of the company.The CA provides, in addition, for indemnity to the members of themanagement body, in that a company may provide for every officeror auditor of the company to be indemnified out of the assets of thecompany against any liability incurred by him/her in defending anyproceedings in which judgment is given in his/her favour or inwhich he/she is acquitted.



The CA does not provide for corporate social responsibility andthus this is something which is voluntarily undertaken by Maltacompanies. However, some form of protection is available underother laws regulating consumer affairs, the environment as well asemployment. The Code and the Guidelines specifically provide forcorporate social responsibility. Hence, Listed Companies andPublic Interest companies are expected to take decisions as goodcorporate citizens in respect of other stakeholder interests.A number of Listed Companies in Malta have undertaken CorporateSocial Responsibility practices such as providing financial supportto voluntary organisations or in relation to cultural or sportactivities, promoting environmental initiatives and assisting thecommunity in general.


The unitary board system adopted by Maltese companies ensuresthat employees are not involved in corporate governance, nor is therepresentation of employees on the board statutorily required.

5 Transparency


Disclosure and transparency, as provided for by the CA, is theresponsibility of the board of directors collectively. Similarly, theboard of directors as a whole is responsible for the preparation ofthe financial statements of the company. Under the Listing Rules a Listed Company must appoint a Sponsorwho will be responsible for ensuring compliance therewith and forbeing the point of contact between the Company, the MSE and theListing Authority.

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Annual accounts must be prepared and published by all companiesin accordance with the CA. These are to include audited financialaccounts, directors’ and auditors’ report and also an account of thecompany’s activities for the period covered by such accounts. TheListing Rules further require the inclusion of a directors’ statementof compliance in the annual report. The annual report should alsooutline the company’s compliance with the Code. Under theListing Rules directors of Listed Companies are to publish halfyearly financial reports and also immediate companyannouncements in relation to the appointment of board members,unpublished price-sensitive matters and any informationconcerning the company or any of its subsidiaries the publication ofwhich would avoid the establishment of a false market in itssecurities.


Audited financial statements are to be presented to the shareholdersfor approval at the annual general meeting. This is a requisiteapplicable to all companies. The CA requires these financialstatements to include an auditors’ report, which is to be drawn up inaccordance with international standards on auditing. This report isto include the auditors’ opinion on whether the annual accountshave been properly prepared in terms of the CA.

The external auditors of Listed Companies must also report on thestatement of compliance drawn up by the directors. In terms ofMaltese law, Listed Companies must also form internal AuditCommittees which are to be chaired by a non-executive director andmade up of a majority of non-executive directors. SuchCommittees are to meet at least six times a year and are responsiblefor reviewing procedures and control systems, assisting the board ofdirectors in monitoring financial reports, reviewing the company’sinternal financial systems, monitoring the internal audit function,and making recommendations to the board on the appointment ofthe company’s external Auditors. The Listing Authority is to be informed by the company of themanner of constitution of the Audit Committee and also of anysubsequent changes in the composition of the Committee. Insubstitution of convening an extraordinary general meeting ofshareholders, the Audit Committee may, in certain specificcircumstances, discuss and approve certain transactions.


Listed companies tend to publish information such as companyannouncements in relation to corporate governance on theirwebsites, although there is no mandatory requirement to do so.

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Dr. Tonio Ellul

EMD AdvocatesVaults 13 - 15Valletta Waterfront, FRN1913Malta

Tel: +356 2203 0000Fax: +356 2123 7277Email: [email protected]: www.emd.com.mt

Tonio Ellul has been practising law in Malta for the past 15 yearsand holds a Masters degree in Financial Services. He is a partnerat EMD where his principal areas of practice are commercial andcompany law, iGaming, data protection, financial services,employment and arbitration. Tonio advises several medium sizedand large Maltese companies as well as foreign owned companies.He also lectures and examines in commercial and company law atthe University of Malta. Tonio is a member of the Executive Councilof the Malta Branch of the Society of Trust and Estate Practitioners(STEP) and is also a member of the Council of the Malta Institute ofFinancial Services Practitioners.

Dr. Pierre Mifsud

EMD AdvocatesVaults 13 - 15Valletta Waterfront, FRN1913Malta

Tel: +356 2203 0000Fax: +356 2123 7277Email: [email protected]: www.emd.com.mt

Pierre Mifsud has been practising law in Malta for the past 10 yearsand holds a Masters degree in Financial Services. He is a partnerat EMD where his principal areas of practice are commercial andcompany law, financial services law and media and entertainmentlaw. Pierre advises several companies particularly in the fields offinancial services and media law, and has undertaken several legaldue diligence tasks for clients of the firm. Pierre is a member of theMalta Branch of the Society of Trust and Estate Practitioners (STEP)and is also a member of the Malta Institute of Financial ServicesPractitioners.

EMD Advocates is a dynamic and established boutique Maltese law firm which provides traditional as well asspecialised legal services. The firm boasts a strong international legal practice with particular emphasis on a numberof niche areas including corporate law, tax law, i-Gaming, financial services, trust law, intellectual property, ship & yachtregistration, immigration and residency, employment law, media & entertainment law and property and constructionlaw. Its clients include several medium and large companies Maltese companies and foreign owned companies, someof which are listed companies. EMD Advocates is part of EMD, a Malta-based multi-disciplinary organisation whichprovides consultancy services and assistance to clients in areas such as company formation and administration, taxconsultancy and compliance, accounting, payroll management, trust creation and administration and fiduciary services.This full-service concept enables us to provide clients who choose Malta to take advantage of the various benefitsgranted under Maltese law with all the back-office assistance they necessitate to comply with Maltese legislativerequirements.

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Chapter 21

Basham, Ringe y Correa S.C.

Mexico



Investment promotion companies (sociedades anónimaspromotoras de inversión) These are designed to serve as an intermediate stage between anormal company and a stock exchange company (sociedadanónima bursátil) with respect to the legal system applicable to theprotection of minorities, revealing of information and goodcorporate governance requirements. There is no requirement that anormal company must be converted into an investment promotioncompany and then later into a stock exchange company. Any company may list its shares on the stock market, and there isno requirement that it adopt the form of an investment promotioncompany, although it may do so as an intermediate stage to developand grow, as considered appropriate.Investment promotion companies are regulated in such a way as togive them certain exemptions from the provisions of the GCL, andto provide greater protection for minority shareholders and establishstandards for good corporate governance practices. Theseexceptions permit the company to carry out transactions that areimportant for it to receive private equity capital.As provided by the SL, a company may be incorporated or becomean investment promotion company, subject to compliance with therequirements. In those matters not dealt with in the SL, the GCLapplies. For an existing company to become an investment promotioncompany, an extraordinary shareholders’ meeting must approve thechange. Stock exchange investment promotion companies (sociedadesanónimas promotoras de inversión bursátil) To become a stock exchange investment promotion company, aninvestment promotion company must request that its shares be listedwith the National Securities Registry. Before the registration of itsshares, an investment promotion company shareholders’ meetingmust approve: the change of the company name to include the wordbursátil or the abbreviation ‘B’; and a programme to progressivelyadopt the system applicable to a stock exchange company within aperiod of three years - such programme must comply with therequirements of the regulations of the stock exchange on which thecompany proposes to list its shares; and any changes necessary to thecompany by-laws to enable it to act as a stock exchange company.Stock exchange companies (sociedades anónimas bursátiles)This is the name given by the SL to companies whose securities are

listed with the National Securities Registry and whose structure isalso reorganised by the SL. Inter alia, the SL provides that a stockexchange company and its affiliates form a single unit, sets out rulesfor the operation of the corporate bodies of the company, andestablishes the responsibilities of directors, officers and externalauditors. Finally, the by-laws and articles of incorporation of companiesprovide specific rules applying to each company relating tocorporate governance.


The primary sources of law related to corporate governance inMexico are the Federal Commercial Code, the GeneralCorporations Law (GCL), the Securities Law, the FinancialInstitutions Law and the Mutual Funds Law.In addition, the National Banking and Securities Commission issuessecurities and circulars having provisions related to corporategovernance, and which apply to publicly traded companies andissuers of securities generally. As a voluntary code of practice, theMexican Business Coordination Council issued the Code for theImprovement of Corporate Practices, which establishes principlesand guidelines for the bettering of corporate conduct throughimproving corporate governance. On 28 June 2006, a new Securities Law (SL) became effective.This law brings corporate governance principles into Mexican law.


Over the past year there have not been any new developments orproposals for new legislation or regulation regarding corporategovernance in México. Notwithstanding the foregoing, we considerthat since its practice has increased more and more over the pastfew years, it will not be long before new regulations or proposalsarise. The worldwide crisis will definitely impact and lead to newcorporate governance practices and regulations in México.Most Mexican entities are family corporations that are governedand managed by family members. These entities are in need ofcapital and investment to stay afloat and overcome the crisis. Theneed of alternate capital means to obtain funds through third parties,the stock market or other companies. It is only obvious that thirdparties or other entities that invest money would want some kind ofcontrol over their investments, this leads to additional CorporateGovernance.

Alejandro Escobar Bribiesca

Juan José López-de-Silanes Molina



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Basham, Ringe y Correa S.C. Mexico

Throughout the past few years and taking into consideration theworldwide financial crisis, individuals investing in new companies orprojects are more and more concerned about their investments and therisk involved. Markets now a day are not as safe as they use to be.In addition, it is obvious to say that shareholders and creditors havemore and more interest in the activities and decisions taken by theBoard of Managers/Directors. Shareholders and creditors not onlyseek to be informed but to establish some limitations andobligations to the actions taken by the Board ofManagers/Directors.

2 Shareholders


Shareholders, through the general shareholders meeting (as thesupreme body of the company) appoint and may remove the soledirector or board of directors. Corporate by-laws may, however,provide that such appointment or removal of the sole director orboard of directors must be made through an extraordinaryshareholders’ meeting.In accordance with the SL, shareholders having 10 per cent of thevoting shares, individually or as a group, including those withlimited or restricted voting rights, of an investment promotioncompany may, in a shareholders’ meeting, assign or revoke thedesignation of a member of the board of directors. Shareholdersmay also limit the liability of directors and officers of the companyfor loss or damage arising from their conduct or decisions, the sameprovisions applied for stock exchange companies.In addition, shareholders of such companies may determine thescope of, and limits to, the duties of the sole director or board ofdirectors by the provisions agreed in the by-laws.


From a purely corporate point of view, shareholders cannot be heldresponsible for the acts or omissions of the company, with theexception of a newly incorporated company which does not registeritself as such in the Public Registry of Commerce, and will beconsidered as an irregular company. In this case, any shareholderpurporting to act on behalf of the company, as its legalrepresentative, will be jointly and severally liable for any loss ordamage caused to a third party as a result, in addition to anyresulting criminal liability. In addition, any other shareholdersprejudiced by the above have the right to claim for loss anddamages from the shareholders so acting.Nevertheless, in some cases shareholders may have liability underMexican tax law for an amount equal to such shareholder’s ormember’s capital contributions for federal taxes not paid by thecompany if the assets of the company are not sufficient to pay suchtaxes, as established in the Federal Tax Code, and provided further thatthe company has not registered itself as a taxpayer with the MexicanFederal Taxpayers Registry, changes its tax domicile without notifyingthe tax authorities once a tax audit has begun, or does not maintain theaccounting records required by law or hides or destroys such records.There may be similar or other liability for state taxes.


There is no specific legal provision that regulates relevant

circumstances where shareholders could be disenfranchised.Anti-takeover devices are allowed. The GCL permits the by-laws ofa company to state that the transfer of shares is subject to theauthorisation of the board of directors. The board of directors maydeny the authorisation and designate a third-party purchaser to acquirethe shares at the current market price. Additionally, the by-laws of acompany may include any restriction agreed among the shareholdersincluding a right of first refusal, tag-along rights or similar measures.With respect to publicly traded companies, the SL establishes thatinvestment promotion and stock exchange company shareholdersmay agree upon restrictions on the transfer of shares within thesame series or class, different from those established in the GCL.


Shareholders having 10 per cent of the shares with a right to vote,restricted or limited, individually or as a group, of investmentpromotion or stock exchange companies, pursuant to the SL, may atany time request the president of the board of directors, or anystatutory examiner, to call a shareholders meeting with respect tomatters on which they have a vote.The corporate practices and audit committees of stock exchangecompanies may call a shareholders’ meeting and propose theagenda that they consider appropriate. This is the only case whereresolutions may be put to shareholders against the wishes of theperson or group who, being entitled to do so, call a shareholders’meeting.There are no provisions in the SL that require the board to circulatestatements by dissident shareholders.


Pursuant to the SL, an individual or individuals that wish to acquiredirectly or indirectly thirty (30) per cent or more of the sharesrepresenting the capital stock of a Stock Exchange Company must doso through a public bidding in accordance with article 97 of the SL.Restrictions on the transfer of fully paid shares are provided ifcontained in the by-laws of the company, the most common is aright of first refusal or a requirement to obtain board of directorsapproval for a transfer of shares. Pursuant to the SL, investmentpromotion companies may provide in their by-laws restrictions onthe transfer of shares.The SL also provides that shareholders have the right to agree in thecompany by-laws upon other rights and duties regarding share salesand purchases.Pursuant to the GCL, no company may acquire its own sharesunless by court order in payment of company indebtedness. Ifshares are so acquired, the company must sell these shares withinthe three months following the date that the court order providesthat they may be disposed of. If the shares are not sold by thecompany within the above-mentioned term, the shares must becancelled and the company’s capital reduced accordingly. There isan exception to this rule which applies to mutual fund companies,which are entitled to purchase their shares for the purpose of sellingthem again.In addition to the above, the SL and the Securities Public TradedCompanies Unique Circular authorise the repurchase of its sharesby a publicly traded company. Pursuant to the SL, investment promotion companies, with the priorauthorisation of the board of directors, may acquire and keep their

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own shares without reducing the capital of the company, in whichcase the provisions of the GCL mentioned above do not apply.Shares issued but not subscribed for, and that have been kept in thetreasury, may be subscribed to by shareholders. The SL allows stock exchange companies to acquire their ownshares without the provisions of the GCL mentioned above applyingand without approval of a shareholders’ meeting, provided that theacquisition takes place on a stock market in Mexico, the acquisitionand any subsequent sale occurs at the market price, except in thecase of a public offer or auction authorised by the National Bankingand Securities Commission, and the acquisition is charged againstshare capital of the company, in which case they may be held by thecompany without reducing capital or charged against net worth,where they become unsubscribed for treasury shares. Companies controlled by a stock market company may not acquire,directly or indirectly, shares in such company or its securitiesrepresenting such shares, unless the acquisition is done using amutual fund.


Decisions reserved to the shareholders must be adopted within anordinary or extraordinary general shareholders’ meeting. Pursuantto the GCL, the shareholders may in an ordinary meeting: discuss,approve or amend the directors report, including financialstatements; appoint the board of directors and the statutoryexaminers; determine the compensation of the members of theboard of directors, when these have not been established in the by-laws; and decide upon the payment of dividends.The GCL requires the following issues to be resolved in anextraordinary shareholders’ meeting:

extension of the life of the company, if it has beenincorporated for a fixed period of time;early dissolution of the company;increases or reductions in the capital of the company;amendments to the company’s corporate purposes;a change in the company’s nationality;mergers or spin-offs;redemptions by the company of its own stock and issues ofbenefit shares;issues of bonds;other matters which may require a special quorum;amendments to the company’s by-laws;issues of preferred shares; andconversion of the company from one type to another.

The shareholders of investment promotion companies, in additionto complying with the GCL, may:

agree upon restrictions on the transfer of shares within thesame series or class;establish a basis for requiring or permitting the withdrawal ofshareholders or to reduce capital, other than that set out in theGCL, as well as the price or basis for determining price;issue shares different from those stipulated in the GCL, andthose that do not have a right to vote or have a voting rightrestricted to certain matters, those that confer financial rightsother than the right to vote or exclusively the right to vote, orthose that limit or widen the distribution of dividends or otherspecial financial rights, subject to the provisions of the GCL; implement mechanisms to resolve differences amongshareholders with respect to specific matters; andwiden, limit or deny a preferential right to subscribe for

shares in the company; and limit the liability for loss ordamage of directors and officers of the company, arisingfrom their conduct or decisions.

With the exception of matters that must be dealt with by anextraordinary shareholders’ meeting, under the GCL few mattersare reserved to be dealt with by the shareholders. Largely this is amatter for the company’s by-laws, which may require that anyparticular type of resolution be considered by the shareholders in anordinary or extraordinary meeting. Notwithstanding this, theshareholders’ meeting under Mexican law is the supreme authorityof a company and many matters are customarily dealt with atshareholder level, particularly in closely held companies that mightin other jurisdictions have been dealt with by the board of directors.



The board structure for companies in Mexico is best categorised asone-tier, in general terms. In the company’s by-laws, however,shareholders may agree to create committees or management bodiesother than the board of directors. In accordance with the SL, theboard of directors must have a maximum of 21 members, of whichat least 25 per cent must be independent. For every member, analternate member may be designated upon the understanding thatthe alternates for independent members must also be independent.Pursuant to the SL, the management of investment promotioncompanies is the responsibility of a board of directors, as providedin the GCL, which deals with the board’s organisation, operationand responsibilities. Nevertheless, investment promotioncompanies may adopt the system of management and supervision ofstock exchange companies with respect to the membership,organisation and operation of the board. In such event, therequirement concerning the independence of directors will not beapplicable but directors and managers will be otherwise subject tothe requirements applicable to a stock exchange company. Regarding stock exchange companies, the SL proposes to adopt aunified concept in which the board of directors is givenresponsibility for strategic planning as well as supervisory authorityto ensure that the first is carried out. To do this, the SL has designedone or more committees made up of members of the board,including independent members, to supervise auditing and goodcorporate governance practices. The concept of a totallyindependent external auditor without a conflict of interest inexercising his or her role has been introduced. In addition, theboard of directors of a stock exchange company must comply withthe independent directors’ requirement referred to above.


In accordance with the SL, shareholders having 10 per cent of thevoting shares, individually or as a group, including limited orrestricted rights, may designate or revoke the designation of amember of the board of directors, and designate a statutoryexaminer (comisario). The second right may not be exercised whenthe company adopts the management system of a stock exchangecompany, as it must have an independent external auditor and acommittee made up of independent directors who exercise anauditing role, in place of the statutory examiner. Shareholdershaving 10 per cent of the voting shares also have the right to:request at any time, the president of the board of directors or anystatutory examiner to call a shareholders’ meeting, or postpone for



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three days the consideration of a matter at a shareholders meetingabout which they do not consider themselves sufficiently informed,with respect to matters on which they have a vote; file an action onbehalf of the company against its directors in benefit of thecompany and without needing a previous resolution of a generalmeeting of shareholders - the action may be exercised in the samemanner against the statutory examiners for the purposes set out inthe GCL; and challenge in court resolutions adopted by ashareholders’ meeting with respect to matters over which they havea right to vote, although in this case the dissidents must hold 20 percent of the shares with a right to vote, individually or as a group. Shareholders of investment promotion companies may also enterinto agreements among themselves that forbid the parties fromcompeting with the company in similar businesses, and establishpurchase and sale options with respect to the capital of thecompany, providing that one or more shareholders may:

only transfer all or part of their shareholdings when theacquirer must also acquire all or part of the shares of one ormore other shareholders on the same conditions;require another shareholder to transfer, on the sameconditions, all or part of his shareholdings when the formeraccepts a purchase offer;have the right to sell or acquire shares from anothershareholder, who in turn is obligated to buy or sell, asapplicable, all or a part of the shareholdings, at a determinedor determinable price; andbe obliged to subscribe and pay for a certain number ofshares at a determined or determinable price.

With stock exchange companies, shareholders may meet, inaddition to dealing with the matters set out in the GCL, to approvetransactions sought to be carried out by the company or companiescontrolled by it within any particular fiscal year, that represent 20per cent or more of the consolidated assets of the company.


There is no specific legal provision that regulates the remuneration,service contracts, director’s loans or other transactions between thecompany and a director. Nevertheless, the GCL establishes that ashareholders’ meeting may appoint or remove the members of theboard and establish their remuneration, as well as any security to beprovided by them to guarantee the proper carrying out of their office.The Code for the Improvement of Corporate Practices establishesthe requirements for determining the remuneration of directors.


The National Securities Registry must disclose information on theregistration of shares of stock exchange companies.In addition to the above, companies whose shares are registeredwith the National Securities Registry must submit the relevantinformation and reports regarding:

corporate practices’ resolutions adopted by shareholdersmeetings;quarterly reports regarding company financial statements; annual reports containing financial information;reports concerning corporate restructuring such as mergers,acquisitions, assets purchases, approved by a shareholders’meeting;

reports regarding company management policies; andall other provisions established in the SL to the NationalBanking and Securities Commission.


The SL sets out that stock exchange companies’ and the investmentpromotion companies’ boards of directors must hold meetings atleast four times every year.


The board of directors is entrusted with the representation andadministration of the company. The company by-laws, as well as theGCL, set forth the responsibilities of the board, including the powersgranted to it. In accordance with the SL, the issuing company’s boardof directors has the following responsibilities: the approval oftransactions that are not inherent in the company’s purposes betweenthe company and its shareholders, managers, and with persons relatedto the foregoing by blood or marriage; the approval of transactionsthat involve the purchase or sale of 10 per cent or more of thecompany’s assets; and the granting of a lien or encumbrance for anamount of more than 30 per cent of the company’s assets. The boardmembers are accountable for any resolution adopted in this respectexcept when they express their disagreement at the time of thediscussions and resolutions of the board are adopted.Pursuant to the GCL, the directors will be jointly liable with thecompany for ensuring compliance with the resolutions adopted bythe shareholders.Currently, the board of directors is responsible for the dailymanagement of the business of the company. The SL proposes toadopt the unified concept in which the board of directors is givenresponsibility for strategic planning and supervision to ensure thatthe CEO executes the resolutions adopted by the board. The board of directors also defines company strategy and mayestablish an ethics code, taking into account duties of loyalty anddiligence and the policies that ought to be followed by the members.Members must avoid conflicts of interest and give equal treatmentto shareholders.


The board of directors represents the company and is entrusted, ingeneral terms, with its management. The company by-laws, as well asthe GCL, set forth the responsibilities of the board, including thepowers granted to it. In accordance with the present SL, the issuingcompany’s board of directors has the following responsibilities: theapproval of transactions that are not inherent in the company’spurposes between the company and its shareholders, managers, andwith persons related to the foregoing by blood or marriage; theapproval of transactions that involve the purchase or sale of 10 percent or more of the company’s assets; and the granting of a lien orencumbrance for an amount of more than 30 per cent of the company’sassets. The board members are accountable for any resolution adoptedin this respect except when they express their disagreement at the timethe discussions take place and resolutions of the board are adopted.Pursuant to the GCL, the directors will be jointly liable with thecompany for ensuring compliance with the resolutions adopted bythe shareholders.

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In accordance with the SL, investment promotion companies mustcomply with the provisions established at the GCL, or adopt theregime established for stock exchange companies. The board ofdirectors is entrusted by law with the representation andadministration of the company, although the company by-laws mayestablish the specific responsibilities of the board including thepowers granted to it. The board of directors is responsible for:

strategic planning and for supervision of the company;approving transactions between the company and itssubsidiaries; approving transactions that are not inherent in the company’spurposes between the company and its shareholders,managers, and with persons related to the foregoing by bloodor marriage;approving transactions that involve the purchase or sale of 5per cent or more of the company’s assets;granting liens or encumbrances for an amount of more than5 per cent of the company’s assets;approving the appointment or removal of the generalmanager; andapproving the company management, accounting andinternal control policies.


There is no specific applicable legislation regulating the disclosureof board of directors’ practices. The Public Traded CompaniesGeneral Rules and the Securities Circular 11-33 provide, however,that administrative, accounting, financial and legal informationmust be submitted to the National Banking and SecuritiesCommission.The Code for the Improvement of Corporate Practices provides thatthe company must formulate disclosure principles for the bettermanagement of the company.The SL stipulates that a stock exchange company’s and aninvestment promotion company’s board of directors must requirethe general manager to disclose relevant events to third parties. Thelaw also imposes a direct obligation on the general manager tomake a public disclosure of relevant information and events.


Mexican law does not deal with the issue of indemnifying directors.It is not common to deal with the issue of indemnifying companydirectors since, in general terms, directors are not normally sued inMexico with respect to their conduct as directors.The SL allows the indemnification of directors and generalmanagers against liability for their conduct as such. In addition,directors are not personally liable for damages that might resultfrom the decision made by them acting in good faith with respect tocertain matters, such as:

carrying out the requirements of the law;acting based on information provided by management,external auditors, independent experts, or the corporatepractices and audit committee;choosing the alternative most appropriate from their point ofview without the resulting adverse impact upon the companyas a result of the decision being foreseen and, in both cases,acting upon the information available at the time; orcarrying out the decisions of a shareholders meeting that donot violate the law.

Certain behaviour, such as fraud, excludes a director from the rightto indemnification.



There is no specific legal provision that regulates socialresponsibility for corporations. Notwithstanding the foregoing it isimportant to mention that there are some tax benefits orstimulations for corporate entities that may be involved inenvironmental and community activities.


The GCL does not give employees any role to play in corporategovernance, but shareholders may agree in the by-laws to providethem with such a role. Nevertheless, employees can play a role incorporate governance as good employees, as dealt with inemployment contracts and company policies.The Code for the Improvement of Corporate Practices establishesguidelines and principles for the company’s employees, forexample, with respect to the management of company informationdesigned to contribute to the improvement of corporate governancein the company, in which event the employee shall be responsiblefor any wrong use of the information.The SL, however, introduces the concepts of ‘diligence’ and‘loyalty’ with respect to directors and officers in their conduct.Diligence is considered to mean a duty of care, or in other words toact as if the company’s business were the director or officer’s ownbusiness to create value or benefit for the company. Loyalty isunderstood to mean putting the interests of the shareholders and ofthe company ahead of the personal interests of the director orofficer concerned to reach goals fixed by the company or obtainbenefits for the company.

5 Transparency


For a Mexican entity to become legally incorporated, a companymust be registered with the Public Registry of Commerce for thearea where the company has its corporate domicile. The vigilanceof a corporate entity is in charge of the board of directors, theexaminer appointed by the shareholders or by and externalindependent auditor for Stock Exchange companies. The examinershall be in charge of the following:

To demand from the directors a monthly report including atleast a statement of the financial situation and a statement ofresults.To carry out an inspection of the operations, documentation,records and other supporting evidence, to the extentnecessary to make the audit of the operations which the lawimposes and in order to render the report mentioned in thefollowing paragraph. To submit annually to the ordinary general shareholdersmeeting a report regarding the accuracy and sufficiency ofthe information submitted by the board of directors to suchshareholders’ meeting.



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The Federal Commercial Code requires amendments to companyby-laws, duly approved in an extraordinary shareholders’ meeting,to be recorded in the Public Registry of Commerce, as well asdissolutions and liquidations, and capital increases and reductions.After registration, copies of documents may or may not be retainedby the registry and so are available to the public, depending uponthe registry concerned as, pursuant to the Commercial Code,anyone may request a copy of information maintained by publiccommercial registries.


Stock Exchange companies have to appoint an external independentauditor and a special auditing committee that will perform theauditing activities and could substitute the examiner.As established in question 5.4 herein below, corporate entities inaccordance with the SL, have to submit annual reports regarding theannual financial statements enclosing the external auditor report.The external auditor report will have to be performed and auditedby a public accountant.


Apart from company incorporation documents and related material,and certain other corporate actions that must be registered in apublic registry, such as the grant of general powers of attorney,there is no general requirement that companies must discloseinformation to the public.The Code for the Improvement of Corporate Practices holds that theboard of directors must ensure that shareholders and third partieshave access to information about the company.

In accordance with the Unique Circular of the SL, publicly tradedcompanies must publish the following information on the officialwebsite of the Mexican Stock Exchange:

notices of shareholders’ meetings;copies of a notice given to shareholders to exercise a right toacquire a proportionate share of a capital increase; copies of notices for delivery or exchange of stockcertificates; copies of notices for payment of dividends; copies of any other notices that must be delivered toshareholders or debenture holders, adopted by theshareholders’ meetings; andquarterly administrative, financial, and accountinginformation.

In accordance with the SL, companies whose securities areregistered with the National Securities Registry must submit therelevant information to the Commission for the purpose ofdisclosing it to the public through the following reports:

reports regarding resolutions adopted by the companymembers;quarterly reports regarding the financial statements, and thetraded company management and its operation results;annual reports regarding the annual financial statementsenclosing the external auditor report;reports regarding any company restructure like merger,acquisitions, sale or purchase of assets, prior approved by thecompany shareholders meeting;reports regarding any relevant event, in accordance to theestablished in the SL; andreports regarding the company day-to-day politics andoperation rules.

The commission must issue general rules establishing therequirements and terms and conditions required for the above-referenced information to be disclosed.

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Juan José López-de-Silanes Molina

Basham, Ringe y Correa, S.C.Paseo de los Tamarindos 400-A 9th floorBosques de Las Lomas, Mexico

Tel: +52 55 5261 0540Fax: +52 55 5261 0496Email: [email protected] URL: www.basham.com.mx

Juan José López-de-Silanes earned his law degree at UniversidadIberoamericana, he made postgraduate studies including a degree inCorporate Law, a Program for Instruction for Lawyers at HarvardUniversity, a LLM in Mergers and Acquisitions and Corporate Law atBoalt Hall School of Law at Berkeley, CA.Mr. López-de-Silanes is a partner of Basham, Ringe y Correa S.C.and he has been part of the Firm since January 2 1994. His main areas of expertise are M&A, International BusinessTransactions and Corporate Law. He participated in planning andcarrying out local and international transactions, business formations,shareholders’ agreements, joint-ventures, mergers and acquisitions,reorganisations, investments, corporate governance, includingcommunications with national and foreign investors, analysis ofMexican laws and regulations, due-diligence reports, agreements andminutes for international companies doing business in Mexico. He is member of Barra Mexicana Colegio de Abogados and memberof World Services Group.

Alejandro Escobar Bribiesca

Basham, Ringe y Correa, S.C.Paseo de los Tamarindos 400-A 9th floorBosques de Las Lomas Mexico

Tel: +52 55 5261 0612Fax: +52 55 5261 0496Email: [email protected] URL: www.basham.com.mx

Alejandro Escobar Bribiesca earned his law degree at UniversidadIberoamericana. Mr. Escobar is an associate at Basham Ringe y Correa, S.C., and hehas been part of the Firm since January 2, 2008.His main areas of expertise are M&A, Transactions and CorporateLaw. He participated in planning and carrying out local andinternational transactions, business formations, shareholders’agreements, joint-ventures, mergers and acquisitions,reorganisations, investments, corporate governance, analysis ofMexican laws and regulations, due-diligence reports, agreementsand minutes for international companies doing business in Mexico.

Basham Ringe y Correa is one of the largest and prestigious leading international full-service law firms in Latin America.Established in Mexico in 1912, Basham draws upon nearly a century of experience in assisting its clients to conductbusiness throughout Mexico. The firm’s clients include prominent international corporations, many of them in theFortune 500 list, medium-sized companies, financial institutions and individuals.

Our large group of lawyers and support staff are committed to maintain the highest professional and ethical standards.The firm currently has approximately 150 lawyers. There are 75 paralegals, five engineers and four translators.Constantly exposed to the international legal system, many of our lawyers and other professionals have completedgraduate studies at foreign universities and have worked at companies and law firms from abroad. The firm’s membersspeak English fluently, and in some cases French and German.

The specialisation and development of each department of the firm, the coordination and support among the differentareas and in-depth knowledge of markets and economic trends provide our clients with innovative complete and timelysolutions. It is because of these qualities and values, we believe, that our clients have continued to entrust their legalaffairs to Basham, Ringe y Correa for many years, some for many decades.

The firm has regulatory and practical expertise in all areas of a modern practice and advises clients in mergers andacquisitions, joint ventures, commercial contracts, project financing, domestic and international tax planning, in-bondmanufacturing (maquiladoras), antitrust, banking, bankruptcy, trusts, insurance, business organisations, internationaltrade, NAFTA and WTO matters, anti-dumping, intellectual property covering patents, trademarks, models, designs,copyrights, domain names, licensing, franchising and unfair competition, entertainment, administrative law,government relations, government regulations, immigration, labour, employment, employee benefits and humanresources planning, environmental law, energy, telecommunications, health, transportation, aviation, railroads,maritime, tourism, mining, consumer protection litigation, arbitration, criminal law and testamentary, real estate andagrarian matters. We also have specialised litigation departments for civil, commercial, criminal, labour, tax andadministrative areas as well as commercial arbitration and constitutional proceedings (juicio de amparo).

Likewise, the firm is able to provide complete and accurate legal translations of laws and documents to ensure that ourclients have a full understanding of their Mexican operations.

The firm has been actively involved in the development and globalisation of markets, working with clients to formulatecreative solutions that meet their needs. Basham, Ringe y Correa represents domestic and foreign clients in the privateand public sectors.

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Chapter 22


Advokatfirmaet Haavind AS

Norway



The companies discussed below are public limited companies (inNorwegian: “allmennaksjeselskap” or “ASA”). The presentationis limited to companies admitted to listing on either Oslo StockExchange (“OSE”) or Oslo Axess (“Axess”) (hereinafter the“Companies” or a “Company”). Both of these lists are owned andmanaged by Oslo Børs.OSE is the main Norwegian marketplace for listed companies. It isthe sole regulated market for securities in Norway and is alsolicensed as a stock exchange. Hence, this marketplace is subject toCouncil Directive 79/279/EEC of 5 March 1979, coordinating theconditions for the admission of securities to official stock exchangelisting. Thus, only larger Companies with a distinct financial andoperating history are admitted to listing on OSE. The list attractsCompanies from a broad range of industries, but has becomeespecially interesting for Companies in the shipping, petroleum andoff-shore industries as well as in the seafood business. Axess is aregulated market for smaller growth Companies. The list hasparticularly attracted natural resources/mining Companies fromNorway and abroad, but also includes Companies from otherindustries.


The law is as stated at 6 March 2009.The relevant Norwegian corporate legislation is the Norwegianpublic limited companies act of 13 June 1997 no. 45 (the “PublicCompanies Act”).All Companies must have articles of association, including, interalia, a statement regarding the business activity of the Companyand the number of board members - by exact number or within aspecified range. The Companies are also subject to the Act on securities trading(Securities Trading Act) of 29 June 2007 no. 75 and the SecuritiesTrading Regulation no. 876 of the same date. Further, the Act onRegulated Markets no. 74 and the Stock Exchange Regulation no.875, both of 29 June 2007, have regulations with implications forthe Companies and delegate power to the regulated market to drawup further regulations. Such regulations have been passed for OSEand Axess, which each has issued a set of “Listing rules” and a setof “Continuing obligations”. The rules on admission to listing arequite different between OSE and Axess, due to OSE on the one

hand being a stock exchange and a market aimed at largerCompanies with a distinct financial and operating history, andAxess on the other being a regulated market without being a stockexchange and at the same time a market for smaller growthCompanies. However, once a Company has been listed, thecontinuing obligations for both marketplaces are quitecorresponding. In addition, the Norwegian Corporate Governance Board(“NCGB”) has issued the Norwegian Code of Practice forCorporate Governance (the “Code”). The Code is principallyintended for Companies listed in Norway, but also applies tosavings banks with listed primary capital certificates to theappropriate extent. NCGB each year considers whether a revisedversion of the Code should be issued, the latest version is dated 4December 2007. The objective of the Code is that the Companieswill practice corporate governance that regulates the division ofroles between shareholders, the board of directors (the “board”) andexecutive management more comprehensively than is required byapplicable legislation. It is important to bear in mind, that the Codeis just a recommendation and, thus, cannot be enforced legally.Listed Companies must adhere to the Code based on the “comply orexplain” principle. The Continuing obligations stipulate that non-compliance with the Code must be explained specifically in theCompany’s annual report.


One of the really “hot” areas in Norwegian corporate governanceover the past few years has been the level of top management fees,in particular fees including pay-off from share option schemes,pension, termination payment, etc. The credit crunch has made thistopic even more controversial. As a result of this, the PublicCompanies Act now imposes an obligation on the board to preparean annual declaration on the fixing of salaries and otherremuneration for leading personnel such as option schemes,pension and termination payment, and which shall include, interalia, relevant guidelines for the coming financial year. Thestatement shall be presented before and discussed by the ordinarygeneral meeting. The Code further details these rules, for instance stating that theboard’s guidelines should contribute to corresponding interestsamong the shareholders and the leading personnel. Further, theCode states that any result dependent remuneration to leadingpersonnel in the form of option or bonus programmes, etc., shouldbe connected to value creation for the shareholders and theCompany’s result over time, and that any such programmes should


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be performance-related and founded on measurable conditionssusceptible to the employee’s influence. In addition, the level of topmanagement fees has lately attracted plenty of political and mediafocus, which has led to a number of heated debates.

2 Shareholders


The shareholders generally exercise their rights and powers throughthe Company’s highest authority, the general meeting. The generalexemption from this principle is if the Company is obliged to havea corporate assembly, see the last two paragraphs in this section. The board is responsible for the management of the Company.However, the board’s competence is limited by the Companyobjective as stated in the articles of association, and which is underthe shareholders’ control. Also, the board cannot undertake mattersoutside the Company objective, without a prior consent from a twothirds majority in the general meeting. Further, a shareholder maysubmit a motion on an inquiry into the Company’s formation,management, or further specified aspects of the management or theaccounts.In addition, several issues require an approval through a resolutionby the general meeting. Relevant examples are distribution fromthe Company, reduction or increase of share capital, merger ordemerger of the Company and repayment following dissolution.The same applies for certain large transactions between theCompany on the one hand and either the shareholders, affiliates ofshareholders, etc., a board member or the managing director on theother. Companies with more than 200 employees are obliged to have acorporate assembly, which must have at least 12 members or ahigher number as determined by the general meeting, howeverdivisible by three. The general meeting appoints two thirds of thecorporate assembly, the last third being elected by and among theemployees. There are only narrow exemptions from the obligationto have a corporate assembly. If the Company has a corporate assembly, the corporate assembly -not the general meeting - appoints and removes the board andchairman. The corporate assembly is also the Company’s highestauthority in matters concerning (i) major investments in relation tothe Company’s resources and (ii) rationalisation or altering of theCompany’s operations leading to major changes or reorganisationof the workforce.


The principal and dominating rule is that the shareholder’s liabilityis limited to the amount of capital contributed on the shares ofwhich they have subscribed.


Generally speaking, shareholders of Companies listed on OSE andAxess can be disenfranchised in very few cases. When a share in aCompany is transferred from a seller to a buyer, the buyer may notbe able to vote for his shares until he has been registered as theowner of the shares in the VPS, which normally takes three days. Inthis period, neither the seller nor the buyer may vote for the shares.

Shareholders of listed Companies may be disenfranchised upon atakeover of a Company. When more than 90% of the shares andvotes have been acquired by a bidder, the remaining 10% may bepurchased through a squeeze-out by the same bidder.


A shareholder may seek enforcement action against individualboard members or the managing director if the relevant person hascaused damage to the shareholder through intent or negligence.


After a Company has been admitted to listing, there are basically nolimitations on the number of shares a shareholder can own, buy ordispose of. However, an investor in a Norwegian listed Company issubject to mandatory take-over obligations which kick in atownership of shares representing more than 1/3, 40% and 50% ofthe votes in the Company. Further, an investor holding a majority ofmore than 90% of the shares and votes is entitled to squeeze out theminority shareholders. The majority shareholder above 90% may,on the other hand, be subject to a buy-out claim from the minorityshareholders.An investor in a Company must disclose the percentage of its sharesand/or rights, including voting rights, upon reaching certain levelson the way up or down. These levels are 5%, 10%, 15%, 20%,25%, 1/3, 50%, 2/3 and 90%. The obligation to notify applies foracquisitions, disposals or other circumstances, also including acapital increase in the Company in which the investor does notparticipate. The investor must send the notification to the relevantmarketplace and the Company. These rules are supplemented byrules on consolidation of ownership shares.

2.6 What shareholder meetings are commonly held and whatrights do shareholders have in such meetings?

Shareholder meetings are known as general meetings. AllCompanies are required to hold an annual general meeting (AGM),which for listed Companies must be held within four months afterthe close of each financial year. Companies may hold extraordinarygeneral meetings when needed. It is the board’s responsibility toconvene general meetings. Notice must be given in writing, and thenormal notice period is two weeks. The business to be transactedmust be stated in the notice, including any changes in the articles ofassociation. If the relevant shareholder explicitly has approved the use ofelectronic communication, the Company may use suchcommunication to give messages, notices, information, documents,announcements and similar to such shareholder. The shareholdermay give notices, etc. pursuant to the Public Companies Act to theCompany by way of electronic communication to the e-mailaddress or in such manner as the Company has specified for thispurpose. The board is obliged to call an extraordinary general meeting inorder to discuss a specific matter if shareholders representing atleast one twentieth of the share capital demand this in writing.Further, a shareholder has the right to have matters dealt with by thegeneral meeting which he or she reports in writing to the board insuch good time that it can be entered on the agenda. A shareholder can vote personally or by proxy excluding the

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possibility of participation via electronic media. However, newlegislation is proposed allowing electronic voting and participationin addition to a physical meeting. Resolutions of the generalmeetings require a simple majority of the votes cast, whileresolutions to amend the articles of association require the supportof two thirds of both the votes cast and the share capital representedat the general meeting. In the case of election or employment, theperson who obtains the largest number of votes is deemed to beelected. A foreign shareholder in a Company may nominate a bank oranother agent to be listed in the shareholders’ register - being theVPS (the Central Securities Depository) - in their place. This bankor agent must be approved by the Norwegian Financial ServicesAuthority. The VPS shall contain information on the nominee’sname, address and how many shares comprised under thetrusteeship. The nominee may not exercise other rights in the Company than theright to receive dividends or other distributions from the Companyas well as subscribe for new shares in connection with a capitalincrease. Thus, the shareholder loses the right to vote in the generalmeeting unless the relevant shares are re-registered on theshareholder’s hand in due time before the relevant general meeting. The Company may ban nominee registration of its shares in thearticles of association.



The relevant management bodies are the board and the managingdirector (CEO). The board must consist of at least three members,or at least five if the Company has a corporate assembly. The boardmust have a chairman of the board, who’s only formal power, inaddition to that of the other board members, is the casting vote incase of a tie. The Company also needs to have a managing director.


The board is appointed and replaced by the general meeting, or, ifthe Company has a corporate assembly, by such body. In Companies with more than 30 employees, a majority of theemployees can, if they demand so, require one board member to beelected by and among the employees. If the Company has morethan 50 employees, the employees can demand that up to one thirdof the board members are elected by and among the employees. If the Company has a corporate assembly, then the corporateassembly appoints and replaces the board. At least two, and up toone third, of the board members shall be elected among theemployees if a third of the corporate assembly demands it. A thirdof the corporate assembly may also call for a replacement of theboard. Both gender need to be represented at the board by at least 40percent of the members, the actual numbers are stipulated based onhow many members the board has. Failure to comply may lead toforced dissolution of the Company. If the employees appoint morethan one board member, then both sexes shall be represented. At least half the board members need to be both residents andcitizens of an EEA country.The board appoints the chairman if the general meeting has not

appointed a chairman, and the Company is not required to have acorporate assembly. If the Company has a corporate assembly, thecorporate assembly appoints the chairman.The managing director is appointed and replaced by the board. Themanaging director of the Company cannot be elected as chairmanof the board.

3.3 What are the main legislative, regulatory and othersources impacting on board members’ contracts andremuneration?

The general period of office for board members is two years.However, a board member may be dismissed by the generalmeeting at any time. A board member may also decide to resignbefore the end of the period of office if there are special grounds fordoing so. The board member must in such case give the board areasonable advance notice. The Company is free to remunerate the board members, which maynot, in connection with legal action for the Company, receiveremuneration from any other party. See also question 1.3 above.


Both the managing director and the board members in Companieslisted on OSE and Axess are permitted, without any restrictions, toown shares in the Company. Primary insiders, like members of the board, leading managers,accountants, etc., shall immediately notify the relevant regulatedmarket (OSE or Axess) of the purchase, sale, exchange orsubscription of shares in the Company or a group company. Thisduty also applies to persons closely related to the primary insider.Said insiders are of course also subject to all general insider dealingprohibitions, etc.


Board meetings are called whenever they are required, by givingnotice to the board members. The general rule is that the boardmeetings are to be held as physical meetings. However, themeetings can be held by phone or by circulation of documents if thechairman finds that the matters to be resolved can be handledsatisfactory in such manner. Certain matters can only be resolvedin a meeting, among these are approval of the annual financialstatements and annual report, appointment of the managing directorand fixing of his/her remuneration.


The board is responsible for the management of the Company,including supervising the day-to-day management and theCompany’s activities in general. The board shall ensure thatbusiness activities are soundly organised, and they must, to theextent necessary, adopt plans, budgets and guidelines for theactivities of the Company. The board shall also initiateexaminations it finds necessary for the performance of its duties,such examinations must be initiated if so demanded by a boardmember. In addition, the board has a duty of action in connection with loss

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of equity. If it must be assumed that the equity is lower than can bedeemed sound or if it must be assumed that the equity has beenreduced to less than half of the share capital, the board must takeimmediate action. The managing director is in charge of the day-to-day managementof the Company’s business, which does not comprise matters whichby the Company’s standards are of an unusual kind of majorimportance.


The main corporate governance responsibilities for the board as setout in the Code are: (i) to ensure that the Company implementssound corporate governance; (ii) to provide a report on theCompany’s corporate governance in the annual report, coveringevery section of the Code according to the “comply or explain”standard; and (iii) to define the Company’s basic corporate valuesand formulate ethical guidelines in accordance with these values.


The board has certain disclosure obligations in the annual report:to provide information on the working environment and theinternal state related to equality between the sexes, andoverview of any relevant actions initiated;to present a report on the Company’s corporate governance,covering every section of the Code, all according to the“comply or explain” standard; andto provide information to illustrate the expertise and capacityof the members of the board and identify which members areconsidered to be independent of major shareholders and themanagement team.

The board should further establish and disclose a clear andpredictable dividend policy as the basis for the proposals ondividend payments that it makes to the general meeting.There are also notification requirements in the continuingobligations of both OSE and Axess, for example as to transactionsbetween the Company and closely related persons, like ashareholder, a member of the board, a manager, etc. Further, theCompany is obliged to notify changes in the board or themanagement team to OSE or Axess under the general notificationobligation in the Securities Trading Act.


The Company may resolve to indemnify a board member ormanager for such person’s loss caused in the course of his/herservice for the Company. Indemnification will normally be a matterfor the board to decide. Such indemnification may, however, notinclude loss caused by a claim from an investor based oninformation given by the relevant person in connection with theinvestor’s investment in the Company. A Company is free to insure board members and the managingdirector for liability caused in the course of such persons’ servicefor the Company, and to pay the insurance premium.



The board should, according to the Code, define the Company’sbasic corporate values and formulate ethical guidelines inaccordance with these values. The guidelines are not required, butmay “play a significant role in the way the company is perceived”.


This is described in question 3.2 above. The ethical guidelines asreferred to in question 4.1 should also provide guidance on howemployees can report to the board matters related to illegal orunethical conduct by the Company.

5 Transparency


The board as a body is responsible for disclosure and transparency.


A Company shall generally, without delay and on its own initiative,publicly disclose inside information which concerns the Companydirectly. Inside information means any information of a precisenature relating to financial instruments, the issuers thereof or othercircumstances which has not been made public, and is notcommonly known in the market and which is likely to have asignificant effect on the price of those or related financialinstruments. More specifically, a Company must, on its own initiative, promptlypublish proposals and decisions by the board, general meeting orother corporate body on dividends, mergers, demergers, increases inshare capital or reductions in share capital as well as any mandatefor an increase in share capital. The Company must also promptlydisclose agreements of material significance for the Company thatare entered into between the Company and another company in thesame group or other close associates. In addition, a Company must publicly disclose any agreement for atransaction that represents a change of more than 5% in relation tothe Company’s assets, operating revenue or annual profit. ForCompanies listed at the OSE, an additional specific disclosurerequirement applies for transactions that represent a change of morethan 25% in the same, and for Companies listed on Axess, thecorresponding disclosure requirement applies for transactionsrepresenting a change of more than 100% in the same.All Companies are obliged to issue and make public annualfinancial accounts with notes and an annual report from the board,and, in addition, half-yearly financial accounts plus a half-yearreport.According to the Code, the board should issue guidelines for theCompany’s reporting of financial and other information based onopenness and in consideration of the demand of equal treatment ofthe participants on the securities market. The Company shouldannually publish an overview of dates for important incidents, suchas general meetings, quarterly or half-yearly reports, open

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presentations, payment of dividends, etc. Further according to theCode, information to the shareholders should be presented on theCompany’s webpage at the same time as it is sent to theshareholders. Even further, the board should adopt guidelines forthe Company’s contact with the shareholders outside the generalmeeting. There are prospectus requirements for offers to subscribe for orpurchase transferable securities being addressed to 100 or morepersons, upon admission to trading on a regulated market or uponissue of (more than 10%) new shares in Companies listed on aregulated market. We do, however, not consider these rules to becorporate governance based.


The annual financial accounts shall be audited in accordance withthe Norwegian Auditing Act implementing Fourth CouncilDirective 78/660/EEC of 25 July 1978 and Directive 83/349/EEC.The auditor must, in this respect, provide an audit report, in whichshall be stated whether the accounts in the auditor’s opinion give a“true and fair” picture of financial situation of the Company, areaccording to law and generally accepted accounting principles. Thehalf-yearly accounts do not need to be audited. The auditor must attend the general meeting if the business whichis to be transacted or the meeting is of such nature that his or herattendance must be regarded as necessary.


OSE has introduced as its practice to award the so-calledInformation Symbol to Companies with the following informationpresented on their webpage:

the latest interim and annual reports;financial calendar; articles of association;information about the board and management;a link to company information on www.newsweb.no;latest prospectuses; notice of and minutes from general meetings; anda description of:

the Company’s corporate governance policy;shareholder policy;dividend policy, payment and dates for payments thelast three years;investor relations policy;contact information for IR resources;the 20 largest shareholders; andcontact information for the issuer’s account manager.

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Amund Fougner Bugge

Advokatfirmaet Haavind ASBygdøy allé 2, p.o.b 359 Sentrum0101 OsloNorway

Tel: +47 2243 3000Fax: +47 2243 3001Email: [email protected]: www.haavind.no

Amund Fougner Bugge is partner in the business area Corporate &Commercial, and heads the practice group for Securities law.Bugge is named as one of the world’s leading lawyers in companieslaw in Legal Business European Legal Experts and is by Chambersrecognised as a “talented M&A lawyer who is highly recommendedby the market”. Bugge specialises on mergers and acquisitions,both in the listed market and in the private equity and venturecapital fields. He assists large, medium and small entities,particularly in Scandinavia, Great Britain and the USA. Mr. Bugge lectures on courses and seminars in company law andsecurities law, hereunder on a regular basis for the NorwegianVenture Capital Association.

Kjetil Hardeng

Advokatfirmaet Haavind ASBygdøy allé 2, p.o.b 359 Sentrum0101 OsloNorway

Tel: +47 2243 3000Fax: +47 2243 3001Email: [email protected]: www.haavind.no

Mr. Hardeng is head of Haavind’s corporate department. Kjetil Hardeng is specialised in transactions. He assists bothindustrial and financial parties, primary within the IT- and Energysector. His background is from several business areas, among otherslitigation/corporate litigation and labour law.He is named as one of the world’s leading M&A lawyers inChambers. Kjetil has previously lectured at the Universities ofBergen and Oslo. He lectures several times a year, among others,for the Norwegian Venture Capital Association.

With more than 100 lawyers, Haavind is one of Norway’s leading law firms. We cover all areas of business and publiclaw. Our firm also offers litigation on a considerable scale, including international arbitration and before the SupremeCourt.

Haavind’s business is customer and solution oriented. By utilising the company’s total competence, both with respectto legal skills and industry knowledge, we are able to identify the best solution for each specific customer.

Haavind is organised in market and industry oriented business areas. Dependent on subject or need, the primarypartner contact will establish a tailored team of lawyers from the relevant legal areas. Our philosophy of equal partitionof profits between the partners ensures that the customer’s need is kept in focus.



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Chapter 23


Siemiatkowski & Davies

Poland



The most common form of company operating in Poland is limitedliability company (“LLC”). It provides protection for the personalassets of shareholders against the claims of the company’s creditorsand allows for relatively simple operation of economic activity.This corporate form is also very often used for establishing variousspecial purpose vehicles. An LLC can be established by even oneprivate or legal person, however it cannot be established by the soleact of another LLC that has only one shareholder. The other formof corporate vehicle is the joint stock company - this is not dealtwith here.The LLC can be used for profit, non-profit and not for profitactivity; however, it is not designed for operation of such kindbusinesses as banking, insurance or the activities of financialinstitutions where the law prohibits the use of this corporate form.A joint stock company must be used for these businesses.An LLC is chosen more to exclude the personal liability ofshareholders rather than to raise capital from the market. As a resultit can also be used to establish more complex organisms, such aslimited partnerships where the unlimited partner is the LLC and thelimited partner is some other person.


The Commercial Partnerships and Companies Code dated 15thSeptember 2000, as amended, (“CPCC”) regulates the establishing,organisation, operation, dissolution, merger, division andtransformation of Polish partnerships and companies, including theLLC. The National Court Register Act dated 20th August 1997 regulatesthe procedure of entering the LLC into the National Court Register(“NCR”). The NCR is the Polish register for partnerships andcompanies, where these entities are obliged to be registered anddisclose their data. The procedure before the NCR is also regulatedby Civil Procedure Code dated 17th November 1964. The relevant court of the NCR is where company’s documents arekept. The LLC needs to be entered into the NCR to complete itsformation process and to become legal person. There are other acts that relate to certain aspects of the operation ofLLCs such as the Accountancy Act dated 29th September 1994which constitutes requirements for corporate bodies of LLCsregarding book-keeping and financial statements.


Recently there have not been many amendments to the legalprovisions relating specifically to LLCs. One significant changewas the decrease in the minimum initial capital required for theLLC from PLN 50,000 to PLN 5,000: this was effective from 8thJanuary 2009. There are constant developments of Polish provisions that regulatejoint stock companies, especially those operating on the publicmarket. The legislation is to implement European Union directivesthat relate to e.g. voting on General Meeting of Shareholders ofpublic quoted company, protection of minor shareholders etc. In 2008 the Directive 2005/56/EC of the European Parliament andof the Council of 26th October 2005 on cross-border mergers oflimited liability companies was implemented into the CPCC.

2 Shareholders


The LLC acts through its bodies, in the manner prescribed bystatutory law or its articles based upon the law. The GeneralMeeting (“GM”) is one of the LLC bodies without which thecompany cannot exist. The GM passes resolutions in the mostimportant of the company’s affairs. These are acts of will of theowners of a company and are binding only internally, i.e., they mayoblige the Management Board (“MB”) to undertake certain actionsin order to meet the adopted resolutions. In relations with thirdparties, the resolutions do not give rise to any legal consequences.However, in certain matters, the lack of a resolution may cause theinvalidity of a legal act of LLC. The following matters require the resolution of the GM:(a) consideration and approval of the MB report on the

operations of the company, the financial report for theprevious financial year and granting of approval of theperformance of duties by the members of the companygoverning bodies;

(b) allocation of profit and covering of losses of the company,unless articles exclude these rights from the GM competences;

(c) decisions on claims for redress of damage caused uponformation of the company or its management or supervision;

(d) conclusion of a credit agreement, loan agreement, suretyagreement or other similar agreement with or for the benefitof a member of the MB, supervisory board, audit committee,

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commercial proxy, liquidator, unless CPCC states otherwise; (e) conclusion by the dependent company of an agreement listed

in point (d) above with a member of the MB, supervisoryboard, audit committee, commercial proxy, liquidator of adominant company, unless the dependent company has asupervisory board;

(f) disposal of or tenancy of the enterprise or its organised partand the creation of limited proprietary rights over them;

(g) acquisition and disposal of real estate or share in real estate,unless the articles provide otherwise;

(h) repayment of additional contribution;(i) agreement for management of dependent company or

stipulating transfer of profits by the dependant company;(j) disposal of a right or contracting of an obligation to provide

performance of a value exceeding twice the amount of theshare capital, unless the articles provide otherwise;

(k) adoption of a resolution on the continued existence of thecompany in case the balance sheet drawn up by themanagement board shows a loss exceeding the aggregatedsupplementary and reserve capitals and half of the sharecapital;

(l) amending the articles;(m) redemption of shares;(n) granting power of attorney to represent the company in

conclusion of agreements between the members of the MBand the company, as well as in disputes between theseparties;

(o) dissolution of the company;(p) preventing the company’s dissolution, unless the request that

the company be dissolved has been made by a person orentity strictly specified in the law; and

(q) merging, dividing, or transforming the company.The articles of the company can grant the GM additional powers.However, they cannot cover competences of other company’s bodies,such as managing of the affairs of the company or its representation,due to the fact that these are obligatory powers of the MB.


The general rule is that the company itself is liable for obligationswithout limitation with all its assets. There are, however, certainexceptions. In a situation when the company has not beenregistered yet in the NCR (“company in organisation”), does nothave members of the MB appointed yet or a proxy acting on itsbehalf, the shareholders are jointly and severally liable with all theirassets for the company’s tax arrears. The shareholders may in somecases release themselves from the abovementioned liability.According to the CPCC, the shareholders may also be held liablefor the obligations of a company in organisation if they acted in itsname or if they did not act in its name but they did not make theircontribution for shares: they can then held liable up to the amountof unpaid contribution.


The voting right is one of the key rights of shareholders in the LLC.There are however situations where a shareholder can be deprivedof this right.A shareholder may not vote on resolutions on his liability to thecompany on any account, including granting of approval ofperformance of his duties, release from his obligation towards thecompany or a dispute between him and the company. In order to

exclude circumventing this rule a shareholder is forbidden to voteon the abovementioned matters not only in person but also by proxyof another person, or as a proxy of another person. This ban doesnot apply to the single-shareholder company since there does notexist a conflict between the shareholders, plus such resolutionswould not be able to be adopted.Articles of the LLC may provide for preference shares. The privilegesmay in particular concern the right to vote; however, they may notgrant to the entitled shareholder more than three votes per one share. The dominant company is obliged to notify the dependant capitalcompany that the relation of dominance has arisen, within twoweeks of the date on which such relation arose. Otherwise theexercise of the right to vote the shares of the dominant companyrepresenting more than 33% of the share capital of the dependantcompany is suspended.It is also worth mentioning that a shareholder may be excluded froma company by redemption of his shares. The redemption may becommenced with or without the shareholder consent. It should beunderlined that the terms and procedures of the forced redemptionhave to be stipulated in the company’s articles otherwise theredemption may not be commenced.


Members of the MB in the LLC are jointly and severally liable tothe company for damages only on condition that the damages arecaused by acts or omissions being in contradiction to the law or theprovisions of the articles of association. Members of the MB arealso at fault and liable if in the course of performing their dutiesthey did not exercise diligence characteristic of the professionalnature of their activity. In such a situation company may bring anaction for a redress of damages caused to it within the specifiedperiod of time. Only after the lapse of the abovementioned periodof time, however, not later than three years from the date on whichthe company learned of the damage and of the persons liable toredress it, the shareholders may file a writ in an action for redressof damage caused to the company. To avoid harassing the membersof the MB by filing unfounded claims, on their request the courtmay order a security deposit to be provided by the plaintiffshareholders as a security for a damage which the defendantmembers of the MB may suffer. Failing to pay the deposit within aspecified time limit causes the writ to be dismissed. In such civilproceedings members of the MB as their defence may not invoke aresolution of shareholders on approval of performance of theirduties or a waiver of the company of claims for damages.


In the LLC there is an obligation on the MB to maintain a sharebook where the following information is revealed: the name or thebusiness name of each shareholder, the address, the number and thenominal value of his shares and the creation of the pledge orusufruct and the exercise of the right to vote by pledgee or theholder of the right of usufruct. This document signed by allmembers of MB should be filed with the NCR. The registry is opento the public and anyone is entitled to inspect the disclosed data. As it has already been mentioned in question 2.3, the dominantcompany is under an obligation to notify the dependant capitalcompany that the relation of dominance has arisen, within twoweeks of the date on which such relation arose. Otherwise theexercise of the right to vote with the shares of the dominant

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company representing more than 33% of the share capital of thedependant company is suspended.A shareholder, member of MB or a supervisory board of a capitalcompany may demand that a company being a shareholder in suchcapital company provide information as to whether it remains in arelation of dominance or dependence with respect to a particularcompany or a cooperative which is also a shareholder in the samecapital company. The entitled person may also demand disclosure ofa number of shares or votes which the requested company has in thecapital company. Until the reply is provided the company which isobliged to reveal specific information cannot exercise the share rightsin the capital company. However, in order not to prevent a shareholderfrom voting on a shareholders meeting, if the abovementioned requesthas been made at least two weeks before the planned date ofshareholders meeting, the ban to exercise the voting right in the capitalcompany starts after the shareholder meeting is over. Furthermore, as mentioned above the LLC cannot be formed solelyby another single-shareholder LLC. It is not, however, excludedthat in a later course of business all the shares of such a companyare acquired by another single-shareholder LLC.


GMs are divided into ordinary and extraordinary. The ordinaryones should be held within six months from the end of eachfinancial year with the following agenda: consideration andapproval of the MB report on the operations of the company and ofthe financial report for the previous financial year, adoption of aresolution on division of profits or financing of losses if suchmatters have not been excluded from the general meeting andfinally granting approval of the performance of duties by membersof the MB, supervisory board, and audit committee if there is one.Extraordinary GMs are convened when any resolutions (other thanthe abovementioned) are required to be adopted by the law, by theMB or persons authorised to convene the GM. Resolutions of the shareholders may be adopted at the GM only onthose matters that were included on the agenda but this restrictiondoes not apply if the entire share capital is represented at the GMand none of those present object to the adoption of the resolutionwhich is not included on the agenda. Resolutions may also beadopted without holding a GM but only if all the shareholdersconsent in writing to the decision to be taken or to a written vote.A shareholder or shareholders representing at least one tenth of theshare capital may request that the extraordinary GM be convened,as well as that certain matters be placed on the agenda of the nextGM. The articles may grant the abovementioned rights toshareholders representing less than one tenth of the share capital. Ifthe extraordinary GM is not convened within two weeks of thesubmission of the request to the MB, the registry court mayauthorise these shareholders to convene the extraordinary GM.There is also the possibility that resolutions are adopted despite thegeneral meeting not having been formally convened, where theentire share capital is represented and none of those present hasobjected to the holding of the general meeting or the inclusion ofparticular matters on the agenda.



The MB has the exclusive right to carry on the business and

represent the LLC. Only individuals can hold position of a memberof the MB in the LLC. None of the members of the MB can bedeprive of his right to represent LLC with effect towards thirdparties. It is possible to limit a member of the MB in its right tocarry on the LLC’s business and to represent the LLC but onlyinternally. In more complex arrangements, where it is necessary tosplit particular parts of the LLC’s activities between members, anLLC can conclude agreements and/or establishes internalregulations that are effective between the LLC and such a member. However, in case there are more than one member of the MB, mostoften the articles, otherwise the CPCC, regulate the way ofrepresentation. It is discretional what way of representation thearticles establish. If the articles do not regulate the issue, accordingto CPCC at least two members have to act jointly or one member hasto act jointly with commercial proxy. The wrong way ofrepresentation means that the persons act individually, not as the MB.


A member of the MB is appointed and removed by a resolution ofshareholders, unless the articles state otherwise. The articles may,for example, state that the right to appoint and/or remove a memberof the MB is that of one shareholder or a group of shareholders,some other person, or the supervisory board. It is also possible toestablish the rule that some of the members are appointed and/orremoved in a way of resolution of shareholders and others by someother person or body of the LLC. It is very common that together with the appointment of a member,the LLC concludes a contract for management or a labouragreement, whereby rights and duties of the parties are specified.However, such a contract has only internal effect and the membercan be removed at any time from the MB, but would still haveclaims arising from the contract. Any member of the MB is entitled to resign. He or she can alsoalways be removed by the resolution of shareholders, no matterwhat articles state in this regard. However, the articles can providethat members of the MB can be removed only due to certainreasons, including important reasons such as breaching an anti-competition clause or internal regulations. The term also ends incase of death of the member. A member of the MB can be appointed for a specified orunspecified period of time. In case the member is appointed forunspecified period and the articles does not state otherwise, theterm ends on the day when financial report for the first wholefinancial year is approved by the GM. In case of term for specifiedperiod of time, save that the articles do not state otherwise, the termends on the day when financial report for the last whole financialyear of the term is approved by the GM.


Members of the MB are subject to limits established in theprovisions of the CPCC, the articles and, insofar as the articles donot provide otherwise, in resolutions of shareholders. It is decision for the shareholders to set regulations for the MB, suchas terms referring to remuneration. Shareholders can also transfersuch competence on the supervisory board. The law does notcontain any limits regarding remuneration and/or specialregulations that should deal with contracts with members of themanagement board.

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Without the company’s consent, a member of the MB can neitherengage in a competitive business nor take part in a competitivepartnership as partner and/or company as member of a body nortake part in other competitive legal person as member of its body.It is also prohibited from taking part in a competitive company byhaving at least 10 % of shares or being entitled to appoint at leastone member of the MB of this company.


General rules of the CPCC specify only that, save as the articlesstate otherwise, each member of the MB shall be informed properlyabout the meeting of members of the MB. As a result minimum lawrequirements are that the information shall be sent with reasonableadvance, setting a day, time and place of the meeting. The articles may specify in detail the process; the GM is alsoentitled to establish regulations for the MB in this regard. Thearticles may state that the president of the MB is the person whosevote prevails in case there is equal amount of votes for and against;he/she leads the meeting and has other rights in relation tomanagement of the work of the MB.


As mentioned, the members of the MB carry on the LLC’s businessand represent the LLC. Each of the members is required to act inthe best interests of the LLC. In case the interest of the LLC conflicts with that of a member ofthe MB, a member’s spouse, kin, person related by affinity up to thesecond degree or person with whom the member is personallyconnected, such member of the MB shall refrain from participationin the decision taking and is entitled to claim that it shall be notedin a minutes. Members of the MB are jointly liable with the LLC for falsestatements made intentionally or by negligence that allcontributions for shares have been paid in full, for a period of threeyears from the registration of the LLC or increase of initial capitalin the NCR respectively. Members of the MB can also be jointly and severally liable forLLC’s unpaid civil obligations, in case execution against the LLCis ineffective. The member can avoid this liability if he presentsevidence that an application for bankruptcy or for arrangementproceedings has been served in time, or in case it was not served intime, that it was not his fault, or that even though it was not servedin time the creditor did not suffer any damage. For tax arrearsresponsibility see comments to question 2.2 above whereregulations for shareholder also apply to members of the MB.


There are no general specific governance responsibilities/functionsof members of the MB other than connected with obligations set inlaw and articles (and as described above). The LLC is not a publiccompany and specific regulations of this type are established in aparticular LLC due to its policy and kind of business.


Please see comments under section 5 - Transparency.


Indemnity agreements are entered into in Poland in favour ofmembers of the MB. Their enforceability has yet to be tested by thehigher courts. Insurance polices are also available for certainliabilities of the members of the MB.



The Polish legal system does not provide any law or regulationdealing with corporate social responsibility. Such matters are left tothe individual practices and policies of the companies in question.


According to the general rule in Polish law employees do not haveany competences or powers in corporate governance in LLCs. Theyare however, entitled to be informed about and consulted inconnection with certain specified matters of the limited liabilitycompany. Such an obligation arises from the Act on Informing andConsulting Employees dated 7th April 2006.

5 Transparency


The MB is responsible to disclose certain information anddocuments to the NCR. Generally it refers to all changes made tothe articles, appointment and dismissal of members of LLC’sbodies, commercial proxies, and certain other events connectedwith operating the LLC or its legal status.


Polish law provides a general obligation to announce or file with theNCR documents and information relating to the LLC. As it hasalready been mentioned the registry is open to the public andanyone is authorised to inspect the company’s documents filedthere. The announcements are obligatory published in Court andBusiness Gazette (Monitor Sadowy i Gospodarczy). They mostlyconcern matters having impact on the financial condition of thecompany as well as being important from the creditors’ point ofview.Not later than within 15 days after the financial report for the lastfinancial year has been approved by the GM, the followingdocuments have to be disclosed in the NCR: (1) financial report forthe last financial year; (2) opinion of expert auditor if required bythe Accountancy Act; (3) excerpt of the resolution of the GMregarding approval of the annual financial report and disposition ofprofit or covering loss; and (4) report of LLC’s activity in the last

Pol

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and

Marcin Wróbel

Siemiatkowski & DaviesAl. Róz 10 apt. 900-556 WarsawPoland

Tel: +48 22 529 3780Fax: +48 22 529 3799Email: [email protected]: www.sdlaw.eu

Marcin Wróbel has been an associate of Siemiatkowski & Daviessince 2007. He specialises in civil, construction and corporate law.He also deals with civil and administrative procedures concerningreal property, spatial planning and environmental matters.

Katarzyna Stanczyk- Bracka

Siemiatkowski & DaviesAl. Róz 10 apt. 900-556 WarsawPoland

Tel: +48 22 529 3780Fax: +48 22 529 3799Email: [email protected]: www.sdlaw.eu

Katarzyna Stanczyk- Bracka has been an associate of Siemiatkowski& Davies since November 2006. She specialises in commercialissues, with a particular emphasis on M&A and finance transactions.She has experience of acting for both domestic and internationalclients. In 2006 she completed a course in English and EuropeanLaw organised by Cambridge University and the University ofWarsaw.


financial year. Non-fulfilment of the obligation to disclose thefinancial report or report of LLC’s activity is an offence that issubject to a fine or restriction of freedom.


In case of some LLCs their financial report has to be reviewed byan expert auditor and an opinion about the report needs to beprepared by the auditor. In case of LLC such an obligation occurs mostly when two from thefollowing three conditions are fulfilled in the last turnover year forwhich the financial report has been prepared:

average annual employment for full time was at least 50employees;sum of assets in balance sheet at the end of the last turnoveryear was the equivalent in PLN of at least the amount ofEURO 2,500,000; andnet income for sale of goods and services and financialactivity in the turnover year was the equivalent in PLN of atleast the amount of EURO 5,000,000.


According to the CPCC there is no provision or regulation requiringany information being published on websites. It belongs to theinternal and discretional will of companies whether the LLC haswebsite. However, once the LLC decides to have website it isrequired to disclose there at least the following information: thebusiness name of the company, its seat and address, name of thecourt where the company’s documents are kept as well as numberunder which the LLC is entered into the NCR, tax identificationnumber (NIP) and the amount of initial capital.

AcknowledgmentThe authors would like to acknowledge the assistance of AndrzejSiemiatkowski in the preparation of this chapter.

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Siemiatkowski & Davies was founded in 2005 by two highly experienced lawyers, one Polish and one English, who formany years were partners at a major international law firm. Siemiatkowski & Davies has been established to focus onfive specific areas: corporate transactions; finance transactions; real estate; private equity; and projects. Both foundingpartners have been involved in many high-profile transactions in these areas in Poland over the last 18 years. Theyhave recently co-authored a book entitled “Joint Ventures in Poland: a Legal Guide”.

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Chapter 24

Vieira de Almeida & Associados

Portugal



We refer to Public Companies Limited by Shares (“SociedadesAnónimas”/“Public Companies”), i.e., those whose share capital isavailable for investment by the public (“sociedade aberta”/“opencompany”) such as:(a) companies incorporated through an initial public offering for

subscription specifically addressed to individuals or entitiesresident or established in Portugal;

(b) companies that issue shares or other securities that grant theright to subscribe or acquire shares that have been the objectof a public offer for subscription specifically addressed toindividuals or entities resident or established in Portugal;

(c) companies that issue shares or other securities that grant theright to their subscription or acquisition and are, or havebeen, listed on a regulated market situated or operating inPortugal (“Listed Companies”);

(d) companies that issue shares that have been sold by publicoffer for sale or exchange in a quantity greater than 10% ofthe company’s capital directed specifically at individuals orentities resident or established in Portugal; or

(e) companies created as a result of the demerger of a publiccompany or a company that incorporates, through merger, allor part of its net equity.

Among such “Open Companies” we shall distinguish the ListedCompanies from the others, once, as explained below, they aresubject to specific regulations.


The main corporate governance sources are the PortugueseCommercial Companies Code (“PCC”, approved by Decree-Law nº262/86, Sept. 2, as amended), the Portuguese Securities Code(“PSC”, approved by Decree-Law nº 486/99, Nov. 13, as amended),the CMVM [Portuguese Securities Market Supervisory Authority(“CMVM”)] Regulation 01/2007 (Sept. 21) in force since January1st 2009 and the CMVM Recommendation under the form of theCorporate Governance Code (“CGC”). The PCC regulates the incorporation and operation of companiesestablished in Portugal setting three different models ofmanagement and auditing bodies and the principles for corporategovernance structure in general.With regards to corporate governance, the PSC regulates securitiesand information regarding securities issuer companies listed on a

regulated market situated or operating in Portugal. Mostimportantly it sets out important corporate governance rules such asthe Annual Governance Report to be disclosed by issuers of suchsecurities and annual, half-annual and quarterly information to bedisclosed.The Regulation 1/2007, in force since January 1st 2009, establishesthe model for the Annual Governance Report to be followed by thePortuguese Public Companies which are listed on a regulatedmarket situated or operating in Portugal which provides that suchcompanies must either comply with the CGC or explain why suchCode is not followed.The CGC was published in 2007 and is a recommendation of therules of conduct for corporate governance for Listed Companies butmay also be adopted by other types of companies. Although thecompliance with such code is not mandatory, the companies listedon a regulated market situated or operating in Portugal must explainif they decide not to follow any of its provisions (the rule is “tocomply or explain”).Despite the fact that we are not concerned with the publicundertakings we would like to point out that a resolution of thePortuguese Council of Ministers (Resolution 49/2007, March 27)sets out the corporate governance rules for public undertakings(State-owned enterprises).Finally, we refer that the Portuguese Corporate GovernanceInstitute - a non-profit private law association - that has recentlyapproved a preliminary version of a Good Practices of CorporateGovernance Code (hereinafter “GPCCC”).The main purpose of the Institute is the investigation and disclosureof Corporate Governance principals and may therefore promote allthe appropriate activities. This document is intended to be a reference of good practices forcompanies that wish to adhere to its principles. Thesubmission/adhesion to the document is optional although itsprincipals become mandatory to companies that wish to adhere.The GPCCC foresees several recommendations regarding: (i) thecompanies’ mission and purposes; (ii) the companies’ corporatebodies’ structure and duties; (iii) the companies’ financialstatements; (iv) internal risk management; (v) the internal andexternal audits; and (vi) the shareholders and institutional investors.The GPCCC, like the CGC, proposes a control mechanism for thecompanies based on a “comply or explain” model. The companieshave to publish a yearly report in which they must set out thepolicies of such code have been adopted, and which have not andwhy.

Sofia Barata

Paulo Olavo Cunha



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With the entry into force of CMVM’s Regulation 1/2007,Portuguese Public Companies are subject to a control based on a“comply or explain” model. The CMVM has published theRecommendations of the CGC and Public Companies have topublish a report (the Annual Corporate Governance Report) yearlyin which they must set out which policies of such code have beenadopted, and which have not and why. The CGC has recommended some important practices of corporategovernance such as: (i) the limitation of the shares blockage periodimposed for the participation in Shareholders’ Meetings; (ii) onevoting right per share; (iii) the disclosure obligation on corporateinformation regarding Shareholders’ Meetings and resolutions; (iv)the avoidance of measures to prevent successful takeover bids (likethe limitation of the number of votes that each shareholder mayhold or use); (v) the creation of internal control systems; (vi) theadoption and observation of a remuneration policy; and (vii) theinformation that should be available on the company’s website.Moreover, let us consider some of the best practices recommendedregarding:The General Meeting:(a) The chairman of the GM should have the adequate human

and logistic backup resources facing the company’s needsand its economical situation, and his remuneration should beincluded in the company’s annual report.

(b) The articles of association should not establish a quorum(constitution or deliberation quorum) superior to the foreseenby law.

(c) The correspondence vote should not have any restrictionsand the deadline to receive it should not be no more than 3days prior to the Meeting.

And regarding the Board of Directors:(a) The Board of Directors must comprise a sufficient number of

non-executive members, in order to ensure the effectivesupervision, oversight and evaluation of its executivemembers.

(b) A certain number of non-executive board members,depending on the size and shareholding structure of thecompany, equal to no less than a quarter of the total numberof directors, must be independent.

2 Shareholders


The main powers and rights held by shareholders are: (i) the powerto appoint and remove the corporate bodies; (ii) the right to approvethe company management’s annual report and accounts; (iii) theright to approve the profit allocation; and (iv) the right to beinformed on the financial situation of the company and to questionthe board.


Public Companies are incorporated as limited liability companies.As such, the liability of the shareholders is limited to the capital thatthey have subscribed. Only the corporate bodies’ members and thecompany itself may be held responsible for acts or omissions of thecompany.


According to Portuguese law, a shareholder of a Public Companymay only be disenfranchised in a scenario of a compulsory takeoverthat follows the launch takeover bid that achieves or exceeds 90%of the voting rights of a specific company.


Shareholders may, in certain circumstances and based in civilresponsibility rules, seek an enforcement action against themembers of the management body for damages they have sufferedby acts or omissions (see art. 79 of PCC). The law also provides that shareholders may resolve in aShareholders’ Meeting that the company will file a claim against themanagement body for damages caused by their acts or omissions.If no resolution is approved, shareholders holding 2% or more of aPublic Company may file a claim against the management body fordamages caused to the company (see art. 77 of PCC).The management bodies have the duty to disclose information onthe company’s status. In this context, shareholders have the right torequest information on the annual reports, accounts and otherfinancial statements. If such information is refused or not properlydisclosed, the shareholder may petition the court to have directaccess to such information.


Regardless of the mandatory takeover rules, Portuguese law doesnot provide any limitations on the securities to be held by ashareholder. In any case, some companies establish in their articlesof association a limitation of the exercise of voting rights whilstestablishing a maximum number of votes per shareholder. TheCGC sets forth that the maintenance of such policies must be votedon at a Shareholders’ Meeting every five years and if such measureis not adopted, the Annual Governance Report must explain thereasons for not complying with such recommendation.As to disclosure notification duties, in general terms, there is a dutyto disclose the holdings in a Portuguese Public Company that reach,exceed or fall below 10%, 20%, 1/3, 1/2, 2/3 and 90% of suchPortuguese Public Company’s voting rights.If the relevant company is the issuer of any securities which areadmitted to trading on a Portuguese Regulated Market (ListedCompany) the notification requirements will apply not only to theabove-mentioned thresholds but also if the relevant holdingreaches, exceeds or falls below 2%, 5%, 15% and 25% of suchcompany’s voting rights.


The law provides that the shareholders must convene at least on ayearly basis, within five or three months from the end of businessyear (depending on whether they are required to presentconsolidated accounts or not), for the purpose of approving theannual report and account documents, approving the distributionproposal of year-end results and general analysis of themanagement and auditing of the company. Also, the shareholder meetings convene to appoint corporatebodies, change the articles of association, and to discuss all otherissues that are listed in the articles of association.

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The CGC provides that the Shareholders’ Meetings should resolveon: (i) maintaining a limitation of the number of votes byshareholder; (ii) the remuneration policy to be adopted; and (iii) theattribution of shares or stock options to corporate bodies.Meetings are called by the Chairman of the General Shareholders’Meeting.Shareholders that, alone or jointly, hold at least 5% of the sharecapital are entitled to request to the Chairman of the Shareholders’Meeting that a meeting is called upon and may also request theinclusion of items in the agenda.Any shareholders with a voting right are allowed to presentproposals of resolutions to the Shareholders’ Meeting.Electronic communication to shareholders is possible regarding theShareholders’ Meeting call notice (i) if all the company’s shares arenominative and (ii) if the shareholders have previously given theirconsent for using such form of communication.In any case we would like to point out that the law provides that anycall notice to the shareholders must be published (on the JusticeDepartment’s website and, in some cases, on the company’swebsite).It is not usual to grant and recognise direct rights to indirectshareholders in relation to the corporate entity according toPortuguese law.Portuguese law provides that the registration of the securities inindividual accounts raises the presumption that the exercise ofrights arising from securities (including voting rights) belong to theaccount holder as recorded in respective registrations (PSC, art.74/1). Although it has been largely discussed, the law only allowsfor such presumption to be refuted for purposes of compliance withinformation duties and takeover bids (PSC, art. 74/3). This meansthat in these circumstances there is some relevance in being anindirect shareholder.In any case, beneficial owners cannot exercise any voting right (i.e.,the one that theoretically would correspond to its holdings) whichprevents them from having direct rights in relation to the corporateentities.



The management of Public Companies may be structured accordingto one of the following three models:(i) the Classic model (also called “Latin”) composed by a Board

of Directors, a Board of Auditors and a Certified AccountsAuditor;

(ii) the Anglo-Saxon model composed by a Board of Directors,integrating an Audit Committee, and by a CharteredAccountant; or

(iii) the German model composed by an Executive Board ofDirectors, a General and Supervisory Council and aChartered Accountant.

As to the Classic model, the management is carried out by theBoard of Directors which, unless otherwise provided by the articlesof association, the board may empower one or more directors todeal with certain aspects of the management of the company. Thearticles of association may also allow that the Board of Directorsdelegate the day-to-day management on an Executive Committee. In the Anglo-Saxon model, the management is carried out by theexecutive members of the Board which are monitored by the AuditCommittee, composed by non-executive members of the Board.

As to the management structure of the German model, theExecutive Board of Directors is responsible for the management ofthe company although it must report its activity to the General andSupervisory Council which controls its activity without havingcurrent executive powers.The management body should establish its own rules and have thempublished on the company’s website. If it does not, it must, in itsyearly management report, explain why.Regarding the number of non-executive members, see question 1.3above.


The management body is either designated in the articles ofassociation (regarding the first mandate) or appointed in theShareholders’ Meeting. The law also provides special rules for appointment of themanagement body such as the possibility of the articles ofassociation establishing that for a number of directors not exceedinga third of the corporate body, isolated appointments may be chosenfrom lists presented by groups of shareholders representing notmore than 20% and not less than 10% of the share capital. Thearticles of association may also establish that a minority ofshareholders having voted against the appointment of directors shallhave the right to appoint at least one director provided that suchminority represents at least 10% of the share capital. This rule isapplicable to Public Companies in the absence of any rule providingthe appointment of board members by a shareholders’ minority.As to the removal of management bodies, it may take place uponthe resolution of the Shareholders’ Meeting, at any time with orwithout fair cause. In the German model, the Supervisory Board is entitled to dismissany member of the Executive Board unless otherwise stated in thearticles of association.


According to Portuguese laws, directors cannot carry out theirduties if they have a work contract, i.e. if they are appointed whilsthaving a contractual relationship with the company (that is, beingone of its employees) their work contract will be suspended.However, directors may enter into a management contract with theshareholders concerning their remuneration’ and fringe benefitsconcerning the term they are appointed for. They may even executea written contract, including a golden parachute clause.In any case the board cannot negotiate or execute a contract withone of its directors concerning their management.Other contracts made by and between the company and itsdirectors, in their own interest, should in general be previouslyapproved by the Audit Committee or Board of Auditors without theparticipation of the interested board member.The duration of each term is usually established in the articles ofassociation of the company and may not exceed four years. Thisterm will be applicable in the absence of a rule in the articles ofassociation.As to the remuneration, the CGC establishes that the remunerationof the members of the Board of Directors shall be aligned with theinterests of the shareholders. In such context the remunerationshould include a part based on the performance of the director and

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a part based in its achievement, and the non-executive members ofthe management body should have a fixed remuneration. The CGC also establishes that the Remuneration Committee and theManagement Body of Listed Companies must submit to the annualShareholders’ Meeting a declaration on the remuneration policy andthe eventual allotment of shares and/or options for share purchase.As to the remuneration of each director, the CGC establishes that itshould be disclosed on a yearly basis.If a Listed Company chooses not to follow these recommendationsit must explain why.


There are no limitations on the number of interests to be held bymanagement body members although they must disclose thenumber of securities held in their own name or behalf and in thename of their direct family members or by companies owned bythem if they are unlimited liability companies.


The board of directors shall meet whenever convened by itschairman or by two directors which shall occur at least once amonth unless otherwise stated in the articles of association. The board cannot adopt resolutions if the majority of its membersare not present or duly represented. Whenever a matter is discussed in which a director has a conflict ofinterests he/she must not vote and such resolutions are taken by themajority of votes.


The directors’ fundamental duties are the duty of care towards theorganisation, revealing availability, technical capacity andknowledge of the company’s business adequate to itsresponsibilities and the duty of acting with the proper diligence ofan organised manager.The members of the management body also have a duty of loyaltyto the interests of the company serving the long term interests of theshareholders and considering the interests of other relevant partiesfor the sustainability of the company such as employees, clients andcreditors.As to the liabilities of the members of the management body, theymay be jointly and severally liable for damages caused by acts oromissions resulting from a breach of their legal or contractualduties.


The companies listed on a regulated market situated or operating inPortugal must present every year, as an annex to the management’sannual report, an Annual Governance Report.Such report must include the shareholder structure, any restrictionsto the transmissibility of the shares, a list of qualified holdings, theidentification of shareholders who were attributed special rights,internal control mechanisms, stock options plans for employees,

voting rights’ restrictions, shareholders’ agreements, rules for theappointment of corporate bodies and alteration to the articles ofassociation, management bodies’ powers, relevant agreements inwhich the company entered into, agreements between the companyand members of the corporate bodies that provide rules forindemnities for termination of their contracts and internal policieson the reporting of irregularities.Also, if they choose not to comply with any rules set forth in theCGC they must present a justification for such refusal.


Please see our reply to questions 3.7 and 5.2.Other than the Annual Governance Report, the Board of Directors’rules and the Supervisory Board rules must be disclosed.


The liability of the members of corporate bodies of companieslisted on a regulated market situated or operating in Portugal mustbe guaranteed in a legally acceptable manner up to a minimum of€250,000 per director or member of the audit committee. Such guarantee may be substituted by an insurance contract (D&O)which cannot be paid for by the company.



Other than tax benefits, there are no corporate social responsibilitylaws, regulations or practices.


Portuguese law does not provide the employees any rightsconcerning corporate governance.

5 Transparency


The corporate body responsible for complying with disclosure andtransparency is the Board of Directors. Also, in some cases, theBoard of Auditors or the Supervisory Board may be responsible forthe execution of such duties.


There are several disclosure obligations regarding corporategovernance. The main obligation is to disclose the financialstatements and annual reports.As mentioned above, the companies listed on a regulated marketsituated or operating in Portugal must present every year, as anannex to the management’s annual report, an Annual GovernanceReport which must include the items mentioned in question 3.7.

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Also, such companies must provide a half-yearly financial report.Some companies must disclose the information quarterly. Thisobligation applies to those that for two consecutive years cross atleast two of the following limits: (i) a balance sheet total of€100,000,000; (ii) total net sales and other profits of €150,000,000;and/or (iii) an average number of employees of 150.


The auditors must audit yearly the financial statements and present(i) a legal account certification in which they establish their wellfounded opinion on certain financial issues, and (ii) their opinionconcerning the approval of the annual accounts.


The Public Companies must provide on their website, in Portugueseand English, information on, at least:(a) The company’s name, its public company quality, type,

headquarters, registry office and number.(b) By-laws.(c) Identification of its corporate bodies and responsible market

relations.(d) Investors Relations Department.(e) Accounts Documents and Reports.(f) Calendar of corporate events.(g) Proposals presented in/for Shareholders’ Meetings.(h) Notice of Shareholders’ Meetings to take place.



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Paulo Olavo Cunha

Vieira de Almeida & AssociadosAv. Duarte Pacheco, 261070 - 110 LisbonPortugal

Tel: +351 21 311 3400Fax: +351 21 311 3406Email: [email protected] URL: www.vda.pt

Law Degree (1984), Masters Degree in Company Law (1989) andPhD in Commercial Law (2009) by the Law School of thePortuguese Catholic University (Lisbon).Lawyer since 1986, former partner of two law firms (between 1994and 2005). Since March of 2005, has been working as Of Counselat Vieira de Almeida & Associados, focusing for the most part onCommercial Law, in general, and Corporate Law, in particular, withvast experience in consulting and legal advisory (includingincorporation, conversions, mergers, liquidation, dissolution,management and general meetings) [and Commercial Contracts].Responsible for several projects and transactions, namely,incorporations of many commercial companies (including financialcompanies), and operations with open companies, acquisitions andcorporate transactions. Professor at the Portuguese Catholic University, presently lecturingCommercial Law and Companies Law, Capitalization and Financingof Commercial Companies in the Masters Degree on Law andManagement, Proceeding aspects of Commercial Law in the MastersDegree on Litigation and lecturing at the Post-Graduation Course inCommercial Law. Participant in numerous conferences, seminarsand round tables, in his areas of expertise.Author of several books [the latest being Direito das SociedadesComerciais (Company Law), 3rd, Almedina, Coimbra, 2007, 797pages], studies and articles on Commercial and Corporate Law.Member of the Catholic University Commercial and Economics LawCentre and founder member of the Portuguese Intellectual LawAssociation. Member of the Editing Committee of Direito dasSociedades em Revista.Admitted of the Portuguese Bar Association, International BarAssociation (IBA) and Union International des Avocats (UIA).

Sofia Barata

Vieira de Almeida & AssociadosAv. Duarte Pacheco, 261070 - 110 LisbonPortugal

Tel: +351 21 311 3400Fax: +351 21 311 3406Email: [email protected] URL: www.vda.pt

Law Degree, University of Lisbon, Faculty of Law.Post-graduation in Commercial Law, Catholic University of Lisbon,Faculty of Law.Before joining the firm worked at A. M. Pereira, Sáragga LealOliveira Martins, Júdice e Associados - law firm, as legal counsel atMarcascais - Sociedade Concessionária da Marina de Cascais, andas an associate at Ferreira Pinto, Olavo Cunha & Associados - lawfirm.Joined Vieira de Almeida & Associados in 2005 and is currently asenior associate integrated in the Mergers & Acquisitions andCorporate practice group. In such capacity she has been involvedin several transactions, in Portugal and abroad, mainly focused oncompany acquisitions and corporate finance transactions. She hasalso been actively working on mergers, commercial contracts andgroup restructuring operations.Published several articles on corporate governance such as in the“International Comparative Legal Guide to Corporate Governance”,2008 and “Ethical corporate governance” on the InternationalFinancial Law Review of, 2008.Admitted to the Portuguese Bar Association.

VdA is an independent Portuguese law firm, with a headcount of approximately 150 lawyers, including 20 partners.

The firm has always adhered to the same code of values, rooted in a strong culture of excellence, dedication and spiritof togetherness and is extremely proud of the loyalty of its clients.

With strong ties in Latin America and Portuguese-speaking Africa, VdA works closely with most of the international andglobal firms and has been involved in the most significant deals that took place in Portugal in the last decades.

VdA is fully committed to its people and the community. It is home to the VdAcademy, a pioneering initiative to promotethe education of lawyers and staff and was among the first Portuguese firms to launch a comprehensive and integratedPro Bono and Social Responsibility Programme.




Chapter 25

Pachiu & Associates

Romania



The main entities to be discussed herein are joint-stock companiesand limited liability companies.


The main legislative source is Law No. 31/1990 on companies(“Law No. 31/1990”), subsequently amended and supplemented.This law contains general provisions regarding the establishment,organisation, functioning and dissolution of Romanian companies.The provisions of Law No. 31/1990 are completed by theprovisions of the Romanian Civil Code and by the provisions of theRomanian Commercial Code. Some of the provisions of Law No. 31/1990 regarding joint stockcompanies and limited liability companies are mandatory, whileothers have only recommendation value. In the latter caseshareholders are entitled to set different rules under the companyby-laws.


Law No. 31/1990 entered into force on November 17, 1990 and wassubsequently amended in order to harmonise it with Europeanlegislation.Generally, companies’ governance is performed by specific bodiessuch as the sole administrator/board of administrators, the executivedirectors or the directorate (in case of joint stock companies) or soleadministrator board of administrators (in case of limited liabilitycompanies).

2 Shareholders


With regard to both joint-stock companies and limited liabilitycompanies, shareholders have the followings rights:

to appoint the members of the management bodies;to convene a company shareholders’ general assembly undercompany by-laws and Law No. 31/1990 provisions;

to approve the balance sheet and the profit and loss accountof the company and to give to administrators release of theiradministration or to file a claim against them, in case offraud;to vote and to make decisions with companies shareholders’general assemblies;to approve the remuneration of the members of the board ofadministrators and of the supervisory board (in case of jointstock companies) and of the administrators (in case of limitedliability companies); andto be informed by company management on companyactivities.


Under the provisions of the Romanian law, joint stock companiesand limited liability companies have its own legal capacity, distinctof that of its shareholders. Consequently, shareholders cannot beheld liable for acts or omissions of such corporate entities.However, shareholders are liable towards creditors of the companywithin the limits of their participation to the company share capital.


In case of joint stock companies, shareholders’ voting rights aresuspended in the following situations:

if such shareholders didn’t comply with their obligation tocontribute to the registered capital of the company;if the voting rights are corresponding to shares owned by thecompany itself;if the voting rights pertain to a shareholder that has also thecapacity of member of the management bodies of thecompany, in case of decisions regarding its release ofliability; and/orif such shareholders have, in a matter, a different interest thanthe company interest.

In case of limited liability companies, one shareholder could notexercise his right to vote in the proceedings of the shareholders’general meeting, regarding his contribution in kind or the legaldocuments concluded between him and the company.


In case of joint stock companies and limited liability companies, themembers of management body are liable towards the company for

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Magda Munteanu



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fulfilment of their office duties as provided under Law No. 31/1990or under the by-laws of the company.Shareholders representing at least 5% of the company share capitalmay convene a shareholders general meeting seeking liability ofcompany management body for non-fulfilment of their officeduties.Limited liability companies’ shareholders representing a quarter ofcompany share capital may convene a shareholders general meetingseeking liability of members of company management for non-fulfilment of its office duties. The Law No. 31/1990 does notstipulate for a specific way of enforcement against members of themanagement bodies, in case of non-fulfilment of their obligations.However, the company, through the shareholders’ general meeting,can file a claim against such members of management bodyaccording to the provisions of the Romanian Civil Code.


As a rule, the Romanian legislation does not provide for limitationswith regard to the possibility of a person becoming a shareholder.However, some exceptions apply:

Law no. 31/1990 prohibits the acquisition by a joint stockcompany of all of its shares;according to Law no. 31/1990, a limited liability companycannot have as sole shareholder another limited liabilitycompany with a sole shareholder; andaccording to the same law, a person having the shareholdercapacity with a limited liability company can transfer itsshares to a person who hasn’t the shareholder capacity withthe same company only with the prior approval of threequarters of the registered capital of such company.


In case of joint stock companies there are two main types ofshareholder meetings: (A) ordinary general meetings; and(B) extraordinary general meetings. In certain cases, specialmeetings may be convened by shareholders owners ofpreferred shares with dividend related priority.

(A) Ordinary general meetings are held at least once a year.Besides the debate of other issues on the agenda, the ordinarygeneral assembly must: (i) approve or amend the yearlyfinancial statements of the company, after listening to thereport of company management or company auditors; (ii)determine the dividends to be paid to shareholders; (iii)appoint the members of company management; (iv) approvethe remuneration for the members of company managementor company auditors; (v) assess the activity of the companymanagement; (vi) determine the income and expenditurebudget of the company; (vii) decide upon the mortgaging,renting or dissolving of one or several of company units; and(viii) discuss and adopt any others issues listed withcompany agenda.At first call, the ordinary general meeting makes validdecisions with the presence of shareholders representing atleast one quarter of the total number of voting rights. Validdecisions are made with the majority of the expressed votes,in case the by-laws of the company do not stipulate a largermajority.

(B) Extraordinary general meetings are held whenever isnecessary to make a decision on any of the following aspects:(i) changing the legal form of the company; (ii) changing thelocation of the headquarters of the company; (iii) changing

the object of activity of the company; (iv) establishment ordissolution of secondary offices; (v) extending thecompany’s duration; (vi) increase or decrease of the sharecapital of the company; (vii) merger and split of thecompany; (viii) early dissolution of the company; (ix)conversion of the shares of the company from one categoryinto another; (x) conversion of one category of bonds intoanother or into shares; and/or (xi) bonds issuance.To ensure the validity of the proceedings of the generalextraordinary meeting, in case the by-laws of the companydo not stipulate otherwise, the following are required: (i) atfirst call, the attendance of shareholders representing at leastone quarter of the voting rights; decisions shall be made withthe majority of the votes owned by the shareholdersattending or being represented at the meeting; and (ii) atsubsequent call, the attendance of shareholders representingat least one fifth of the voting rights; decisions shall be madewith the majority of the votes owned by the shareholdersattending or being represented at the meeting.

The company management must convene the general meeting orinclude new items on the meeting agenda upon the request of theshareholders representing 5% of the registered capital, unlesscompany by-laws stipulates a lower threshold. If the companymanagement does not comply with such demand, the shareholdersmay request the court to authorise such call. The shareholdersrepresenting 100% of the registered share capital of a joint stockcompany could hold a meeting and put a resolution absent anyfurther formalities.

In case of limited liability companies, Law No. 31/1990provides for decisions to be made by shareholders generalmeeting.

For the amendment of the by-laws of a limited liability company, atfirst call, the unanimous vote of the shareholders is required, unlessthe law or the by-laws provide otherwise. At second call, theshareholders general meeting can validly decide irrespective of thenumber of shareholders and of the share capital quota representedwith the meeting. Unless amended by company by-laws, the voteof both majority shareholders and majority shares is required formaking a valid decision.

In case of limited liability companies, shareholdersrepresenting at least one quarter of the share capital of thecompany are entitled to demand to the administrators of thecompany to call the shareholders general meeting.



Upon shareholders decision, joint stock companies may bemanaged based on alternative systems:

A. the “unitary system” comprised of one or severaladministrators; or

B. the “dualist system” including two bodies: (i) thedirectorate; and (ii) the supervisory board.

A. Under the unitary system, the management of the joint stockcompany is performed by one or several administrators. Incase several administrators are appointed, they form a boardof administrators and elect a chairman. The board of administrators may delegate part of its powersto executive directors. The directors may be also appointedamong the members of the board of administrators. In suchcase the majority of the members of the board ofadministrators must be non-executive administrators.The board of administrators may establish advisorycommittees formed by at least two members of the board in

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fields of interest for company business such as companyaudit, establishing administrators’ remuneration, orsubmitting candidates for the management positions.

B. The dualist system involves the existence of two corporatebodies: a directorate and a supervisory board. The directorate consists of an even number of membersappointed and revoked by supervisory board. Thesupervisory board includes three to 11 members elected bythe company shareholders’ general meeting. Romanianlegislation prohibits a member of the directorate to be also amember of the supervisory board. The directorate is theactual management body of the company. Its activity isoverseen by the supervisory board. The supervisory boardcan form advisory committees authorised to instruct thedirectorate in various fields.

Limited liability companies are managed by one or severaladministrators. In case several administrators are appointed, theyconvene a board of administrators.


In case of joint stock companies, under the unitary system, theadministrators are appointed and revoked by the shareholdersgeneral meeting. In case of newly set up companies administratorsare directly appointed by shareholders under company by-laws.Administrators elect executive directors and establish their powers.Under the dualist system, the members of the supervisory board areappointed and revoked by shareholders general meeting, while themembers of the directorate body are appointed and revoked by thesupervisory board. In case of newly set up companies the membersof the supervisory board are appointed under such companies’ by-laws. In case of limited liability companies, administrators are appointedand revoked by the shareholders general meeting.


For the sake of understanding, under Law No. 31/1990administrators are the actual managers of either joint stockcompanies (under the unitary system) or limited liabilitycompanies, while directors act as executives of either a joint stockcompany or limited liability company. Joint stock companies(dualist system) are managed by members of directorate body,which is overseen by a supervisory board.In case of joint stock companies and limited liability companies, theremuneration framework of the members of company managementbodies is decided under the shareholders general meeting or underthe by-laws of the company.In joint stock companies administrators and executive directors(unitary system) or members of the directorate (dualist system)shall be compensated based on a mandate contract as during theiroffice they cannot act as employees.With regard to the limited liability companies, the law does notprovide for any limitation with regard the possibility of anadministrator or director to be compensated based on a labouragreement.


Romanian law allows that members of management bodies of eitherjoint stock companies or limited liability companies have at thesame time the capacity of shareholder of such companies. In case of joint stock companies, such members of the managementmust refrain from voting their release of liability, when acting asshareholders with company shareholders general meeting.In case a member of company management has, with regard to aspecific operation, a different interest than the interests of thecompany, he must inform the other members of management andthe auditors of the company and refrain from any decision maderegarding such operation.In case of limited liability companies, administrators cannot receivean administrator mandate in competing companies absent theauthorisation of the shareholders general meeting, nor may theycarry out same trading activity or another competitive activity ontheir own account or on the account of another person.


In case of joint stock companies managed under the unitary system,the meetings of the board of administrators are held at least onceevery three months. The meeting is convened by the chairman ofthe board, or by two of the members of the board or by the generalexecutive director of the company. When invited, the executivedirectors and the auditors of the company must attend the meeting,as observers without voting rights. A minute shall be drafted andexecuted by meeting participants, evidencing the decisions made bymanagement.Under the dualist system, the supervisory board chairman, two of itsmembers or the directorate, may validly convene the meeting of thesupervisory board of the company. The supervisory board isconvened at least once every three months. Meetings shall takeplace in 15 days as of the call date. A minute shall picture theresults of the meeting. The members of the directorate may be alsoconvened to the meetings of the supervisory board, without votingrights. The decisions of the board of administrators/directorate/supervisoryboard are valid only if such were adopted in the presence of at leasthalf of its members, unless the by-laws of the company providesotherwise. As a rule, the decisions with the board ofadministrators/directorate/supervisory board are made with the voteof half of the members which are participating to the meeting,except for the decision regarding the appointment or the removal ofthe chairman of such bodies which are made with the vote of themajority of the members of such bodies. In case of limited liability companies, the board of administratorsmeetings are held in accordance with the rules stipulated with theby-laws of the company.


The principal general legal duties of the members of themanagement bodies are: to refrain from receiving an administratormandate in other companies which are competitors or have thesame object without the authorisation of the shareholders generalmeeting; to inform the shareholders general meeting about therelevant cases which may represent an impediment for complying



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with its responsibilities; and to refrain from disclosing informationregarding the company to third parties.


In case of joint stock companies and limited liability companies themain responsibilities of the management (administrators of unitarysystem and limited liability companies’ members of the directorateunder dualist system) are:

setting development and activity directions of the company;setting the accountancy directions and the accounting andfinancial system of the company;appointment and dismissing the executive directors of thecompany;surveying the activity of the executive directors of thecompany;calling and organising of the shareholders general meetingsof the company; andimplementing the resolutions made by shareholdersmeetings.

The executive directors of the company are responsible forimplementing the decisions made by company management.


In case of both joint stock companies and limited liabilitycompanies each year, the shareholders’ ordinary general meetingsshall assess the annual financial statements of the company,including the accounting balance sheet, the profit and loss accountand the report of the administrators. By approving the accountingbalance sheet and the profit and loss account, the shareholdersgeneral meeting confirms the company performances.


In case of joint stock companies and limited liability companies,indemnities are permitted in relation to the members of themanagement bodies. The amount of the remuneration of theadministrators and of the members of the supervisory board (in caseof joint stock companies) and of the administrators (in case oflimited liability companies) is settled under shareholders generalmeetings. Remuneration of executive directors of joint stockcompanies or limited liability companies is set by managementboards.



Currently there is no law or regulation concerning corporate socialresponsibility. However, there are Romanian corporate entitiesinvolved in programmes supporting various matters such aseducation; environment protection; disabled, displaced or agedpersons; community work; or entrepreneurial development.


According to Law No. 67/2006 on the protection of the rights ofemployees, in case of transfer of the company, the managers of thecompanies totalling more than 20 employees shall inform companyemployees representative on evolution of economic status of thecompany, when dismissals are intended to be performed.

5 Transparency


As a rule, management bodies of joint stock companies and limitedliability companies should ensure disclosure and transparencytowards shareholders.


Following the shareholder general meeting, the management shallregister the resolutions adopted with the shareholders generalmeeting and corresponding amended by-laws with the competentregister of commerce in order to ensure its enforceability towardsthird parties. The annual financial statements of the company mustalso be registers with the register of commerce for enforceabilitypurposes.


The activity of joint stock companies must be audited by at leastthree auditors and a deputy auditor. In all cases the number of theauditors must be even. Auditors are appointed by the shareholdergeneral meeting for a mandate of three years. The auditors can bere-elected for an undetermined number of times. The auditors maybe at the same time shareholders of the company.The auditors must supervise the accounting books of the company,to verify if the financial statements of the company are legal andvalid, if the accounting registers are kept in accordance with thelegal provisions and if the evaluation of the patrimony of thecompany was correctly performed.It is prohibited for auditors to disclose to shareholders or thirdparties any information regarding the company’s operations.With regard to limited liability companies, the appointment ofauditors is mandatory only if such companies have more than 15shareholders. In such case, auditors attribution are similar withthose of the auditors of joint stock companies.


The company’s website shall publish the following information:company name, legal form, headquarters address, register ofcommerce registration number, sole identification code, andregistered and paid share capital. For joint stock companies, annualfinancial statements, annual board reports, distribution of dividendsproposals, and general meeting calls must also be posted on thecompany website.

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Magda Munteanu

Pachiu & Associates4-10 Muntii Tatra Street, 5th floorBucharest 1, RO 011022Romania

Tel: +4021 312 1008Fax: +4021 312 1009Email: [email protected]: www.pachiu.com

Magda graduated the Law School of Bucharest University, and theFaculty of Management of Academy of Economic Studies.She is a junior member of the Bucharest Bar Association and amember of the National Romanian Bars Association. Magda has experience and provides assistance in matters related tocommercial contracts, corporate law, real estate law and bankinglaw.She is also fluent in Romanian, English, and Spanish andconversant in French.

Florina Pop

Pachiu & Associates4-10 Muntii Tatra Street, 5th floorBucharest 1, RO 011022Romania

Tel: +4021 312 1008Fax: +4021 312 1009Email: [email protected] URL: www.pachiu.com

Florina graduated the Law School of Babes-Bolyai University fromCluj-Napoca. She is also a graduate of the Master in Business Lawprogramme with the Law School of Bucharest University. Florina is a legal consultant, subject to be admitted as a juniormember of the Bucharest Bar Association.Florina is a member of the Corporate, Commercial and Real EstateDepartments of the firm.Florina is fluent in Romanian and English and conversant in Germanand French.

Pachiu & Associates is a Buchares- based business law firm established by Romanian attorneys. The firm currentlyconsists of 24 lawyers plus additional staff comprising paralegals, authorised translators and supportive staff. Thelawyers of the firm are all graduates of leading universities in Romania or abroad. More than half of the lawyers aresenior members of the Bucharest Bar Association. All lawyers are fluent in Romanian and English, and some are fluentin German, French, Spanish or Hungarian. The Firm provides for a full range of commercial and corporate legal advicefrom its main office in Bucharest and its secondary office in Cluj-Napoca (west of Romania).

The Firm has extensive expertise in matters related to corporate governance, corporate disputes, securities, mergers andacquisitions, insolvency, commercial contracts, offshore and tax structures, labour law, real estate, anti-trust law,intellectual property, banking and project financing, secured transactions, cross-border transactions, public acquisitions,procurement, and litigation. Apart from its consistent mergers & acquisitions and cross-border transactions practice,the firm has developed a strong practice in tax, securitisation and real estate, construction, labour and intellectualproperty. Any type of transaction is always duly considered from a tax point of view.

The firm maintains a close relationship with some leading multinational law firms and other small and medium-sizedlaw firms from abroad, so as to ensure efficient liaison with important foreign business centres and jurisdictions.


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Chapter 26


ALRUD Law Firm

Russia



The corporate entities to be discussed herein are public companiesin the form of open joint stock companies with unlimited number ofshareholders (hereinafter - the “companies”). Public companies areentitled to place shares and issue securities convertible into sharesby means of public subscription and have the securities listed onstock exchanges like RTS Stock Exchange, Moscow StockExchange, St. Petersburg Stock Exchange. In fact many of the openjoint stock companies in Russia are nominal public companiesoperated as closed companies which do not trade securities on stockexchanges. The amendments are expected to be made to the lawson companies aimed at restricting the definition of publiccompanies and eliminating an uncertain intermediate constructionof a closed joint stock company which has no sensible specificityand is more in common with a limited liability company, but is stillunder regulation of the law related to public companies.


The legal status of companies is set in the First Part of the CivilCode of Russia of November 30, 1994 No. 51-FZ and in the FederalLaw on Joint Stock Companies of December 26, 1995 No. 208-FZ(hereinafter - the “Law”, the “Companies Law”). The Federal Lawon Securities Market of April 22, 1996 No. 39-FZ regulates thesystem of securities issue and turnover. Broad scope of acts of the Federal Service for Financial Markets ofRussia (the former Federal Commission for Securities Market ofRussia, hereinafter - the “FSFM”) are aimed at streamlining internalcorporate activities of companies and reduce corporate conflicts(ex., the Resolution of the former Federal Commission forSecurities Market of Russia of May 31, 2002 No. 17/ps containingRegulations for preparation, convening and holding a generalmeeting of shareholders).The Code of Corporate Conduct adopted by the Order of formerFederal Commission for Securities Market of Russia of April 04,2002 No. 421/r provides guidelines for the companies onstructuring management bodies and outlines corporate proceduresnot duly determined in the Law. It is in the status ofrecommendations.All companies act basing on the provisions of their articles ofassociation. For public companies it is a sole constituent documentto be developed in accordance with the Law.

The articles of association contain key information on the company(the name and the legal type of the company, its registered address, theamount of the authorised capital, detailed information on the categoryand types and the number of shares issued, as well as shares authorisedfor issuing in addition to outstanding shares, the scope of rightsaccruing to each type of shares of the company, structure ofmanagement bodies of the company and scope its authorities).The anticipated amendments to the Companies Law are supposed totransfer regulation of corporate governance to shareholdersagreements which are now not enforceable in Russia as soon asthose contradict to mandatory provisions of the Law.


At the end of the year 2008 laws on companies weresignificantly amended. The amendments mainly relate tooperation of limited liability companies; however upcomingbills are aimed at novate laws on open corporations. Thestatus of a public company is anticipated to be specified andrestricted to that having its securities listed on stockexchange. The existing open joint stock companies would beobliged to move either to be a listed company or a limitedliability company. The legal form of a closed on stockcompany is supposed to be eliminated. The general trend is anticipated to a more dispositiveregulation of companies, and transfer of regulation of issuesof corporate governance to shareholders agreements. At the same time the bills available provide for restrictingprofessional requirements for the members of managementbodies, increase of their personal liability for damages beforethe company, and establishing the possibility to insurepersonal liability of members of management bodies.

2 Shareholders


Shareholders in public companies acquire rights to operate andmanage the business of the company through acquisition of sharestogether with rights and obligations accruing to it. Public companies may issue two types of shares: ordinary votingshares (equities); and preferred shares. Different types of sharesprovide different scope of rights to its shareholders as specified inthe decision on issue of shares and articles of association.

Vassily Rudomino

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Rights of shareholders accruing to ordinary voting sharesShareholders owning ordinary voting shares in a public companymay participate in general meetings of shareholders (hereinafter the“GMS”) with the right to vote on all issues of the agenda of theGMS. Such shareholders enjoy the right to participate indistribution of profits of the company in case the board of directorsof the company and the GMS take decision to distribute profits asdividends to shareholders. Rights of shareholders accruing to preferred sharesShareholders owning preferred shares enjoy the right to receive afixed amount of profits of the company as dividends but normallyhave no voting right accruing to preferred shares. Voting right may incur to preferred shareholders in the casesdetermined by the Law and the articles of association. For example,if the agenda of the GMS includes the issue of reorganisation orliquidation of the company, or amending the articles of associationin part of limitation of rights of holders of preferred shares of aspecific type, or provisions on establishing preferences toshareholders of another type of preferred shares. Preferred shareholders may vote on all issues falling within thecompetence of the GMS next to that annual GMS which tookdecision to pay no dividends to preferred shareholders or to paydividends in the amount less than that determined in the articles ofassociation of the company. As soon as for voting on the GMS each share is calculated as onevote, voting of preferred shareholders may significantly affectvoting results at such GMS.Rights of shareholders owning blocks of sharesOne voting share gives a shareholder the right to participate andvote at the GMS, receive dividends and a portion of the company’sassets in case of liquidation of the company. 1% shareholding gives the right to request and get acquainted withrecords of the register of shareholders of the company, bring claimsin court against members of the board of directors. 2% shareholding entitles a shareholder to propose two issues for theagenda of the GMS, nominate candidates for the board of directors,executive board, internal auditors committee, and sole executive body.Holding 10% of voting shares gives the right to demand conveningextraordinary GMS, get acquainted with the list of persons havingright to participate in GMS, demand holding audit of company’sfinancial and accountancy records.Owning 25% plus one share provides the right to block up decisionsof GMS, for example, related to amending of the articles ofassociation of the company, reorganisation or liquidation of thecompany, execution of major transactions. Owning 30% plus one share entitles to convene and hold anextraordinary GMS instead of the failed meeting, adopt decisions atthe GMS (except for those requiring voting quorum of ¾ majorityof votes).Owner of 75% plus one share has full control over the company,takes decisions on key questions of business, and enforcesexecution of any extraordinary transactions of the company.


Normally, shareholders are not liable for obligations of thecompany and bear the risk of losses associated with businessactivities of the company at the extent of the value of shares owned,except for very limited cases stated in the Law. For example, in case of insolvency of the company if caused by the

actions (or omission) of its shareholders having the power todetermine its business activities, such shareholders may, if theassets of the company are insufficient be subsidiary liable for itsobligations.


The Law provides for very limited situations in which shareholdermay be disenfranchised/limited in rights (voting rights) accruing tothe voting shares of the company he owns.For example, the shares of the company allocated at establishmentof the company shall be fully paid up by the founders of thecompany within one year since the date of the state registration ofthe company; the founders have no voting rights accruing to theshares until these are fully paid up, and unpaid shares shall betransferred to the ownership of the company. Another example is limiting voting rights accruing to the block ofshares which exceeds the limited by the Law amount (at onceacquisition of more that 30% of voting shares). Since acquisition ofmore than 30% of shares till the moment he sends the obligatory offerto the rest shareholders on acquisition of their shares, the biddercannot vote by the portion of shares exceeding this 30% threshold. Upon takeover of the company a holder of more than 95% of votingshares may compulsory purchase shares from the rest shareholdersof the company.


Members of management bodies (board of directors/collegialexecutive body) as well as the sole executive body are personallyresponsible to (i) the company and/or (ii) to its shareholders.Claims may be brought by the company and shareholder(s) owningnot less than 1% of voting shares of the company. Members of management bodes should act as to the benefit of thecompany in good faith and on reasonable grounds. The criteria arerather controversial and are hardly evincible in practice. The Law sets out personal responsibly under two formal grounds:

for damages caused to the company due to their faultyactions (or omission); and for damages caused to the company in violation of theprocedure for acquisition of shares of the public company.

Ambiguity of the Law leads to the issue of collateral claims.Practically it appears difficult to prove the cause and effect relationbetween faulty actions and the damages caused to the companyand/or a shareholder. Such issue mostly arises when a shareholdergives formal instructions to a member of the management bodyrepresenting the said shareholder. Anticipated amendments to the Law are mainly aimed at clarifyingdefinitions of “good faith and reasonable grounds” and enforcinginsurance of personal liability of members of management bodies ofpublic companies.


The law establishes no strict limits in relation to interests insecurities by shareholders.Still the Law stipulates the option to limit in the articles ofassociation the maximum number (block) of shares to beconcentrated by one shareholder.



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As stipulated solely in the articles of association, these limits leadto no liability of a violating shareholder. Such violator can hardlybe limited by the company in voting rights accruing to theexceeding shares. The main limitations and disclosures regarding acquisition of themajor shareholding in the company are:

a special procedure for a voluntary and compulsory offer ofthe bidder of the major shareholding in the company; prior coordination with the Federal Antimonopoly Service ofRussia of all transactions on acquisition of 10%, 25%, 50%,75% shareholding (antimonopoly clearance);prior coordination with the Governmental Commission ofacquisition of control over the companies performingstrategic activities (ex., polygraph or cryptographicactivities) by foreign investors (strategic clearance); andnotification by a shareholder of the Federal AntimonopolyService/FSFM on acquisition of more than 5% voting shares.


The Law requires that companies hold a general meeting ofshareholders at least once a year (the annual meeting, hereinafterthe “AGMS”). Time constrains for holding the AGMS (from the 1st of February upto the end of June) are aimed at complying with the terms for filingannual accounts to tax authorities, and cannot be changed bycompanies neither for financial purposes nor for the purposes ofholding internal corporate activities. The AGMS shall consider and adopt annual results of the companybusiness, financials and accounts (prior to submission to taxauthorities), auditors report, annual report of the company (prior toits publication), distribute annual profits, elect the board ofdirectors, internal auditors committee and adopt an external auditorof the company.An extraordinary GMS may be held any time throughout the yearon all issues of the exclusive competence of the GMS, includingpayment of interim dividends as per the results of the respectivereporting period, given that law requirements are observed forconvening and holding the GMS. Voting at GMS is conducted as per the principle “one voting share-onevote”, except for the election of the board ? directors, when all votesbelonging to a shareholder are multiplied by the number of directorsand may be given for one candidate or distributed between severalcandidates. Decisions on amending the articles of association,reorganisation, liquidation of the company, buy-out of shares by thecompany shall be adopted by a special ¾ majority of votes. Voting requirements of the Law and voting quorum can be changedneither by the shareholders agreement nor by the articles ofassociation.



Companies may establish corporate managing bodies within theguidelines provided for by the Law and specified in the articles ofassociation. General meeting of shareholdersThe GMS is a supreme managerial body of the company whichshall decide upon key issues of business activities of the company.

Board of directors (Supervisory board)Public companies are obliged to elect the board of directors in thenumber of at least five members. In order to ensure representation ofminor shareholders nominees in the board of directors, the Lawrequires that the companies’ board members are elected bycumulative voting, and the company complies with the set minimummembership of the board of directors (for companies with more than1,000 shareholders the board shall consist of at least seven members;companies with the number of shareholders exceeding 10,000 theminimum membership of the board is nine directors).In public companies the board of directors has significant powers todecide on a large scope of issues (execution of extraordinarytransactions or transactions determined as extraordinary in thearticles of association of the company, increase of the authorisedcapital of the company, providing recommendations to the GMS ondistribution of profits, and opinions on financial statements andannual reports of the company).Collegial executive body of a company (Executive board,Directorate)The executive board is a continuously operating body of thecompany which manages its day-to-day operations. In practice, the executive board is aimed at facilitating the work ofthe sole executive body of the company and/or limiting authoritiesof the sole executive. Sole executive bodyThe sole executive body presides the executive board and solelyrepresents the company before the third parties with no specialauthority, acting solely pursuant to the articles of association of thecompany. Functions of the sole executive body may be transferred to acommercial organisation (managing company) under a decision ofthe GMS pursuant to recommendations of the board of directors.


Board of directors (Supervisory board)Members of the board of directors (supervisory board) are electedat the GMS by cumulative voting for the period till the next AGMS.Thus the AGMS shall anyway consider this issue, and shareholdersshall undertake to nominate candidates in the board of directorsprior to the AGMS.The Federal Service for Financial Markets issued recommendationsfor the number of directors which an owner of a respective block ofvoting shares may introduce into the board. Shareholdersagreements which contain provisions for nomination of directors inthe board and the voting procedure contradicting the Law are notenforceable in Russia.Sole executive body, Collective executive body (Executive board,Directorate)Formation of executive bodies of the company and their earlytermination are in the competence of the GMS, unless assigned tothe board of directors of the company.


Only executives of the company are employed by thecompany and are subject to protection under the LabourCode of Russia.

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Remuneration for the members of the board of directors is anexclusive authority of the GMS, and it is not an issue ofcontracts with members of the board of directors. Amendments to the Law which allow contractual regulationof remuneration and the scope of obligations of members ofthe board of directors would hardly be adopted in the shortrun as soon as the said amendments are considered ascontradicting principles of the Law.

3.4 What are the limitations on, and what disclosure isrequired in relation to interests in securities held bymembers of the management body?

The Law establishes no limitations in relation to interests insecurities held by the members of the management bodies.Disclosures of the management bodies are generalised in question2.5 herein.


Meetings of the Board of directorsArticles of association of the company set general requirements forholding meetings of the board of directors which are specified in theinternal documents of the company - regulations for the board ofdirectors.The Law provides no standardised procedure for holding meetings.The Code of Corporate Conduct recommends that companies holdboard meetings at least six times per year, but this depends on thesubstance of extraordinary activities of the company which are outof regular course of its business activities. Meetings are convened by the Chairman of the board. The Lawdoes not prohibit holding meetings by sending written opinions ofmembers of the board of directors to the Chairman of the Boardwho collects the opinions and together with the secretary of themeeting issues voting results as minutes of the board meeting. Decisions are taken by the majority of votes of directors present atthe meeting, with the exception of votes of interested directorswhose votes are not considered in specific cases. Shareholders are not allowed to amend their agreements withrespect to the Law provisions regarding the procedures of electionand voting at the board meetings. Meetings of the Collegial executive body (Executive board)Meetings of the executive board are held in compliance with thearticles of association of the company and company’s internalregulations for the executive board. Meetings are convened by thesole executive body of the company in a day-to-day manner tomaintain regular activities of the company, and the results are issuedin the form of minutes.


Members of the board of directors, executive board and the soleexecutive body (or managing company) shall exercise their dutiesas determined in the articles of association, regulations for therespective management body and provisions of the employmentcontracts. They shall act reasonably and in good faith with dueregard to the interests and benefits of the company. Liabilities ofmembers of management bodies are detailed in question 2.4 herein.


As for the GMS and the board of directors the scope of theirexclusive competence is established in the Law. Specific corporategovernance functions of the management bodies shall be outlined inthe articles of association of the company and internal documents ofthe company, if it does not contradict the law provisions.


Public companies disclose information on internal corporateactivities in the way which makes it available to its shareholders.For example, companies publish prior notice on the GMSconvening and its agenda, the list of the GMS participants, and theGMS Minutes with voting results and adopted decisions.The company discloses decisions of its board of directors,especially the decision related to the essential facts of thecompany’s business (securities issue, distribution of profits,execution of transactions). The sole executive body is responsible for publishing annual reportsof the company. Disclosures shall be made in mass media as well as on the web-siteof the company and the FSFM.


The Law establishes no obligatory rules regarding indemnities, orinsurance, permitted in relation to the members of the managementbodies. Indemnities for losses caused to the company as well as obligationsto insure its liability may be stipulated in the agreement of thepublic company with the managing company which bears thefunctions of the sole executive body. Anticipated amendments to the Law establish a requirement for themembers of the board to insure personal liability for losses causedto the company by their faulty actions.



The law establishes basic issues regarding corporate socialresponsibility:

minimum wages;environmental requirements; andlabour protection (protection of life and health of employeesin the course of their labour activity, including legal,socioeconomic, organisational, technical, sanitary, andmedical measures).


Employees do not feasibly affect the corporate governance of thecompany, except for those rare cases when labour unions or shop-floor union organisations are established in large companies.



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Management bodies of the company are not obliged by the Law toconsider interests and benefits of employees of the company in theiroperation of the company business.

5 Transparency


The Law specifies no management body responsible for disclosuresand transparency in the company. Practically, the sole executivebody of the company undertakes to sign annual reports andaccounts and discloses and publishes information on company’sactivities.


The scope of information which is officially disclosed by publiccompanies is established by the Law and the acts of the FSFM. Listed public companies are obliged to disclose information on keyissues, the so called “essential facts” of their corporate activities(prospectus of issue, results of securities allocation, changes inmajor shareholders, information on one-time increase or decreaseof the value of assets of the company, decisions of corporate bodies,information and materials related to the GMS convening andholding, dividends distribution and payment, information on majortransactions, and transactions with the interest of a shareholder or amember of the board involved).Public companies are subject to obligatory audit, and are obliged todisclose and publish annual reports and annual financial statementsas confirmed by auditors’ reports. Disclosures shall be made in mass media as well as on the web-siteof the company and the FSFM.


Public companies are subject to obligatory audit of financialaccounts. Prior to filing to tax authorities and publicdisclosure, financial statements of listed companies shall beaudited and attached to the report of an external auditor.

External auditor signs issue prospectus which is subject topublic disclosure.


The public company shall allocate key information on its businessactivities and corporate events published on its official website,including all information contained in the articles of association,membership and decisions of its management bodies, financialstatements and annual reports and other information as listed inquestions 3.8 and 5.2 herein.

Vassily Rudomino

ALRUD Law Firm17 Skakovaya str. Moscow Russia

Tel: +7 495 234 9692 Fax: +7 495 956 3718Email: [email protected]: www.alrud.ru

Vassily Rudomino is the co-founder and the Senior Partner ofALRUD Law Firm. He is recognised as an expert in Corporate/M&A,Restructuring/Insolvency, Competition/Antitrust, Banking andFinance, Real Estate and Dispute Resolution. Vassily Rudomino ismanaging the most solid and sophisticated legal projects of the Firmarising both in Russia and abroad. The major legal directories prize Vassily Rudomino for his acumen,deep knowledge and well-defined client-orientation and recommendhim for Corporate/M&A, Restructuring/Insolvency, Competition/Antitrust, Banking and Finance. Vassily Rudomino is the author of the articles on acute issues inlegal practice which are published in leading Russian and foreignmedia. He is a member of the General Council of Non-commercialpartnership “Competition Support Association”, a member of theInternational Bar Association, advocate. The Chambers Global 2009 speaks of Vassily Rudomino as “one ofthe best Russian lawyers applauded for being always accessible anddefinitely client-oriented” and recommends him for Corporate/M&A.

ALRUD Law Firm, based in Moscow, was established in 1991 and is one of the oldest and most respected independentlaw firms in Russia. ALRUD is advising its clients on Corporate/M&A, Competition/Antitrust, Real Estate, Commercial,Employment, Tax, Banking and Finance, Intellectual Property, Arbitration and Litigation, and Restructuring andInsolvency matters.

ALRUD’S team has extensive experience in diverse economic sectors: banking and finance, oil, real estate andconstruction, power engineering and natural resources, wholesale and retail trade, industrial markets, pharmaceuticals,agriculture, metallurgy, transportation and tourism.

ALRUD has a strong, forward-thinking team committed to providing an international standard work product and highlevel of responsiveness. The goal-oriented approach and attention to all legally relevant matters allow the firm toprovide accurate, practical and cost-effective advice and to create comprehensive solutions to meet its client’s globalneeds.

The major legal directories recommend ALRUD as one of the best domestic law firms in Russia.



Chapter 27

Cechová & Partners

Slovakia



The main corporate entity to be discussed is a joint-stock company(company limited by shares). The joint-stock company issuesshares either in documentary or book-entered form; shares issuedby joint-stock companies may be offered and traded on regulatedmarkets (subject to satisfaction of conditions for their acceptance).The joint-stock company is managed and supervised by collectivebodies (boards).


The main legislative source is Act No. 513/1991 Coll., CommercialCode, as amended (the “Commercial Code”). The CommercialCode contains general provisions regarding establishment,organisation, governance, corporate financing, functioning anddissolution of Slovak companies.Majority of provisions of the Commercial Code regulating jointstock companies are obligatory, however quite an extensive scopeof regulation of corporate governance is delegated to Articles ofAssociation (the “Articles”) as the basic corporate document ofeach joint stock company. The Articles are adopted by a generalassembly of shareholders (the “General Meeting”), meanwhile aqualified majority of shareholders is required for their adoption (ata minimum, two-thirds of present shareholders unless the Articlesspecify a higher percentage).In certain limited respect also Act No. 566/2001 Coll., on Securitiesand Investment Services, as amended, and Act No. 429/2002 Coll.,on Stock-Exchange, as amended regulate some rights, duties andnotification requirements of Management Boards and shareholdersof joint stock companies.


The current topical issues in corporate governance in Slovakia are(i) the liability of members of Management Boards towards jointstock companies, (ii) abuse of minority and majority shareholderrights, and (iii) enforcement of performance of and damage claimsfrom members of Management Boards.

2 Shareholders


Operation and management of joint-stock companies is governedby Management Boards. Competence of shareholders is limited todecisions on matters devoted by the Commercial Code and Articlesto the General Meeting (see question 2.6 below). In principal(unless expressly provided by Articles) the General Meeting maynot give any binding instructions to the Management Boardregarding operation and management of the company. Members ofManagement Boards are liable not to perform a resolution of theGeneral Meeting if such resolution is in conflict with theCommercial Code or Articles.


No, they cannot. A joint-stock company is liable with its entireproperty for any breach of its obligations; whereas the shareholderbears no liability for obligations of the joint-stock company.


Exclusively in the case of failure to pay-up the issue rate of shareswithin the time period stipulated by law and Articles provided theshareholder was delivered additional written notice of theManagement Board to pay-up the issue within another 60 days (ortime period stipulated in the Articles). In such a case theshareholder shall be excluded from the company by resolution ofthe Management Board and his/its shares shall be transferred to thecompany.


No, it is the company (not shareholders) who can enforce claimsagainst members of the Management Board. The company isrepresented in such enforcement proceedings by a member of theSupervisory Board. The Minority Shareholders may request theSupervisory Board to claim damages or other claims againstmembers of the Management Board. Only if the Supervisory Boarddid not follow such request, the Minority Shareholders may enforcesuch claim for and on behalf of the company; such shareholdersshall bear costs of the company for such enforcement.

Peter Mateja

Katarína Cechováv

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A legal entity (or an individual) acquiring an interest in votingrights attached to shares traded on a regulated market equal to orexceeding 5%, 10%, 20%, 25%, 30%, 50%, or 75% of all votingrights attached to the shares of the joint-stock company is requiredto disclose to the joint-stock company his/her/its interest in votingrights attached to such shares, as well as to notify this to theNational Bank of Slovakia.Moreover, a prior approval of the National Bank of Slovakia isrequired for attaining or exceeding certain thresholds of shares inspecified types of joint-stock companies (such as banks, insurancecompanies, reinsurance companies, securities dealers, assetmanagement companies or pension management companies)notwithstanding whether the shares of such companies are admittedfor trading on a regulated market or not.


There are two main types of shareholder meetings: (i) ordinaryGeneral Meetings; and (ii) extraordinary General Meetings.Ordinary General Meetings must be held at least once a year toapprove financial statements and profit distribution/disposal of loss.A Management Board shall convene an extraordinary GeneralMeeting upon request of the shareholders representing 5% of theregistered capital, unless the Articles stipulate a lower threshold(the “Minority Shareholders”). Also, the Management Boardshall convene an extraordinary General Meeting if it found out thatan accumulated loss of the company exceeded or may exceed one-third of its registered capital. The scope of powers of the General Meeting includes in particularthe following:(i) an amendment of the Articles of Association;(ii) a decision on the increase or decrease of the registered

capital, an authorisation of the Management Board toincrease the registered capital and an issue of priority bondsor convertible bonds;

(iii) an election and recall of members of the Management Board(unless the Articles provide their election and recall by theSupervisory Board);

(iv) an election and recall of members of Supervisory Board andother company bodies if stipulated in the Articles (other thanSupervisory Board member elected and recalled byemployees);

(v) an approval of financial statements, resolutions ondistribution of profits or coverage of losses and determiningdividends;

(vi) a decision on the replacing of documentary shares with book-entered shares and vice versa;

(vii) a decision on winding-up and on change of legal form of thecompany;

(viii) a decision on terminating trading with company shares onregulated markets (stock exchanges), and a decision on thecompany’s ceasing to be a public joint stock company;

(ix) an approval of the rules for remuneration of members of bodiesof the company (providing that the Articles do not stipulate thatsuch rules shall be approved by the Supervisory Board);

(x) a decision on approval of contract on transfer of enterprise ora part of enterprise; and

(xi) a decision on other matters entrusted by the CommercialCode or the Articles to the authority of the General Meeting.

Generally, voting at the General Meeting requires a simple majority

of votes of shareholders voting in person or by proxy. However, aresolution concerning (i), (ii), (vii) and (viii) above requires aqualified majority of not less than two thirds of votes ofshareholders voting in person or by proxy. The number of ashareholder’s votes is determined as a proportion between thenominal value of the shares held thereby and the total amount ofregistered capital of the company. The voting procedure isdetermined by the Articles. Voting at the General Meeting shall nottake into account the shares with which the shareholder cannotexercise the voting right (e.g. priority shares).The shareholder registered in the list of shareholders of joint-stockcompany is an ultimate shareholder authorised to perform rights andpowers of the shareholder of the company. Shareholders may initiateconvocation of a General Meeting by request of the MinorityShareholders. The Management Board is liable to convene theGeneral Meeting upon such request; if the Management Board doesnot comply with such demand, the Minority Shareholders mayrequest the court to authorise them for such a call.Each shareholder may submit proposals, including proposals forresolutions, however exclusively in the matters put to the agenda ofa General Meeting. Upon request of the Minority Shareholders anagenda of a General Meeting shall be supplemented by the pointproposed by them (subject to on time request and notification ofother shareholders on such supplement).



The Management Board is the statutory body of a joint-stockcompany fully authorised to manage its operations and act on itsbehalf. The Management Board makes decisions concerning anymatter of the company, unless such matter is reserved to theauthority of the General Meeting or to the Supervisory Board by theCommercial Code or Articles. Unless the Articles provideotherwise, any member of the Management Board is authorised toact for and on behalf of the company. The Management Board shallconsist of the number of members stated in the Articles, theminimum is one member.The authority of the Management Board to act on behalf of thecompany may be restricted by the Articles, resolutions of theGeneral Meeting or Supervisory Board, however such restrictionsare not effective vis-á-vis third parties.The Supervisory Board is not a management body; it onlysupervises the exercise of powers by the Management Board.Members of the Supervisory Board are entitled to review anydocument and report concerning activities of the company. TheSupervisory Board also inspects whether accounting books areproperly kept, whether the business of the company is performed incompliance with law, the Articles and resolutions of the GeneralMeeting. Furthermore, the Supervisory Board reviews financialstatements and proposals for distribution of profits and coverage oflosses, and shall submit its comments to the General Meeting. Itconsists of a minimum of three members; in companies with morethan 50 employees one third thereof is elected by employees.


Under Slovak law, members of the Management Board are electedand removed by the General Meeting unless the Articles devote thepower to elect and remove members of the Management Board tothe Supervisory Board.

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The body which elects the members of the Management Board shalldetermine which member shall be the Chairman thereof. Theperiod of office is a maximum of five years, a repeated election ispossible unless the Articles provide otherwise.The Articles of Association may provide that election of membersof the Management Board shall be made en bloc. A list ofcandidates shall be drawn out from all proposals and shareholdersshall elect the members by specifying the number of votes, out oftheir aggregate votes, which they cast in favour of individualcandidates while the maximum number of candidates to whom theymay give their votes shall be equal to the number of members of theManagement Board to be elected. The candidates who have beengiven most votes shall become members of the Management Board.Members of the Supervisory Board may be elected exclusively bythe General Meeting save for one-third elected by employees of thecompany provided there are more than 50 full-time employees inthe company at the time of election. The Articles may provide ahigher number of members of the Supervisory Board to be electedby the company’s employees; however, such number may not behigher than the number of members to be elected by the GeneralMeeting. The Articles may also provide that even if the number ofemployees employed with the company is less than 50, theemployees shall elect a member (several members) of theSupervisory Board.Members of the Supervisory Board shall be elected for the termspecified in the Articles of Association; however not more than forfive years. Unless the Articles of Association provides otherwisethe election by the General Meeting shall be made en bloc (seeabove).


Relationship between the company and a member of the Board(either Management or Supervisory) is regulated by provisions ofthe Commercial Code on a mandate contract, unless a specialagreement on performance of function was executed between thecompany and the Board member. The agreement on performanceof a function must be approved by the General Meeting (orSupervisory Board if the Articles so stipulate). Nonetheless, duringtheir office the members of the Management Board can be alsoemployed under a separate employment contract with the company.This is quite often practice in Slovakia, where e.g. the sameindividual being the Chairman of the Management Board (under acontract on performance of function or mandate contract) is theGeneral Manager of the company (under an employment contract).Remuneration of members of the Boards is not regulated in theCommercial Code. It is in the competence of the General Meetingto approve an amount of remuneration directly or within theagreement on performance of a function, unless the Articles delegatesuch competence to another body (e.g. the Supervisory Board).


Slovak law does not stipulate limitations on members ofManagement Boards to own shares. As to disclosure duties onacquisition of shares of companies traded on a regulated market, thenotification requirements already mentioned in question 2.5 applyequally.


Regulation of the process for meetings of members of the Boards isdelegated by the Commercial Code to the Articles, however unlessthe Articles provide otherwise, the Boards may pass resolutions iftheir meetings are attended by a majority of their members, whileany such resolution requires an approval of a majority of presentmembers. The Articles may provide for per rollam adoption ofresolutions (in writing or using other communication means).Minutes executed from meetings of Boards shall include resolutionspassed thereby and shall be undersigned by the Chairman of theBoard and minutes clerk. Each member of the Board is entitled todemand that his/her opinion (opposing to opinions of anothermember) is recorded in the minutes.


Members of the Management Board are liable to perform theirfunction with due care, which involves a duty to exerciseprofessional care and act in line with interests of the company andall of its shareholders. In particular, the members of theManagement Board have to collect and take into account allavailable information concerning their decisions. Moreover, theymay not disclose any confidential information, the disclosure ofwhich to third parties could cause damage to the company orprejudice its interests or the interests of its shareholders. Also, theymay not give priority to their own interests or interests of certainshareholders or interests of third parties prior to the interests of thecompany.Unless the Articles provide for further restrictions, no member ofthe Management Board may: (i) enter in his/her own name, or for his/her own account, into

business deals inherent to the company’s business activities;(ii) intermediate deals of the company for other parties;(iii) participate in the business of another entity as a member with

unlimited liability; and(iv) be a member of a statutory or similar body of another legal

entity having a similar scope of business, unless the company(of whose statutory body he/she is a member) has ashareholding or other participation in the other company’sbusiness.

Members of the Management Board are responsible for: keepingthe company’s accounting records properly; publishing the annualreport and financial statements; and preparing the proposal fordistribution of profits or coverage of losses to the General Meetingfor approval in accordance with the Articles.


The Management Board submits to the Supervisory Board, at leastonce a year, a written report specifying the fundamental strategy ofthe management of the company for the upcoming period, and theexpected development of property, finance and revenues of thecompany. It also submits a written report on business and propertyof the company, and a comparison thereof with a prognosis. Inaddition, the Management Board promptly informs the SupervisoryBoard on any fact which may have a material impact on businessand property of the company, including (but not limited to) itsliquidity.

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The Management Board is responsible to convene an extraordinaryGeneral Meeting if it found out that accumulated loss of thecompany exceeded or may exceed one-third of its registered capitaland it shall submit to the General Meeting a proposal of steps to betaken.


The practices of the Management Board are disclosed in annualreports. By approving the annual report, the General Meetingconfirms practices of the Management Board of the company.


Any agreement between the company and a member of theManagement Board which excludes or restricts his/her scope ofliability is forbidden. Nor by the Articles can such liability berestricted or excluded. The company may waive its damage claimstowards members of the Management Board or make a settlementwith them, however not earlier than three years from occurrence ofthe claim and provided such waiver was approved by the GeneralMeeting and no objection against such resolution was raised by anyMinority Shareholders.Joint-stock companies cannot indemnify members of theManagement Board in respect of liabilities towards third parties.Nonetheless, companies are permitted to maintain insurance inrespect of liability of members of the Management Board.



There is no law which would directly regulate corporate socialresponsibility, however on the other hand several additionaldisclosure requirements are regulated by e.g. Act No. 311/2001Coll., the Labour Code, as amended, regarding informingemployees on corporate changes or reorganisation withincompanies. Several other disclosure and notification duties areimposed to the companies - issuers of shares traded on regulatedmarkets, like e.g. interim reports on important events, trades withrelated persons, more details on financial situation and economicresults of the company.


Employees have a specific, although limited role in corporategovernance. One third of Supervisory Board members are electedand removed by employees of the company, provided there aremore than 50 full-time employees at the time of election ofmembers of the Supervisory Board.Elections of employees’ nominees to the Supervisory Board shall beorganised by the Management Board in cooperation with tradeunions or employee representatives. If there are no employeerepresentatives, the elections shall be organised by the ManagementBoard in cooperation with the employees, who are authorised toelect the members of the Supervisory Board.

5 Transparency


It is the Management Board, i.e. all and any of its member who isresponsible for disclosure and transparency.


A joint-stock company shall file its financial statements with theCollection of Deeds of the Commercial Register after their approvalby the General Meeting. The Management Board shall submit thefinancial statements for their approval within six months after thelast day of the accounting period.In addition, a joint stock company shall file the financial statementsaudited by an auditor together with the auditor’s report to theCollection of Deeds of the Commercial Register and is obliged topublish them also in the Commercial Bulletin issued by theMinistry of Justice of the Slovak Republic. In case of companieslisted on regulated markets a special financial report (containing notonly audited financial statements, but also declaration ofresponsible members of Management Board that such reportprovides true and complete information on state of assets, liabilitiesand financial situation of the company) and interim semi-annualreports also containing information of important facts and trades,have to be published in the Commercial Bulletin.


Financial statements of a joint-stock company must be verified byan independent auditor. The role of the auditor is to verify data,reports, statements, conduct of accounting procedures, accountingsystem, assessment etc. within the scope of a request of thecompany.


The business name, registered seat, legal form, identificationnumber, registration number and designation of the relevant registrycourt of the company are mandatory required to be published onwebsites of the company; however, only if the company hasestablished a website. If the company specifies on its website alsothe amount of its registered capital, it must indicate to which extentthe registered capital has been paid up.Information on the Management Board or Supervisory Board is notrequired to be published on corporate websites, however suchpractice is quite common. Nevertheless, the said information ispublicly accessible via the website of the Slovak CommercialRegisters.

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SlovakiaCechová & Partners

Katarína Cechová

Cechová & PartnersŠtúrova 4 811 02 Bratislava Slovakia

Tel: +421 2 544 144 41Fax: +421 2 544 345 98Email: [email protected]: www.cechova.sk

Katarína Cechová is a senior partner in Cechová & Partners. Duringher 25 years of practice she has worked on a wide range oftransactions and was instrumental mainly in M&A work,restructurings, corporate and project financing. Katarína graduatedfrom the Law Faculty of Comenius University, Bratislava, Slovakiaand received her Dr. Jur. in 1984. In 1990 she was the foundingpartner of the firm. Katarína has served as the guest professor ofcommercial and financial law at the Law Faculty of ComeniusUniversity in Bratislava since 1996 to 1998. She serves as thearbitrator for international disputes of the Court of Arbitration of theSlovak Trade and Industry Chamber since 1997. Katarína is arecognised expert in the area of corporate law, particularly corporatefinance and governance. She was also involved in several equityfinancing deals, reorganisations and restructurings of localcompanies.

Peter Mateja

Cechová & PartnersŠtúrova 4 811 02 Bratislava Slovakia

Tel: +421 2 544 144 41Fax: +421 2 544 345 98Email: [email protected]: www.cechova.sk

Peter Mateja is an associate at Cechová & Partners. He joinedCechová & Partners in 2007. Prior to this, Peter worked inBratislava for a Big 4 firm. During his previous practice, Peter hasbeen involved in legal and tax advisory to leading foreign companiesin the field of banking, telecommunications, postal services,automotive, electronics and steel industry. Peter specialises in thearea of corporate law and governance as well as intellectualproperty, data protection, advertising and consumer protection. Healso gained significant experience in the area of employment andfinancial law issues.

Cechová & Partners is one of the leading and largest commercial law firms in Slovakia with considerable internationalexperience. It provides its services to foreign as well as domestic clients since its establishment in 1990, being one ofthe first law firms established in Slovakia after the commencement of transformation to a free market economy.

Cechová & Partners is an independent Slovak law firm and regularly ranks as top tier in most legal surveys of the Slovaklegal market. The firm gained extensive experience not only in commercial, corporate, regulatory, competition andantitrust matters, but has been involved in a number of M&A, restructuring, project finance, securities and wide varietyof banking, financial and capital market transactions. Cechová & Partners draws from the European Union lawexpertise of its Brussels office. The firm is a member of Lex Mundi and World Services Group.

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Chapter 28


Law firm Miro Senica and attorneys

Slovenia



In the Slovene legal system there are two main types of companies:private companies; and companies with share capital. The mainfeatures of the private companies are the personal responsibility ofits members for the company’s obligations and that no share capitalis required for the establishment of a company. On the contrary, incompanies with share capital, its shareholders or members are notliable for the company’s liabilities but the company warrants for itsobligations by its share capital. There are four types of companieswith share capital: joint-stock companies (public and non-public);limited liability companies; limited partnership with share capital;and Societas Europaea (SE).This article will mainly refer (unless otherwise stated) to joint-stockcompanies. Its subscribed capital is divided into shares and thecompany is liable to creditors for its obligations with all its assets.Shareholders are not liable to creditors for the obligations of a joint-stock company unless they abused the company (for more, pleasesee below, question 2.2).


The primary legal source is the Companies Act (first adopted in1993, last revised in July 2008) which sets general rules regardingall types of companies and individual entrepreneurs, by defining theprocess of incorporation and conduct of business of the companiesand individual entrepreneurs, its subsidiaries and affiliates as wellas their mergers and divisions. The Companies Act has beenfreequently revised in the past years due to the implementation ofthe acquis communitaire and the harmonisation of the Slovenelegislation with the European regulation. The Regulation EC No.2157/2001 of 8 October 2001 on the Statute of a EuropeanCompany has also been implemented into the Slovene legal system.There are also some special provisions regarding corporategovernance in specific types of companies such as insurancecompanies, stock exchanges, banks, brokerage houses in the lawsregulating specific fields of business (e.g. Insurance Act, Bank Act).Even though the Slovenian legislation defines many aspects of thecorporate governance, it should be noted that it defines onlyminimum standards, therefore the soft law as other source ofcorporate governance is very important, although it primary refersto joint-stock companies. The soft law in Slovenia is based on thebest practice codes and regulations and includes:

The Corporate Governance Code (February 5, 2007),adopted by the Ljubljana Stock Exchange (LJSE), theAssociation of Supervisory Board Members of Slovenia(ASBM) and the Managers’ Association of Slovenia (MAS).The Code incorporates the relevant Slovene legislation, thedirectives and recommendations of the European Union,principles of business ethics, bylaws of the three institutionsand internationally recommended best practices ofresponsible and good governance. The purpose of the Codeis to define more precisely the governance and managementprinciples of public joint-stock companies, having theirshares listed at LJSE. The recommended practices can alsobe applied by other companies, so as to contribute to atransparent and intelligible governance system in Slovenia.The statement on the corporate governance has become amandatory component of companies’ annual reports and isbased on the “comply or explain” principle. This principleallows companies to deviate from the Code’srecommendations and thus enables them to develop theirown business practices; however the deviations have to beexplained. It is nevertheless expected that public joint-stockcompanies, especially those listed at the LJSE, should largelyabide by the Code’s recommendations.Recommendations for the Appointment, Discharge andManagement of Remuneration of members of theManagement Board and Executive Directors (June 7,2007), adopted by ASBM. The provisions of therecommendations are non-binding and basically define therespective aspects of the relationship between the companyand its management board or its executive directors by takinginto account the statutory provisions and recommendedpractice in this field. Recommendations for the membership, work ansrenumeration of the Supervisory Board members andBoard of Directors members (June 7, 2007), which wasalso adopted by ASBM. Recommendations are non-bindingand define more precisely the recommendations of theCorporate Governance Code in accordance withinternational recommended standards for good andresponsible corporate governance. Codes of Ethics (ASBM and MAS adopted each its ownCode of Ethics).

It should be noted that public joint-stock companies, listed at theLJSE, have to comply with the LJSE Rules. These Rules areespecially important for they define more precisely the issuers’ dutyto disclose information and prepare reports.


Over the past three years a lot of emphasis has been put on the role

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and necessity of the audit committees. In 2006 a one-tier system ofcorporate management was introduced into the Slovene legalsystem therefore it has been a very frequent subject of discussion.Recently, ASBM and MAS focused on the MBO’s and Directors’and Officers’ liability insurance.

2 Shareholders


Shareholders may not adopt resolutions regarding the conduct ofbusiness at general meetings (except when so requested by themanagement). Their rights and powers may be exercised throughtheir participation at the general meeting. The Companies Actdefines that a general meeting has the power to decide on thefollowing matters:

the appointment and recall of members of the supervisoryboard and the board of directors;issuing of a discharge for the members of the management orsupervisory bodies;amendments to the articles of association;measures to increase and reduce the capital;the dissolution of the company and its restructuring;the appointment of an auditor; andother matters where so provided by the articles of associationin accordance with the law or other matters determined bylaw.

Finally, the general meeting decides on the use of the distributableprofit upon a proposal from the management and the supervisorybody and on the distribution of dividends.


Shareholders of a joint-stock company are not liable to creditors forthe obligations of the company. However, the members of the limited liability companies can beheld liable for the company’s obligations beyond the amount oftheir capital contribution, in the following cases:

if they abused the company as a legal person in order toattain an aim which is forbidden to them as individuals;if they abused the company as a legal person thereby causingdamage to their creditors;if in violation of the law they used the assets of the companyas a legal person as their own personal assets; orif for their own benefit or for the benefit of some otherperson they reduced the assets of the company even if theyknew or should have known that the company would not becapable of meeting its liabilities to third persons.

They can also be held liable, if the company was terminated by acourt decision due to the inactivity of the shareholders.


Shareholders of joint-stock companies can be disenfranchised onlyin very limited circumstances. For example, the Companies Actdefines, that upon a takeover of a company, where 90% of theshares have been acquired by a bidder, the remaining 10% may becompulsory purchased by that bidder (squeeze-out). A furtherexample is when a company acquires more than one-quarter of the

shares or stakes in another company with share capital having itsregistered office in the Republic of Slovenia, it must report this factto the company in writing immediately. If it fails to do so, it maynot exercise rights deriving from shares and capital shares in acompany which it is obliged to notify. The Takeover Act also defines suspension of illegal offeror’s votingrights, namely, the offeror who reaches the takeover threshold onthe basis of the offeror company’s all voting shares that areconsidered in determining the proportion of voting rights, may notexercise these rights until he has made a takeover bid or until he hasdisposed of securities and call options for shares that are notincluded in the securities, so that he no longer achieves the takeoverthreshold.


The general rule for the joint-stock companies is, that themanagement of the company (not shareholders) must file a lawsuitfor the compensation of damage incurred by the company’sindividual operations as a result of the management and supervisoryboard members violating their obligations, if it is so decided by thegeneral meeting. Should the lawsuit be filed against a person whostill performs the duties of a member of the management orsupervisory body at the time of adoption of such a resolution, thegeneral meeting must appoint a special representative, who shallrepresent the company in the court proceedings. There is no directaction available to the shareholders.But in addition to the abovementioned general rule, the minorityshareholders (minority meaning at least 10% of the subscribedcapital or at least 400,000 Euros) can file a lawsuit for the damagecompensation in their own name and for the account of thecompany, if:

the proposal for filing a lawsuit has not been adopted by thegeneral meeting;the general meeting failed to appoint a special representative;or the management or the special representative do not act inaccordance with the resolution adopted by the generalmeeting.


According to the Companies Act, the company who holds aninterest of more than 25% or 50% in another company seated inSlovenia must immediately inform in writing such a company ofthis fact and the company has to publish such notification. Untilsuch notification is published the shareholder cannot exercise anyvoting rights. According to the Financial Instruments Market Act the shareholderwho aquires share of significant importance (5%, 10%, 15%, 20%,25%, 1/3, 50% or 75% of all voting rights) in a public companymust also inform in writing the public company of this fact.


The shareholders exercise their rights in respect of mattersconcerning the company at a general meeting. A general meeting isconvened at least once a year for the reasons defined by law or bythe articles of association or if it is in the interest of the company. The general meeting must be convened if shareholders whose total

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interest accounts for at least 5% of the subscribed capital file awritten request for the convocation of a general meeting, stating thepurpose and reasons for it. The articles of association may alsodefine the right to convene general meeting in another manner, inwhich case the total share of the shareholders requesting the generalmeeting to be convened may not be set at more than 10% of thesubscribed capital. Upon the request of the minority (5%), the general meeting mustmeet no later than within two months, or the court may authorise theshareholders who requested the convocation, to convene the generalmeeting or to publish the subject on which the general meetingshould decide. Shareholders holding an interest of at least 5% may request anothersubject-item to be added on the agenda of the general meeting if theadditional subject is published within 10 days after the publicationof the convocation. In any case each shareholder may submit itsown proposal of a resolution to be voted upon at the generalmeeting.



The shareholders of a joint-stock company may choose between atwo-tier management system or a one-tier management system.The composition and the number of members of the managementbodies are determined by law and the articles of association. Themembers of the management boards are appointed for a perioddetermined in the articles of association which may not be longerthan six years, with the possibility of reappointment.In a two-tier system the company is managed by a managementboard, which conducts business independently and on its ownresponsibility. In a one-tier system a board of directors manages a company andalso supervises its operations. The board of directors has to becomposed of at least three members. The board of directors mayappoint one or more executive directors and may assign somemanagement tasks to them except in the public companies where atleast one executive director must be appointed.


In a two-tier management system the members of the managementboard are appointed by the supervisory board. The supervisoryboard may recall a member or the president of the managementboard before the end of its term:

if he is in serious breach of obligations;if he is incapable of business conduct;if the general meeting passes a vote of no confidence in him,except where the vote of no confidence was passed forclearly unsubstantiated reasons; orfor other economic and business reasons (significant changesin the shareholder structure, reorganisation, etc.).

In a one-tier management system the members of the board ofdirectors are appointed by the general meeting. As in the case of thesupervisory board, the general meeting may recall the members ofthe board of directors before the end of their term of office by amajority of at least 75% of the votes cast. In some special cases a member of the board of directors may beappointed by the court upon a proposal by interested persons.However, for justified reasons the court may also recall a member

of the board of directors at the proposal of the board of directors orshareholders whose shares account for at least 10% of thesubscribed capital.


The general legislative framework is the Companies Act, whichdefines basic rules for directors’ contracts and remuneration. Thedirector’s contract must be approved by the supervisory body,otherwise the director must return the benefits arising therefrom.In a two-tier management system, the supervisory board mustensure that the total income of the management board isproportional to the tasks carried out by its members and thefinancial position of the company. The articles of association mayprovide that members of the management board share in the profitin exchange for their work and the level of the share in the profit isset (as a rule) as a percentage of the annual profit of the company.In a one-tier management system, members of the board ofdirectors may receive payment for their work or participation in theprofit, as determined by the articles of association or the generalmeeting. Similar to a two-tier management system, payment mustlikewise be commensurate with the tasks carried out by themembers of the board of directors and the financial position of thecompany. Other sources impacting on directors’ contracts and remunerationare non-binding recommendations of good practice, adopted byASBM (please, see above under question 1.2).


Members of the supervisory and management board and board ofdirectors are permited to own shares but they have to report theacquisition or disposal of shares to the company in order to preventthe insider trading.


The management board must be convened at least once in eachquarter or shorter period, as defined in the articles of association. Ifso requested by any member of the management body who mustalso state the purpose and reasons for the convocation, the presidentor chairperson is obliged to convene the session immediately. Asession must be held within two weeks. If the president orchairperson does not accept the request, at least two members of themanagement body may convene a session of the management orsupervisory body by themselves and propose the agenda. The management body has to adopt its rules of procedure with themajority of votes cast by its members.


The Companies Act defines, that in performing their tasks on behalfof the company, the members of the management body must actwith the diligence of a conscientious and fair manager and protectthe business secrets of the company.The members of the management body are jointly and severally

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liable to the company for damage arising as a consequence of aviolation of their tasks, unless they demonstrate that they fulfilledtheir duties fairly and conscientiously. Members of themanagement body do not have to reimburse the company fordamage if the act that caused damage to the company was based ona lawful resolution passed by the general meeting.


According to the Companies Act, the powers and obligations of themanagement board in a two-tier system are:1. to prepare measures within the competence of the general

meeting at the request of the general meeting;2. to prepare contracts and other acts which require the consent

of the general meeting in order to be valid;3. to carry out resolutions adopted by the general meeting;4. to report to the supervisory board at least once every quarter

on planned business policies and other general questionsconcerning operations, the profitability of the company andother questions which may influence the company; and

5. to prepare and submit annual report to the SupervisoryBoard.

The responsibilities stated above also apply mutatis mutandis forthe board of directors in a one-tier system of management. Theboard of directors may (but is not obliged to) assign the followingtasks to the executive directors:1. management of regular operations;2. applications for registration and submission of documents to

the registry;3. taking care of keeping the books of account; and4. compilation of the annual report to which, if subject to

auditing, the auditor’s report and the proposal for the use ofnet distributable profit for the general meeting shall beattached and immediately submitted to the board of directors.


Corporate Governance Code defines that all legal transactionsbetween the company and a management board member, as well astransactions between the company and persons or companiesrelated to the member, in which he is personally involved, should beconcluded by observing the code of good practices and be publiclydisclosed.


The liability of members of management and supervisory board orboard of directors may be insured either by the company either bythe members themselves.



In Slovenia there are two laws concerning corporate socialresponsibility:

The Law on the Worker Participation in Management

(ZSDU; Official Gazette of RS No. 42/1993, 56/2001,26/2007); andThe Law on the Worker Participation in Management in theEuropean Company (ZSDUEDD; Official Gazette of RS No.28/2006).

Slovenia as well implemented Council Directive 2001/86/ECsupplementing the Statute for European Company with regard tothe involvement of employees (OJ L 294, November 10, 2001).


According to The Law on the Worker Participation in Managementthe workers have the right to participate in the decision makingbodies of the company through their representatives. They have theright to appoint at least one third to one half of the supervisoryboard members. They have also the right to appoint one of themanagement board members, if the company has more than 500employees. The workers’ participation is ensured only if requestedby the workers otherwise the shareholders are not obliged to ensureworkers’ representation on the company’s boards. The workers’representatives are appointed by the workers’ council, the membersof which are elected by the workers. According to the law the management board has the duty to:(1) obtain approval of the workers council when adopting

decisions on annual leave and other absences from work,criterions for evaluation of working efficiency, criterions forrewarding innovations, when deciding about housing fundsand holiday facilities and criterions for promotion;

(2) perform joint consultations with the workers’ council beforeadopting decisions on statutory changes, sale or purchase ofthe company, termination of the company, significantchanges of ownership, new employments, post system,transfer of a high number of workers outside the firm or fromone city to another, retirement, disability or health insurance,reduction of number of workers, acceptance of general termsof disciplinary liability (the 10% of all workers is deemed tobe a high number of workers); and

(3) inform the workers’ council before adopting decisionsregarding economic situation of the company, developmentof the company, production and sale, general situation of theindustry, change of business activity, reduction of economicactivity, changes in the organisation of production, changesof technology and annual accounts and annual report.

5 Transparency


Disclosure and transparency are the responsibility of the board ofdirectors or the management board.


According to the Companies Act, the annual report must containvarious disclosures, namely disclosures regarding company’sinterests in other companies and its controlling company, authorisedcapital, treasury shares, provisions for pending litigations andcompany’s obligations secured by mortgages and pledges. The Corporate Governance Code recommends all companies topromptly report on their financial position and legal status and ontheir business activities by publishing:

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mag. Melita Trop

Law firm Miro Senica and attorneys Barjanska cesta 3, P.O. Box 1945, SI-1001 Ljubljana Slovenia

Tel: +386 1 252 8000Fax: +386 1 252 8080Email: [email protected]: www.senica.si

Melita Trop, LL. M. (NYU) is the Head of international andcommercial law department. Her areas of expertise are: corporatelaw, civil law, commercial and civil disputes, mergers & acquisitions,international transactions and representation of foreign clients. Shespeaks English, German, Spanish, French, Croatian and Serbianlanguage.Melita Trop graduated at the Faculty of Law, University of Ljubljanain year 2000. In 2001 she gained her masters degree LL.M. in thefield of Corporate law at NYU. She passed New York State BarExam in 2001 and since then she has been a member of the NewYork State Bar Association. In 2003 she passed Slovenian State BarExam and then joined our law firm in 2004 as Attorney Candidate.Since 2006 she has been practicing law as Attorney.

mag. Iztok Milac

Law firm Miro Senica and attorneys Barjanska cesta 3, P.O. Box 1945, SI-1001 Ljubljana Slovenia

Tel: +386 1 252 8000Fax: +386 1 252 8080Email: [email protected]: www.senica.si

Iztok Milac, LL.M. (Heidelberg) is the Deputy Head of internationaland commercial law department. His areas of expertise arecorporate law, mergers & acquisitions, civil law, representation offoreign clients in commercial and civil disputes, internationaltransactions, contract law and intellectual property law. He speaksfluently English, German, Croatian, Serbian language.Iztok Milac graduated at the Faculty of Law, University of Ljubljanain year 2002. In 2004 he gained his masters degree LL.M. in thefield of Commercial law at Ruprecht-Karls Universität Heidelberg.In 2005 he passed Slovenian State Bar Exam and then joined ourlaw firm as Attorney Candidate. Since 2006 he has been practicinglaw as Attorney.

With employing on average 35 to 40 lawyers the Law firm Miro Senica and attorneys, d.o.o. is the largest law firm inSlovenia and in the region. Our lawyers come from various professional backgrounds (court trainees, judge assistants,corporate lawyers, and state employees), two of them also have completed post-graduate studies (LL.M.) abroad, whichenables them to efficiently and professionally complete the job even within very short deadlines, understand variousand the most complex legal relationships and to actively participate in the planning of the utmost demandingtransactions.

We offer to our clients legal counselling and representation in all areas of law whereby the most important cases are inthe field of corporate and commercial law (mergers & acquisitions, commercial litigation, competition protection,general corporate issues, etc.). Concerning large international and national corporate transactions we provide allrequired legal services including regarding takeover procedures, anti-competition proceedings and due diligence ofcompanies.

We are proud that our law firm is the first and so far the only law firm in Slovenia which received the certificate ofquality for management system ISO 9001:2000. This reflects our focus on excellence in offering services that answerour clients’ needs and their satisfaction as well as quality of our attorney services.


unaudited annual financial statements;summaries from the annual and semi-annual reports andother interim financial results;reviews of financial results of previous years;any variance from the business projections; andforecasts and plans for future business operations.

Companies should, as soon as possible, provide for the disclosureof all material information about their business operations, thecompany, the company’s ownership and governance, any changedterms of business and impact of events from the environment,which could affect their financial position and legal status.


The annual reports of large and medium-sized companies and theannual reports of small companies whose securities are listed atstock exchange must be examined by an auditor. The auditor mustaudit the financial statements as well as business report in order to

determine whether the content of business report is in conformitywith the other parts of annual report and whether the financialstatements provide a true and fair view of financial situation of acompany and whether they are in conformity with regulations.


The Corporate Governance Code recommends that companiesshould strive to create a company’s official website as transparentas possible. The website should contain all essential information onthe company and its business activities. A clean copy of thecompany’s articles of association currently in force should also bepublished on the website.Companies should post on their websites the name and contactinformation of the persons who are responsible for investorrelations, especially if the information on the website is notavailable in English to the same extent as in Slovene language.

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Chapter 29

Deneys Reitz Inc

South Africa



South Africa has two types of companies with share capital i)private companies (not listed) and ii) widely held public companies(“Public Companies”). Public Companies may be listed on theJSE Limited (“JSE”). Listed Public Companies will primarily bediscussed in this chapter.Listed companies are regulated by a variety of legislation(dependant upon the type of company) and by the JSE ListingRequirements (the “JLR”) and the King Code II on CorporateGovernance, which will be replaced by the King Code III on 1March 2010, which act as guidelines. The JLR and the King Codeshave been aligned with international best practice in order toincrease investor confidence in the South African equities market.


The law is stated as at 1 May 2009.The primary corporate legislation covering all companies iscontained within the Companies Act, 1973 (the “1973 Act”)although a new Companies Act (the “New Act”) has beenpromulgated which is intended to come into force in mid 2010. Theintention of introducing the New Act is to modernise currentlegislation to improve corporate governance, transparency,accountability, modern merger methods and minority shareholderprotection. The New Act proposes new methods of recourse forcompanies in distress such as the concept of “business rescue”(which is similar to the United States’ Chapter 11 procedure).In terms of the 1973 Act all companies have a Memorandum andArticles of Association (the “Constitutional Documents”),reflecting the contractual relationship between shareholders andcontaining the rules the company must follow in relation toshareholder’s meetings, borrowing powers, powers and duties ofdirectors and other aspects relating to the governance and operationof the company. The Constitutional Documents must not only bealigned to the 1973 Act but also to other legislation depending onthe type of company. The New Act has consolidated theConstitutional Documents into a document called the Memorandumof Incorporation which will be similar to the ConstitutionalDocuments of the 1973 Act. However, certain provisions relatingto corporate governance will be unalterable in the Memorandum ofIncorporation. This ensures that certain protections built into theNew Act will apply universally to all companies.

Listed companies must adhere to the JLR which provide additionalregulation. The JLR include but are not limited to provisionsdealing with the following:

the disclosure requirements of directors;the compliance of a company’s Constitutional Documentswith certain requirements;the rotation of 1/3 of a company’s non-executive directors onan annual basis;continuing obligations of listed companies;required financial information; special rules for:mineral companies;property companies;investment companies; andexternal companies;procedures for major transactions and related partytransactions; restrictions in and regulation of certain security dealings e.g.share buybacks, claw-back offers, right offers and the like.

In anticipation of the New Act and due to changes in internationalgovernance, the King committee has drafted the third report onCorporate Governance in South Africa (“King III”) which willreplace King II. Currently the JLR requires listed companies tocomply with King II but King III requires companies to “apply” itscodes or “explain” the reasons for not doing so. King III providesfor the following:

risk based internal audit (risk including operational,strategic, financial and sustainability issues must beinternally audited in companies and adequate controls mustbe implemented by the company);information systems governance (use, access, disclosuremust all be evaluated);shareholders and remuneration (the remuneration policymust be fixed by the board and management);the structure and responsibilities of the board;evaluation of board and individual directors; andfundamental and affected transactions (directors are to beaware of their responsibilities in regard to mergers,acquisitions and amalgamation).


The promulgation of the New Act and the imminent replacement ofthe King Code II by the King Code III has emphasised the focus onthe regulation and responsibilities of directors individually and the

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board as a whole. However the general trend remains on theincreased transparency of companies.Black Economic Empowerment (“BEE”) also remains a prevalentissue in South Africa. For more information on BEE, see question4.1.

2 Shareholders


Shareholders’ rights and powers are determined in terms of theConstitutional Documents and, in certain instances, theshareholders agreement of a company. Although the shareholderscontrol the composition of the board, usually operation andmanagement of a company is delegated to the board. Directors’powers may be limited in the Constitutional Documents. Certaintransactions require a special resolution to be passed by theshareholders. These transactions would include the initiation ofvoluntary winding-up, changes in authorised share capital, andalteration of the Constitutional Documents. This will remainunchanged in the New Act.In terms of the JLR, the Constitutional Documents of a listedcompany must contain certain provisions, such as regular rotationof non-executive directors. The JSE will not allow theConstitutional Documents or any shareholders’ agreement tocontain provisions that are contrary to the JLR and that may restrictfree dealings in securities.


No, a shareholder enjoys limited liability and is not responsible forthe acts or omissions of a company unless the shareholder hasassumed a directorial or management role.


Shareholders may not be disenfranchised in a Public Company. The1973 Act specifically states that shareholders in a Public Companyshall be entitled to vote in the Company. This provision cannot bealtered by the company’s Constitutional Documents.The Constitutional Documents of a Private Company may containprovisions limiting the voting rights of shareholders in specificsituations. However, a shareholder may always enforce his rightsby making application to court. See question 2.4 below.


In terms of the 1973 Act and the New Act (although the New Acthas wider protection rights for minority shareholders), shareholdersmay make an application to Court if they believe that any particularact or omission of a company is unfairly prejudicial, unjust orinequitable to him/her or to some part of the shareholders of thecompany.Shareholders may, in terms of the common law and as codified bythe New Act, approach a court to enforce the company’s rights.These derivative actions are only available in specificcircumstances as it is usually only the company that is entitled toenforce its rights. However, a shareholder may make an application

to court to prevent a company acting or failing to act in a specificmanner insofar as that act or omission may have any adverse effecton the shareholders’ interests.A shareholder may also make application to Court to declare theactions of a director or a manager to be reckless and/or fraudulent,and to hold such persons personally liable for the debts of thecompany. Any person who was knowingly party to such recklessand/or fraudulent behaviour may also incur personal liability.


There are no limitations on the number of securities a shareholdermay hold unless provisions in the Constitutional Documents orshareholders’ agreement state otherwise. The New Act will require the disclosure of the identity of the truebeneficial owners of securities and debentures. The 1973 Act onlyrequired the publishing of the names of the persons in the financialstatements who hold beneficially more than 5% of the company’scapital.Competition laws in South Africa might necessitate a companyobtaining approval from the relevant authorities for certainsecurities transactions and/or shareholding. Further, legislativelimits over shareholding and control has been established in certainindustries e.g. telecommunications and insurance.


Shareholder meetings are known as general meetings. Generalmeetings are called in order to pass both ordinary and specialresolutions. An ordinary resolution must be passed by a simplemajority of the attendees whilst a special resolution must be passedby a majority of 75% of the attendees.If a special resolution is required to be passed, 21 clear days’ noticein writing must be given. Any other general meeting shall be calledby not less than 14 clear days’ notice. The New Act has changedthis time period to 15 and 10 business days respectively. TheConstitutional Documents govern the procedure of generalmeetings. No business shall be transacted at any general meetingunless the quorum necessary is present. The 1973 Act only recognises shareholders that are reflected in thecompany’s register of shareholders. Indirect shareholders mustexercise their rights through the registered shareholders.The New Act, however, introduces the concept of “beneficialinterest” whereby not only those persons listed as shareholders inthe share register have direct rights, but also those persons who areentitled to receive or participate in any distributions in respect of thecompany’s securities, exercise any rights attaching to a companiessecurities, or dispose and/or direct the disposition of the company’ssecurities. These direct rights include the right to inspect thecompany’s records and the right to receive financial statements.The provisions relating to a shareholder’s right to call meetings andpropose resolutions are usually contained in the ConstitutionalDocument and/or the shareholders agreements which may stipulatecertain requirements and thresholds.However, the 1973 Act does allow shareholders to requisition thecalling of a meeting provided that the meeting is requisitioned by atleast 100 shareholders holding at least 1/20 of the total voting rightsof the company. Further, any shareholder may make application tothe Registrar of Companies to call a general meeting.The New Act also allows shareholders to call meetings at any time.

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Yes, both the New and 1973 Act allow for notification throughelectronic communications. General meetings may be held throughelectronic means, although the Constitutional Documents maystipulate otherwise.



Companies are managed by a board of directors. The board consistsof non-executive directors (who provide scrutinising, monitoringand strategic functions); executive directors (who performexecutive functions concerning the day-to-day running andoperation of the company) and, in certain instances, independentdirectors, who are completely objective and unconnected to thecompany.There is no level of distinguishing responsibility depending on typeof director. Every director must exercise a due level of care to thecompany.The Constitutional Documents will provide for a minimum andmaximum number of directors. King III further stipulates the roleand function of the board. The board must ensure that the company:

is responsible for the process of management;acts in the best interest of the company;manages conflict of interests;acts as a responsible corporate citizen; follows an ethical culture;considers sustainability as a business opportunity; andappoints the chief executive officer and establish aframework for the delegation of authority.

King III requires that the majority of directors on the board to benon-executive and to ensure the chief executive officer is effectiveand ethical. It is also a requirement that the company has effectivecommittees such as an audit and remuneration committee. TheConstitutional Documents may allow the board to establish localboards, agents and committees to ensure a company performseffectively.


Shareholders appoint the initial board on incorporation andgenerally have ultimate approval regarding the appointment andremoval of directors. The board of directors may make casualappointments upon the resignation of a director. These casualappointments must, however, be ratified by the shareholders at thenext general meeting. In terms of the JLR, non-executive directors may serve a maximumof three years on the board whereafter they must resign, althoughthey may be re-elected.In terms of King III, when making an appointment, the board mustensure that the requisite knowledge, skills and resources requiredare present to ensure the company operates effectively. Directorsmust also be appointed through a formal process that is transparent.Listed companies must, in terms of the JLR, investigate thebackground of directorsThe removal of a director is often regulated by the ConstitutionalDocuments. However, both the 1973 and New Acts and provideprovisions for the removal of such a director.


Directors’ contracts and remuneration are governed by theConstitutional Documents and remuneration committees. Theremuneration committee is appointed by the shareholders anddirectors in terms of the King Code II and III. The remunerationcommittee is required to draft a remuneration policy detailing thebasis for its suggested remuneration of directors which policy mustbe approved by shareholders.King III further requires shareholders to approve the remunerationof directors on the recommendation of the remuneration committee.The King Code III suggests that any proposed fees payable to non-executive directors also be approved by shareholders. King III also requires companies to fully disclose the remunerationof all directors including their pay, bonuses, share-based payments,restraint payments and bonusesThe JLR permit directors to be employed by the company in anoffice other than that of director. However, the JLR require adisinterested quorum of directors to approve the director’s non-directorial appointment and remuneration.


Both the 1973 and New Act require all directors to disclose anypersonal financial interest that may cause a conflict of interest.The JLR further require directors to fully disclose the nature andextent of any interest in property owned by, share capital of andtransactions entered into by the company. A company is alsorequired to disclose any dealings in securities by directors and/orthe company secretary.Directors may not deal in security during “closed periods” as definedin the JLR. “Closed periods” relate to certain lengths of time on andaround the release of financial statements of a company.


Board meetings are called whenever required by giving notice to alldirectors as stipulated by the Constitutional Documents. Further, interms of King III, the board must meets sufficiently often to ensurethe company operates efficiently and that the duties of the directorsare discharged effectively.


Directors owe certain fiduciary duties to the company. These dutiesare applicable to both executive and non-executive directors. KingII and King III stipulate the duties as:

the exercise of care and skill;ensuring that sufficient time is devoted to carry outresponsibilities properly;exercising utmost good faith, honesty and integrity;acting in the best interests of the company;never permitting a conflict of interest; anddisclosing conflicts of interest in proposed transactions.

These reflect the common law which is now codified in the New Act.

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In terms of King II and King III the board is responsible to:act as focal point of corporate governance;cultivate and promote ethical corporate culture;appreciate strategy, risk, performance and sustainability areinseparable;responsibility for the process of risk management;manage conflicts of interest;ensure the integrity of financial reporting;report on effectiveness of internal financial controls;internal and external disputes are resolved effectively,expeditiously and efficiently; andeffective compliance framework is implemented in thecompany.


The JLR stipulate that the following must be disclosed in thecompany’s annual report:

policy detailing the procedure for appointments to the board;policy evidencing a clear division of responsibilities at boardlevel;a brief description of the mandate of the active committeesand their composition; andcapacity of each director.remuneration of directors; andholdings and dealings of directors in securities.

For an elaboration on the disclosure requirements of themanagement body, see questions 3.4 and 5.2.


A company can never indemnify a director for his negligent and/orwrongful conduct toward the company. Similarly, a company’sConstitutional Documents may not release a director from hisobligations in terms of the 1973 and New Acts.However, in terms of both the 1973 and New Act, a company mayindemnify and take out insurance for any liability a director mayincur toward third parties. Such liability must arise out of adirector’s conduct in his capacity as director and can never arise outof the wilful misconduct, wilful breach of trust or criminal conductof the director.



In order to achieve substantive equality, the government haspromulgated the Broad-based Black Economic Empowerment Act(“BEE Act”). The BEE Act seeks to “promote the achievement ofthe constitutional right to equality, increase broad-based andeffective participation of black people in the economy and promotea higher growth rate, increased employment and more equitableincome distribution”.The Codes of Good Practise on Black Economic Empowerment

contain a “scorecard” on which all companies, whether public orprivate, are graded. Appointed BEE Verification Agencies use thescorecard to grade companies on their black ownership,management control, employment equity, skills development,preferential procurement, enterprise development, and socio-economic development initiatives. Varying grades may be awardedto a company, ranging from level one contributor (at the top end) tonon-compliant contributor (at the bottom end).Although failure to comply with the provisions of the BEE Act doesnot carry any sanction, there are compelling reasons to strive for ahigh rating:

all governmental entities are required to take cognisance of acompany’s BEE rating when awarding tenders, entering intopublic-private partnerships; andcompanies are graded on preferential procurement and assuch, they will seek to do business with other companies thatare BEE compliant.

Many companies have some type of corporate social project inorder to increase their socio-economic development initiativerating. These projects may be related to the Company’s specificbusiness (i.e. a legal firm running a pro bono legal aid clinic) ormay be completely unrelated to the Company’s primary business(i.e. sponsoring a children’s crèche).The Constitution of the Republic of South Africa (“theConstitution”) specifically envisages an environment that is notharmful to any person’s health and/or wellbeing. As such, there area myriad of laws protecting the environment from pollution anddamage. The most overarching environmental legislation in SouthAfrica is the National Environmental Management Act (“NEMA”).NEMA places a duty of care on all persons (including Companies)to prevent pollution and degradation of the environment. Failure tocomply with these provisions is an offence and may result in a finebeing imposed on the offending Company.South Africa is also a signatory to the Kyoto Protocol. As such,there is a viable trade of carbon credits in South Africa.


The New Act makes specific provision for the protection of“whistleblowers”. The definition of “whistleblower” includes, butis not limited to, employees, trade unions representing employees,employees of a supplier. A whistleblower is afforded qualifiedprivilege for any disclosure he may make as well as immunity fromcivil, criminal or administrative liability arising from his disclosure.Further, in terms of the New Act, a Public Company is obliged toput in place systems enabling employees to make confidentialdisclosures.The 1973 Act, on the other hand, is silent regarding the role ofemployees in corporate governance.Ultimately it is the responsibility of the board to ensure complianceby employees of their corporate governance responsibilities.

5 Transparency


The directors of a company are responsible for the drafting offinancial statements and the disclosure of the financial affairs of thecompany.In terms of both the 1973 and New Acts, a Public Company is alsoobliged to appoint a company secretary who shall ensure that the

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directors know their responsibilities and that all the transparencyand disclosure requirements of the company are being satisfied.Further, it is the duty of the company secretary to ensure that theminutes of all shareholder and board meetings are properlyrecorded.The JLR require listed companies to appoint “sponsors” to ensurecompliance with the JLR, that corporate governance requirementsare satisfied and that directors discharge their fiduciary duties.Sponsors are usually entities such as law firms, accounting firms orfinancial institutions.


Every shareholder has the right to inspect the share register andConstitutional Documents of the company.In both the 1973 and New Act, it is the duty of the directors to keepaccurate and current accounting records of the company.All companies are required to draft annual financial statements interms of the 1973 and New Acts, and the JLR require listedCompanies to draft interim and quarterly financial statements. Allfinancial statements are distributed to every shareholder of thecompany and every shareholder has the right to access thesefinancial statements at any time. A Public Company is required to lodge its annual financialstatements with the Registrar of Companies and, in terms of theJLR, a listed company is required to lodge its annual financialstatement with the JSE.The 1973 Act, the New Act, the JLR and the King Codes allstipulate minimum information that financial statements mustcontain. The directors are also obliged to distribute an annual report toshareholders detailing “state of affairs, the business and the profit orloss of the company or of the company and its subsidiaries”. Seealso question 3.8.In addition to financial statements, the 1973 and New Acts requirethe directors of a company to disclose any interests they may havein contract. See question 3.4.Finally, in terms of the Promotion of Access to Information Act,2000 any member of the public may request information from acompany if such information is necessary for the exercise or

protection of the rights afforded to persons in the Constitution.


Public Companies are required to appoint an independent auditcommittee which is responsible for the appointment of auditors andensuring that the company’s financial reporting is accurate andcomplete. The audit committee is also responsible for ensuring thatthe internal financial controls of the company are correctly in placeand that the overseeing the external audit of the company.Both the 1973 and New Acts require all companies to appoint anexternal auditor upon their incorporation. The auditor is required toaudit the financial statements and prepare a report to be presentedat the annual general meeting stating that the financial statementsreflect the financial position of the company and its subsidiaries.The JLR require the audit to be performed in accordance with theInternational Standards on Auditing.The auditor is also required to ensure that that the register ofdirector’s personal interests is accurate and that the minute bookshave been kept in the proper form.King II and King III recommend that all companies appoint aninternal auditor to ensure that the board of directors and anycommittees are discharging their governance responsibilities. If theboard of directors does not appoint an internal auditor, it must detailin the director’s annual report what alternative steps it has taken toensure that governance responsibilities have been discharged.


In terms of the JLR, King II and King III, both the full andsummarised financial statements of a company must be placed onits website.Further, although not a directive, the JLR, King II and King IIIenvisage the possibility of a company satisfying their investornotification obligations (e.g. notification of meetings, provision offinancial statements etc.) via electronic media such as e-mail or awebsite.Should a public company wish to issue warrants, the warrantprogramme and pricing supplement must be listed on thecompany’s website.

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Kevin Cron

Deneys Reitz Johannesburg82 Maude Street Sandown, SandtonSouth Africa

Tel: +27 11 685 8670Fax: +27 11 883 4000Email: [email protected]: www.deneysreitz.co.za

Kevin Cron heads the commercial division of Deneys Reitz Inc. Heis one of the most respected corporate lawyers in South Africa,having acted for well-known South African mining and industrialgroups and for various South African and international banks. He holds the degrees of Bachelor of Commerce, Bachelor of Laws andMaster of Laws (Tax) from the University of the Witwatersrand and wasadmitted as an attorney, notary, and conveyancer in January 1982. Heis a member of the Law Societies of the Northern Provinces, Natal, andCape Provinces and is in addition a member of the company lawcommittee of the Council of the Law Society of the Northern Provinces. He has specialised in general commercial and corporate work, tax,mergers and acquisitions, restructuring, financial services generallyincluding securities law and commercial and corporate aspects, andinsurance. He has acted for clients such as Anglo Platinum, RioTinto, De Beers, Kumba and other well-known South Africancorporations. He has represented financial institutions both locallyand internationally including FirstRand, Rand Merchant Bank,Standard Bank, Investec Bank, ING Barings, J.P. Morgan Chase,Bank of America, Goldman Sachs, Citigroup and others. Kevin also has extensive merger and acquisition experience, havingbeen involved in major transactions in this field for over 25 years.He is consistently ranked as a leader in his field by numerousprestigious global publications. Areas of Expertise:Banking; Capital Markets, Securitisation and Derivatives;Commercial and Corporate; Exchange Control; Financial Markets;Mergers and Acquisitions; Project Finance; Tax.

Christine Rodrigues

Deneys Reitz Johannesburg82 Maude Street Sandown, SandtonSouth Africa

Tel: +27 11 685 8912Fax: +27 11 883 4000Email: [email protected]: www.deneysreitz.co.za

Christine Rodrigues is an Associate in the Commercial Departmentof the firm.Prior to joining Deneys Reitz she worked for one of the major shortterm insurers dealing with compliance management issues todeveloping business strategies for underwriting managers. She completed her B.com Honours (First Class) at the University ofthe Witwatersrand. In her Honours course she specialised inInsurance and Risk Management. She completed her LLB at theUniversity of the South Africa. Areas of Expertise:Commercial.Corporate Governance.Insurance.

Deneys Reitz Inc was established in the early 1920’s. The firm provides specialist services in the spectrum of legaldisciplines. Its client base includes major industrial and commercial corporations, the large mining houses, parastatals,government departments and large financial institutions including major banks and most major insurance companies.

We are truly a national firm with offices located in Johannesburg (Sandton), Durban and Cape Town. The firm also hasexcellent working relationships with major law firms in the United Kingdom, United States of America, Australia andthe Far East.

In 2004 Deneys Reitz established Africa Legal (Africa International Legal Services (Pty) Ltd), an Africa-specialiseddivision providing an international pan-African legal service by English solicitors and other practitioners with Africandeal experience. In 2006 Deneys Reitz/Africa Legal was named “African Law Firm of the Year” in the Annual ChambersGlobal Awards.

In 2005 Deneys Reitz established Deneys Reitz Tax Services, a dedicated tax division providing expert services on allcommercial tax aspects.

Deneys Reitz is a major employer with a total staff complement of more than 500. The firm currently employs 91directors, 72 associates, 75 candidate attorneys and over 250 support staff.

The firm’s success may be judged by the fact that its clients include the major financial institutions, mining houses,insurance companies, industrial conglomerates as well as major overseas clients which invest or do business in SouthAfrica. The firm is also favoured by major law firms overseas as their correspondents in South Africa.

The firm is the foremost practitioner in complex specialities (e.g. mining law). A long association with the insuranceindustry has resulted in the highly competent litigation department with highly specialised abilities.



Chapter 30

Garrigues, Abogados y Asesores Tributarios

Spain



The corporate entities referred to this article are Spanish listedcorporations (sociedades anónimas) which, in accordance withArticle 111 of Securities Market Law 24/1988, of July 28, 1988 (the“Securities Market Law”), are corporations whose shares areadmitted to trading on an official securities market.


The basic legislation governing listed corporations in Spain consistsof the revised Corporations Law (the “Corporations Law”),approved by Legislative Royal Decree 1564/1989, of December 22,1989, the new Law on Structural Modifications of MercantileCorporations 3/2009, of April 3, 2009, and Title X of the SecuritiesMarket Law, which contains the general regime applicable to thistype of corporate entity, with special provisions applicable to listedcompanies, particularly in matters relating to corporate reportingand transparency. Indeed, Title X of the Securities Market Law wasintroduced by Law 26/2003, the purpose of which was to reinforcethe transparency of listed corporations.In this regard, it must be noted that the recently approved Law onStructural Modifications of Mercantile Corporations entitles theSpanish government to pass in the twelve months following itsapproval a new “Capital Companies Law”, which shall harmonisein a single text, among others, the three rules mentioned above.In addition, listed corporations are subject to other pieces oflegislation that, in implementing the above, regulate significantaspects of the rules on transparency and corporate governance,including most notably:

Royal Decree 1333/2005, of November 11, 2005,implementing the Securities Market Law in the area ofmarket abuse.Royal Decree 1362/2007, of October 19, 2007,implementing the Securities Market Law in relation totransparency requirements concerning information on issuerswhose securities are admitted to trading on an officialsecondary market or on a regulated market in the EuropeanUnion. Order ECO/3722/2003, of December 26, 2003, on the annualcorporate governance report and other reporting instrumentsof listed corporations and other entities.Order EHA/3050/2004, of September 15, 2004, on theinformation on related-party transactions that must be

provided by issuers of securities admitted to trading onofficial secondary markets.

Under the legislation mentioned above, the National SecuritiesMarket Commission (the “CNMV”), the Spanish regulator taskedwith the supervision and inspection of the securities markets and theactivities of all individuals and legal entities involved in trading onthose markets, has, in the exercise of the powers legally attributedto it, issued a number of Circulars on transparency and corporategovernance (compliance with which is mandatory), including:

CNMV Circular 2/2007, of December 19, 2007, approvingthe forms for notifying significant holdings, board membersand executives, transactions by the issuer in treasury stock,and other forms.CNMV Circular 1/2004, of March 17, 2004, on the annualcorporate governance report of listed corporations and otherissuers of securities admitted to trading on official secondarymarkets, and other reporting instruments of listedcorporations.CNMV Circular 4/2007, of December 27, 2007, approving anew form for annual corporate governance information onlisted corporations.CNMV Circular 1/2008, of January 30, 2008, on periodicinformation from issuers with securities admitted to tradingon regulated markets on half-yearly financial reports,intermediate management declarations and, as the case maybe, quarterly financial reports.

With respect to codes of conduct, reference should be made to theUnified Code of Good Governance, attached as Exhibit I to theReport of May 19, 2006, of the Special Working Group on GoodGovernance at Listed Companies, which was approved by theCNMV on May 22, 2006 as a single document containing corporategovernance recommendations, for the purposes of the provisions ofparagraph 1.f) of Order ECO/3722/2003, of December 26, 2003 asreferred to above. The Unified Code contains 58 recommendationson good governance aimed at listed corporations and compliancetherewith is voluntary, subject to the “comply or explain” principle.In this connection, Article 116 of the Securities Market Lawrequires Spanish listed companies to state in their annual corporategovernance report “the level of compliance with the corporategovernance recommendations or, as the case may be, anexplanation of the lack of compliance with such recommendations.”The Unified Code sets forth the recommendations that must betaken into account by listed companies in order to comply with thereporting obligations established under such Article. Although it isup to listed companies whether or not they follow the goodgovernance recommendations, in reporting on whether or not theycomply, they must use the definitions that the Unified Code ascribesto the concepts to which it refers for making the recommendations.

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Garrigues, Abogados y Asesores Tributarios Spain

Lastly, listed corporations are regulated by their corporate bylawsand, furthermore, by two mandatory sets of regulations under theSecurities Market Law:

The Shareholders’ Meeting Regulations, which govern allmatters concerning the Shareholders’ Meeting, with respectto the matters regulated in the bylaws. The Board Regulations, which contain the rules on theinternal workings and functioning of the Board itself,together with specific measures aimed at ensuring optimummanagement of the company.

The Shareholders’ Meeting Regulations and the Board Regulationsmust be notified to the CNMV and registered at the MercantileRegistry. According to the CNMV, during 2007, 30 entities amongthe top 35 listed corporations in Spain modified their BoardRegulations and 22 entities modified their Shareholders’ MeetingRegulations, to include the recommendations of the Unified Code(thus making them fully binding and enforceable).


One of the most noteworthy recent milestones in the area of corporategovernance in Spain has been the approval in mid-2006 of the UnifiedCode of Good Governance, the recommendations of which haveraised the level of the requirements that companies need to meet in thisregard. The recommendations became applicable for the first time in2007, and 2008 was the first year that Spanish listed companiespublicly reported on their degree of compliance with them.In addition, 2007 also saw significant legislative developments thataffected corporate governance, such as the approval of the newregime on tender offers for securities and of the update of theregime on regulated information and on the disclosure of significantholdings.All of these initiatives are aimed at making listed companies moretransparent and at strengthening corporate governance standards,which Spanish companies have been diligently applying in recentyears. Questions such as the transparency of related-partytransactions with directors and significant shareholders, theappointment of truly independent directors or compensationpolicies for boards and their public disclosure will continue to berelevant matters in the future.

2 Shareholders


Pursuant to the applicable legislation, the management andadministration of listed corporations corresponds exclusively to theBoard of Directors, and the powers of the Shareholders’ Meeting inthis connection (i.e., without prejudice to any other agreementscorresponding to it, such as approval of mergers, spin-offs,subsidiarisations, changes in legal form, bylaw amendments, etc.)are limited to the appointment and dismissal of directors, theappraisal of corporate management, and the approval of thefinancial statements prepared by the directors.However, the Unified Code of Good Governance recommends thatcertain corporate transactions that may have an effect similar to astructural modification of the company, while they may legally beadopted by the Board of Directors, since there is no formal andspecific attribution of powers in this area to the Shareholders’Meeting, should be subject in any case to approval by theShareholders’ Meeting.

It is therefore common that the bylaws or Shareholders’ MeetingRegulations of Spanish listed companies specifically establish thattransactions that entail a change to the structure of the company(such as the conversion of listed companies into holding companies,the acquisition or disposal of essential operating assets, where itleads to an actual modification of the corporate purpose, andtransactions the effect of which is equivalent to the liquidation ofthe company) are subject to approval by the Shareholders’ Meeting.


Listed corporations are companies that limit the liability of theirshareholders to the amount of their capital contributions.Accordingly, the Corporations Law expressly establishes thatshareholders shall not be personally liable for corporate debts.


Shareholders at Spanish listed corporations may only be deprived oftheir right to vote in very specific situations, which are generallylinked to the acquisition of shares in breach of the requirementsestablished in legislation on tender offers or other special regulatoryrules (for example, failure to obtain prior administrative consentwhere required).


Directors are liable to the company and to the shareholders for anydamage they cause as a result of acts or omissions contrary to Law,the bylaws or in breach of the duties inherent in the discharge oftheir office.Shareholders may agree, by simple majority, to have the companybring an action for liability against the directors.Furthermore, the company’s shareholders may bring direct actionsfor liability against directors for any acts that directly damage theirinterests.


In general, there are no limits on the number of shares that can beheld by a shareholder of a listed company, without prejudice,logically, to the consequences of exceeding certain shareholdingthresholds (such as, for example, the obligation to make a tenderoffer for 100% of the company if a shareholder owns 30% or moreof the voting rights at a listed company) or to specific limits or theneed to obtain prior consent in certain businesses or industries.There is, however, a full regime for the notification of significantholdings in Spanish listed companies, generally regulated underRoyal Decree 1362/2007. Briefly, Royal Decree 1362/2007 provides that shareholders acquiringor transferring the voting shares of an issuer must notify the issuer andthe CNMV of the proportion of voting rights it holds following thetransaction where, as a result of such transactions, this proportion isequal to, exceeds or falls below 3%, 5%, 10%, 15%, 20%, 25% 30%,35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90%. Thesepercentages will be replaced by 1% and its successive multiples wherethe notifying shareholder is resident in a tax haven or in a country orterritory with zero-taxation or with which there is no actual exchangeof tax information pursuant to the legislation in force.

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Shareholders’ Meetings at listed companies may be ordinary orextraordinary and must be called by agreement of the Board ofDirectors of the company.The ordinary Shareholders’ Meeting must meet within the first sixmonths of each year in order to appraise the corporate management,approve, as the case may be, the financial statements of thepreceding year, and resolve on the appropriation of income/loss.Any Shareholders’ Meeting not provided for in the above paragraphis an extraordinary Shareholders’ Meeting. The Board of Directorsmay call an extraordinary Shareholders’ Meeting when they deem itnecessary in the interests of the company.Shareholders representing at least 5% of the capital stock have theright to request the call of the Shareholders’ Meeting, stating the itemsto be discussed at the meeting in their request. The Board of Directorsmust call the meeting to be held within the thirty days following thecall request, and must include the items requested on the agenda.Once the Shareholders’ Meeting has been called, shareholdersrepresenting at least 5% of the capital stock are also entitled to requestthe publication of a supplementary call notice, for the inclusion of oneor more items on the agenda. Such right must be exercised by a dulyauthenticated notice served on the registered office within the fivedays following the publication of the original call notice.Until the seventh day before the scheduled meeting date,shareholders have the right to request from the directors, in relationto the matters on the agenda, such information they deem necessary.Shareholders of a listed company can request information on any ofthe public information made available by the company to theNational Securities Market Commission since the last generalmeeting was held. During the holding of the meeting, shareholders may also requestorally such information they deem convenient in relation to theitems included on the agenda. If a shareholder’s request cannot beanswered at that time, the directors will be obliged to provide thatinformation in writing within seven days after the conclusion of thegeneral meeting.Directors shall be obliged to provide the information requestedunless, in the chairman’s opinion, disclosure of the informationrequested would be damaging to the company’s interest. Informationcannot be refused if the request is supported by shareholdersrepresenting at least 25% of the share capital of the company.The bylaws of corporations can limit the right of the shareholders toattend and vote in the meetings. Specifically, the bylaws mayrequire the holding of a minimum number of shares in order toattend general meetings, but the number required may under nocircumstances be greater that one thousandth of the company’sshare capital. Shareholders may appoint another person, whether amember or not, to represent them in the meeting. The Bylaws maylimit this power. Bylaws may also establish the maximum numberof votes which may be cast by a single shareholder or companiesbelonging to the same group.Lastly, pursuant to the provisions of the Corporations Law, thebylaws of corporations may provide for the exercise byshareholders of their rights to information, to attend and to vote (ordelegate their right to vote) by regular mail, e-mail or any othermeans of remote communication, provided that the identity of theperson exercising the right is duly ensured.Since the legislation on this latter point is very scarce, reference willhave to be made to the provisions made in each specific case in thebylaws and, in implementation of such provisions, in theShareholders’ Meeting Regulations of each listed company and, in

particular, to the specific rules established by the Board of Directorsfor the call of each Shareholders’ Meeting.



The management of listed companies must fall to a Board ofDirectors which may, in turn, create an Executive Committee towhich it may delegate certain functions, and appoint one or moremanaging directors.The Board of Directors is a collective management body, theresolutions of which are adopted by a majority of votes, withoutprejudice to the fact that certain resolutions (such as theappointment of the managing director) require a qualified majority(two-thirds of the votes).The Spanish Unified Code of Good Governance distinguishesbetween the following basic types of directors:Executive directors: directors who perform senior managementfunctions or are employees of the company or of its group.Nominee directors: directors who have a holding greater than orequal to that which would be legally considered to be significant orwho have been appointed by reason of their status as shareholders,even where their holding is not deemed significant, and anyonerepresenting such shareholders. Independent directors: directors who, having been appointed inview of their professional or personal attributes can perform theirfunctions without being affected by relationships with the company,its significant shareholders or its executives.


In principle, without prejudice to the power of co-optation, directorsare appointed by majority by the Shareholders’ Meeting. Normally,the approval of the appointment or reappointment of directors bythe Shareholders’ Meeting is based on the proposals submitted bythe Board of Directors. In this connection, the Unified Code ofGood Governance recommends that proposals for the appointmentor reappointment of directors that are submitted to theShareholders’ Meeting by the Board, as well as provisionalappointments by co-optation, be approved by the Board: (i) at therequest of the appointments’ committee, in the case of independentdirectors; and (ii) subject to a report by the appointments’committee, in the case of all other directors.Shareholders who voluntarily aggregate their shares so that they areequal to or greater than the result of dividing the total capital stockby the number of directors have the right to appoint a correspondingproportion of the members of the Board of Directors (rounded downto the nearest whole number) in the event of any vacancy.Shareholders who exercise this right may not vote on theappointment of other directors.Directors may be removed by the Shareholders’ Meeting (whetherordinary or extraordinary) at any time. Furthermore, it is commonfor the Board Regulations of Spanish listed companies, in line withthe recommendations of the Unified Code of Good Governance, tocontain specific rules that oblige directors to tender their resignationin certain situations, such as, in the case of nominee directors, whenthe grounds for their appointment no longer exist or, in general, ifthey become involved in any situation that could adversely affectthe credit and reputation of the company.

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The Corporations Law establishes that directors’ compensationmust be stipulated in the corporate bylaws. Notwithstanding, it iscommon for the bylaws of listed companies to establish thatcompensation per the bylaws will be compatible, in the case ofexecutive directors, with any compensation agreed on for theperformance of such functions.In this connection, the Unified Code of Good Governancerecommends that directors’ compensation be sufficient to attractand retain directors with the sought-after professional profile butnot excessive, so that their independence is not compromised, andthat the Board should approve a detailed compensation policy to beincluded in a report on compensation policy to be submitted to theShareholders’ Meeting for consultation, without prejudice to theinclusion of such compensation in the notes to the financialstatements of the company.Pursuant to the applicable legislation, the information oncompensation in the financial statements may be included in anaggregate form, although the Unified Code of Good Governancerecommends that it be broken down individually.


There are no limits on directors of listed companies as regards theholding of shares in the company at which they hold office.However, there is an enhanced regime for the notification ofsignificant holdings, regulated in Royal Decrees 1333/2005 and1362/2007.Basically, the directors of the issuer must disclose the proportion ofvoting rights (regardless of the percentage those rights represent)they continue to hold after the acquisition or transfer of shares orvoting rights, as well as any financial instruments entitling them toacquire or transfer voting shares. This disclosure obligation shallalso apply when they accept their appointment and upon theirresignation from the office of director.


The functioning of the Board of Directors is regulated in the bylawsand in the Board Regulations; therefore the specific rules applicabledepend on each company.The Regulations tend to regulate the manner in which calls tomeetings should be made (call notices must include an agenda) andBoard meetings conducted, the voting system (situations in whichsecret ballots are required), and the possibility that the Board maybe assisted by experts.As a general rule, the Board of Directors is called by the Chairman,whenever it is deemed necessary in the interests of the Company, byindividual notice served on each of the directors and there are noprovisions regarding the maximum or minimum number ofobligatory board meetings per year.In this connection, the Unified Code of Good Governancerecommends that the Board meet as often as is necessary toefficiently perform its functions, following the dates and itemsscheduled at the start of the year, with each director being able topropose other items for the agenda not initially envisaged.


Directors shall carry out the duties associated with their respectivepositions on the board and on the Board committees they sit on, inaccordance with statute, the bylaws, the regulations on corporategovernance and in accordance with any resolutions adopted in thisregard by the managing bodies of the company.The code of conduct for directors of a Spanish corporation isgoverned by the Spanish Corporations Law, which establishes thefollowing duties:

Directors shall discharge their office with the diligence of anorderly trader and of a loyal representative.Each of the directors must report diligently on the conduct ofthe business of the company.Directors must fulfil the duties imposed by statute and thebylaws with faithfulness to the corporate interest, which isunderstood to be the interests of the company.Directors shall refrain from using the name of the company ortheir status as directors of the company to perform transactionson their own behalf or on behalf of persons associated with them.Directors may not make or perform, for their own benefit or forthe benefit of persons associated with them, any investments ortransactions involving the assets of the company and of whichthey may have become aware in the discharge of their duties,where the investment or the transaction was offered to thecompany or the company has an interest in it, provided that thecompany has not rejected such transaction or transactionwithout influence exerted by such director.Directors shall report any potential direct or indirect conflict ofinterest they may have with the company to the Board ofDirectors. In the event of any conflict of interest, the directorsaffected shall refrain from participating in the transaction towhich such conflict refers. In any case, any conflicts of interestinvolving company directors must be stated in the annual reportof the governing body.Directors shall report any holding they may hold in the capitalof companies that pursue activities that are the same, similar orcomplementary to those making up the corporate purpose ofthe company at which they are directors and the offices orduties they discharge at such companies, and any activities theyperform on their own behalf or on behalf of a third party, thatare the same, similar or complementary to those making up thecorporate purpose of the company at which they are directors.Even after they no longer perform their functions, directorsmust keep secret information of a confidential nature, and areobliged to keep confidential any information, data, reports orbackground details which may come to their attention as aconsequence of discharging their duties, and which may not becommunicated to third parties or disclosed where it might havean adverse effect on the company’s interest. Cases wherecommunication or disclosure of such data to a third party ispermitted by law or, as the case may be, where they arerequired by or are to be sent to the respective supervisoryauthorities are excluded from the duty referred to in thepreceding paragraph, in which case the disclosure ofinformation must be in keeping with statutory provisions.

Directors shall be liable to the company, to the shareholders and to thecreditors of the company for any damage that they may cause by actsor omissions contrary to law or to the bylaws, or by acts performed inbreach of the duties inherent in the discharge of their office.


The Board of Directors is the body responsible for the management

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and administration of the company and, in particular and withoutlimitation, is responsible for the preparation of the financialstatements and the financial information disclosed to the market, forestablishing the necessary and appropriate internal control systems,for approving an annual corporate governance report, and forensuring that the market and investors are supplied with accurateand appropriate information in such time as is practicable, pursuantto the applicable legislation.


Briefly, the reporting mechanisms concerning the corporategovernance practices of the Board of Directors are, principally, theBoard Regulations, which contain the rules on the internal workingsand functioning of the Board itself, together with concrete measuresaimed at ensuring the optimum management of the company andthe annual corporate governance report that must be published byall listed companies and must contain a specific section on thestructure of the company’s managing body (composition of theBoard of Directors, rules on organisation and operating procedures,directors’ compensation, etc.).


It is not possible to restrict or limit a director’s liability in respect ofbreaches of their duties and a company cannot, generally, indemnifya director against liabilities for such breaches to the company.Nevertheless, although it is not expressly contemplated in the law,it is commonly admitted that companies can maintain insurance inrespect of directors’ liability to the company and third parties.



There is no legislation in Spain that regulates corporate socialresponsibility in a general way. The existing legislation merelyregulates certain specific matters, such as the obligation to includeinformation in a company’s annual report on its environmentalpolicies, or in the case of mergers, spin-offs and assignment of allof the assets and liabilities, where directors must expressly mentionin their reports the effects that such modification will have on thecorporate social responsibility.In practice, many large companies have specific initiatives in placeand offer precise information on certain aspects of corporate socialresponsibility.


Spanish law does not give employees any specific corporategovernance role at listed companies.

5 Transparency


The Board of Directors is ultimately responsible for disclosure andtransparency.


Information and transparency are essential elements for theadequate operation of securities markets and a condition of theessence for their development and consolidation. The disclosure ofaccurate, comprehensive and timely information about securitiesissuers builds sustained investor confidence and allows an informedassessment of their business performance and assets and, ultimately,this enhances both investor protection and market efficiency.Listed companies must publish and disclose so-called “regulatedinformation”, that consists, first, of the public periodic financialinformation contemplated in Articles 35 and 35 bis of the SpanishSecurities Market Law that issuers should make public and disclose tothe market (basically, annual and half-yearly reports and interimmanagement statements or quarterly reports), and, second, of ongoinginformation about issuers, that should be made available to the publicand disclosed (relevant information according to the system of marketabuse, information about the total number of voting rights and capital,identity of significant shareholders and treasury stock transactions).Additionally, listed companies must make public each year a corporategovernance report, which will contain information on the (a) structureof ownership of the company, (b) structure of the company’smanagement body, (c) related-party transactions and intragrouptransactions, (d) systems of risk control, (e) shareholders’meeting, and(f) degree to which the corporate governance recommendations arefollowed by the company or, when not followed, an explanation of thereasons for such non-compliance.


The auditors are responsible for issuing an auditors’ report on theindividual and, if appropriate, consolidated financial statements oflisted companies.


All listed companies are required to have a website on whichshareholders can exercise their right to information and relevantinformation is disclosed. Failure to provide the website or toprovide the statutory minimum amount of information on thewebsite is a serious administrative infringement.The minimum contents of the information that all listed companiesare required to include on their website are as follows: (a) bylaws;(b) rules governing the shareholders’ meeting; (c) rules governingthe Board of Directors and Board committees; (d) annual report andinternal code of conduct; (e) corporate governance reports; (f)documents on ordinary and extraordinary shareholders’ meetings,and any other relevant information that shareholders may need tocast their votes; (g) existing communication channels between thecompany and shareholders; (h) means and procedures for grantingproxies at shareholders’ meetings; (i) means and procedures fordistance voting, according to the rules implementing the relatedsystem, including forms for substantiating attendance and votingelectronically at shareholders’ meetings; and (j) relevant facts.

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Garrigues is the leading law firm in Spain with a long tradition in providing the highest quality advice to meet both itsdomestic and international clients’ needs. From its very beginning, Garrigues has excelled in the commitment to itsfirst-rate professional standards and its openness toward innovation.

Garrigues is an independent full-service firm and employs some 2,137 professionals working in 29 offices in Spain andPortugal and with international offices in Brussels, Bucharest, Casablanca, London, Miami, New York, Shanghai,Tangiers and Warsaw. Further, Garrigues has promoted Affinitas, a truly integrated alliance with the leading law firmsin Argentina, Chile, Colombia, Mexico and Peru. Garrigues is also a member of Taxand, the first global network ofindependent tax advisors with partners in 40 countries and more than 2,000 professionals.

Fernando Vives

Garrigues Hermosilla, 328001 MadridSpain

Tel: +34 91 514 5200Fax: +34 91 399 2408Email: [email protected]: www.garrigues.com

Partner. Head of the Garrigues Corporate / Commercial LawDepartment which includes: Financial Services, Real Estate, Energy& Telecommunications (Utilities), EU and Antitrust and Mergers &Acquisitions.Education: Graduated in Law and Economics and BusinessAdministration from Universidad Pontificia de Comillas (ICADE).Professional career: Fernando Vives has over twenty yearsexperience at Garrigues, where he was made a partner in 1998. Hepractices in the financial services area, specialising on corporatefinance, restructuring transactions and acquisitions (M&A), takeoverbids, issues and offerings of securities and regulatory matters onlisted companies. He regularly advises on large M&A transactionsand is very active in private equity, where he acts in transactionalwork and debt raising. He also has a wide experience in theinsurance industry where he renders advice to many insurancegroups operating in Spain.Member: Madrid Bar Association. Commercial Law professor atICADE, the Garrigues business and training center and ESADE.



Chapter 31

Lenz & Staehelin

Switzerland



The companies covered in the below answers are organised asstock corporations.


The primary sources of law relating to corporate governance inSwitzerland are the following:

Swiss Federal Code of Obligations (CO), in particular Art.620 et seq., which govern stock corporations and are in partmandatory and in part non-mandatory and apply (withexceptions) to any Swiss corporation, whether privately heldor listed on a stock exchange.Swiss Federal Act on Stock Exchanges and SecuritiesTrading (SESTA) and its implementing ordinances whichcontain, amongst other things, rules regarding the disclosureof significant shareholdings, and public takeover offers withrespect to Swiss companies listed on a stock exchange inSwitzerland.Listing rules (Listing Rules) enacted by SIX SwissExchange (formerly SWX Swiss Exchange) and itsimplementing directives which contain, amongst otherthings, periodic financial reporting and other continuing andad hoc reporting rules applying to companies whose sharesare listed on SIX Swiss Exchange. SIX Swiss Exchangeholds the status of self-regulatory organisation under theSESTA. The Listing Rules are currently under revision; it isexpected that the revised listing rules will come into effecton 1 July 2009.Directive on Information relating to Corporate Governance(SIX-DCG) enacted by the SIX Swiss Exchange whichrequires Swiss companies listed on SIX Swiss Exchangeand non-Swiss companies whose shares are listed on SIXSwiss Exchange, but not in their home jurisdiction, todisclose in their annual reports certain information on theboard and the senior management, their compensation andthe control mechanism.Directive on the Disclosure of Management Transactions(SIX-MTD) enacted by SIX Swiss Exchange which requiresSwiss companies listed on SIX Swiss Exchange and non-Swiss companies whose shares are listed on SIX SwissExchange but not in their home jurisdiction to disclosetransactions in the company’s own shares by members of theboard and the senior management.

Swiss Code of Best Practice for Corporate Governance(SCBP) issued by economiesuisse, the largest umbrellaorganisation representing the Swiss economy inSwitzerland, which sets corporate governance standards inthe form of non-binding recommendations primarily forpublic Swiss companies.

In addition, companies have articles of association and internalorganisational regulations which, within the limits of the law, mayprovide for additional rules in the area of corporate governance(see question 5.2). Further, special or different rules on corporategovernance exist in Switzerland for banks and insurancecompanies and for investment companies with variable capital(SICAV) or fixed capital (SICAF) within the meaning of the SwissFederal Act on Collective Investment Schemes.


The most recent amendments relate to extended transparency, inparticular the disclosure of board and management compensation(see question 3.3) and, as regards disclosures of purchases andsales of relevant participations, where the legislator has introducedadditional thresholds (see question 2.5). An amendment proposed by the Swiss government in December2007 will, if adopted by parliament, increase shareholders’ rightsfor information, impose annual re-election of all the directors andlimit proxy voting of banks and representatives of the company’smanagement. In addition current discussions on (excessive) topmanagement salaries are fuelled by a popular initiative which callsfor a vote on strict management pay rules. As a reaction, the Swissgovernment has amended its proposed bill of December 2007 tosubmit indirectly a counter-proposal to the popular initiative whichdilutes somehow the proposals of the popular initiative. If thegovernment proposal is adopted by parliament, the board of listedcompanies will have to implement regulations defining theprinciples and elements of board and senior managementcompensation and render account of compliance with suchregulations by way of a written remuneration report to be disclosedin the annual report. In addition, the fees to be paid to the membersof the board are to be approved beforehand by the relevant annualshareholder meeting in a binding vote; further, the board will haveto put the fees paid to the senior management to a consultative voteat the subsequent annual shareholder meeting.However, these issues are under discussion and formaldeliberations in parliament have not started yet.

Andreas von Planta

Patrick Schleiffer



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2 Shareholders


The operation and management of a company is by statutory lawwith the management body (board and senior management), andsuch power may not be withdrawn by way of a shareholders’resolution (certain exceptions apply with respect to anti-takeoveractions in the event of a public takeover). Accordingly, under Swisslaw, shareholders have no direct rights or powers in the operationand management of a Swiss company. However, shareholders areto vote on the appointment and the removal of the members of theboard whenever a shareholder meeting is held and its agendaprovides for the appointment or removal of the members of theboard. Thus, shareholders may indirectly influence the course ofaction taken by the board by threatening or bringing removalmotions. There are additional decisions which may have an impacton the operation of a company and which are required to bereserved to the shareholders, e.g. change of the company’scorporate purpose, approval of mergers, declaration of dividends,and increase or decrease in the company’s share capital.


Shareholders may only be held responsible for the acts and/oromissions of the company where they acted as actual orconstructive founder, organ or agent of the company. In exceptionalcases the corporate veil of a company may be pierced on thegrounds of abuse of rights, particularly where a sole shareholdercommingles its own funds and those of the company, disregardscorporate formalities, and where the company is severelyundercapitalised. Also, controlling shareholders owe no fiduciaryduty to the company and its minority shareholders unless acting asactual or constructive organ or agent of the company.


The board may cancel the entry in the share register of ashareholder and nominee with voting rights if the entry in the shareregister is based on false information. Further, upon a publictakeover of a listed company where 98% of the shares have beenacquired by the bidder, the remaining 2% may be cancelled, and,upon a merger to the extent the bidder holds 90% or more of thevoting rights in the target company, the remaining 10% may beforced to accept cash or any other kind of assets in exchange fortheir shares in the target company.Under a recently enacted amendment of the SESTA, the votingrights of shareholders who have acquired or sold their shares inviolation of disclosure rules, may be suspended for up to five yearsby the court. Such suspension may be requested by the SwissFinancial Market Supervisory Authority (FINMA), the company orany of its shareholders.


In general, the members of the board are liable to the shareholdersfor damage caused to them by any intentional or negligent violationof their duties (see question 3.6).Resolutions of the board may not be challenged in court.

Exceptionally, however, board resolutions which are so defective asto be incompatible with the basic structure or organisation of thecompany may be declared void following a petition of shareholders.


Under Swiss corporate law, there are no statutory limitations on thenumber of shares a shareholder may hold or the speed with whichhe can build a stake in a company. To the extent provided in thearticles of association, listed companies with registered shares mayhowever refuse to register shareholders in the company’s shareregister with voting rights, if (i) a shareholder, or shareholdersacting in concert, exceed a certain defined percentage of registeredshares in the company or (ii) the acquirer, on the company’s request,does not state that he holds the acquired shares in its own name andfor its own account. In addition, the articles of association mayprovide for voting restrictions so that a shareholder may onlyexercise its voting rights up to a certain percentage. Further, thearticles of association may refuse the registration as a shareholderwith voting rights if such registration would prevent the companyfrom providing evidence of Swiss control as is required by certainSwiss laws. Further limitations and restrictions apply with respectto regulated industries (e.g., banks and insurance companies) and inthe case of a public takeover.As regards disclosure, under the SESTA and its implementingordinance, whoever, directly or indirectly or acting in concert,acquires or sells shares in a Swiss company listed on a stockexchange in Switzerland and thereby reaches, exceeds or fallsbelow the threshold percentages of 3, 5, 10, 15, 20, 25, 331/3, 50 and662/3% of the voting rights must notify the company as well as thestock exchange within four trading days. The company then has tomake regulatory announcements of this information by using SIXSwiss Exchange’s electronic reporting platform. The disclosureobligations are (inter alia) also triggered by put and call options andconversions rights. Further, Swiss company law requires listedcompanies to disclose in their annual report the identity ofshareholders or organised groups of shareholders with an interest inshares of more than 5% (if the articles of association provide for apercentage restriction of shareholders at less than 5%, it is suchlower percentage which applies to this disclosure). As to dealing inshares of the company by the members of the board or the seniormanagement, see question 3.4.


Swiss corporations need to hold an annual shareholder meetingwithin six months after the close of the business year and may holdother (extraordinary) shareholder meetings as and when they needto. All shareholders are entitled to be given notice of shareholdermeetings in the form provided by the articles of association at thelatest 20 days prior to the day of the meeting.The prevailing view in Switzerland is that companies whose sharesare in the form of registered shares may provide in their articles ofassociation for the use of electronic communications toshareholders; accordingly, it should be possible to send out therelevant notice for calling a shareholder meeting to the holders ofregistered shares in electronic form only.Shareholders representing at least 10% of the share capital mayrequest that a shareholder meeting be convened. Shareholdersrepresenting at least 10% of the share capital or an aggregate parvalue of at least CHF 1 million may request that a specific item be

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put on the agenda irrespective of the board’s backing.Shareholders may participate in the shareholder meeting personallyor by proxy. The articles of association may limit proxy-representation to other shareholders.Swiss corporate law does not provide for communication rights ofdissident shareholders which would entitle them to require theboard to circulate their statements among the shareholders or tomake available the name and address of the other shareholdersregistered in the company’s share register to the dissidentshareholders in order that they can contact them. Thus, in practice,proxy fights are mainly fought by using the media to make knownthe relevant positions of a dissident shareholder to the othershareholders.The shareholder meeting may pass resolutions and carry outelections by absolute majority of the votes allocated to the sharesrepresented. For certain specific resolutions, however, such as thechange of a company’s corporate purpose, the creation of shareswith privileged voting rights, restriction of the transferability ofshares, the limitation or suspension of pre-emptive rights ofshareholders in a capital increase requires a qualified majority of atleast two-thirds of the votes represented at the relevant shareholdermeeting and an absolute majority of the nominal value of the sharesrepresented.



In principle, Swiss corporate law provides for a one-tier boardstructure. However, the board is granted considerableorganisational discretion. Save for non-transferable corecompetences, such as strategic management, appointment andremoval of the members of the management, the supervision of themanagement and the set up of a sufficient internal controlling andreporting system, the board may delegate the management to anindividual or to a senior management. In listed companies, the dayto day management is typically delegated to the chief executiveofficer or the senior management resulting in a two-tier boardstructure. Special rules apply to banks and insurance companieswhich must establish a two-tier structure with a functional andpersonal separation of operative management and supervision.Swiss law does not require that the functions of the chairman of theboard and the CEO be separated (except for banks and insurancecompanies). To the extent the board decides that a single individualshould assume the functions of the chairman of the board and theCEO, the SCBP recommends that the board provide for adequatecontrol mechanisms, e.g. by appointing a non-executive boardmember (lead director) responsible for such control.Pursuant to Swiss law, there is no required minimum number ofnon-executive or independent directors. The SCBP recommendsthat the majority of the board be composed of non-executivedirectors, i.e. members who do not perform any line managementfunction within the company.Neither Swiss corporate law, nor the Listing Rules or any otherdirectives of SIX Swiss Exchange provide for mandatory boardcommittees. The SCBP recommends that an audit, compensationand nomination committee be established. The members of theaudit committee should be non-executive, preferably independentdirectors and the majority of the members (including the chairman)should be experienced in accounting matters. The members of thecompensation committee should be independent directors. TheSCBP defines “independent director” as a non-executive board

member who was not a member of the executive management in thepast three years and who has no, or only comparatively minor,business relations with the company. Special rules apply to banksand insurance companies.


The shareholder meeting appoints and removes the members of theboard of directors (see question 2.1).The term of office is usually defined in the company’s articles ofassociation. In the absence of a specific provision, Swiss companylaw provides for a default term of three years and a maximum of sixyears. In practice, either a term of one or three years is common.In case the term of office is three years, the articles of associationor the internal organisational regulations generally provide forstaggered terms so that every year a third of the directors are to benewly appointed or re-elected.


Listed companies are obliged to disclose the total amount of allremunerations and loans granted to members of the board and thesenior management. In addition, remunerations and loans ofpersons close to the members of the board or the seniormanagement have to be disclosed. Remunerations and loansgranted to every member of the board have to be disclosedindividually, comprising the name and function of the member.With respect to the members of the senior management, only thehighest compensation awarded, indicating the recipient and hisfunction, has to be disclosed. The respective disclosure needs to bemade in the notes to the annual financial statements. In addition,the SIX-CGD requires the disclosure of information on the basicprinciples and elements of compensation and any share and optionplans in the annual report (see question 5.2).The SCBP provides for detailed recommendations pursuant towhich the board has to implement a remuneration system for themembers of the board and the senior management and to prepare aremuneration report for the annual shareholder meeting describingthe remuneration system and its application in the business yearunder review. It is further recommended that the board either bringthe remuneration report into the discussion during the agenda items“approval of the annual financial statements” or “discharge to theboard” (so that the resolution to approve the annual financialstatements and the resolution of discharge, respectively, are takenby the shareholders in knowledge of the content of the remunerationreport) or put the remuneration report to a consultative vote at theannual shareholder meeting in question.Swiss corporate law does not provide for specific rules regardingdirectors’ contracts. The SCBP recommends that as a principle thecompany not grant “golden parachutes” or severance compensationto the members of the board or the management.


Directors may own shares in their companies.As to disclosure, the significant shareholding notificationrequirements of the SESTA apply equally to director shareholders(see question 2.5). Further, Swiss corporate law requires that any



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shares as well as option and conversion rights of the members of theboard, the senior management and such persons close to them bedisclosed on an individual basis in the notes to the annual financialstatements of the company.As regards dealing in the company’s own shares, listed companiesare under the SIX-MTD obliged to report to SIX Swiss Exchangetransactions conducted by members of the board and the seniormanagement in the company’s own shares, conversion and shareacquisition rights, as well as in financial instruments the price ofwhich is influenced primarily by the company’s own shares. If thetransactions concluded by an individual during a calendar monthexceed CHF 100,000, SIX Swiss Exchange publishes the person’sfunction (executive or non-executive member of the board ormember of senior management) but not his name.


Swiss company law requires that at least one board meeting be heldper year for the purpose of preparing the annual general shareholdermeeting. In addition, each board member may request that a boardmeeting be convened at any time. The SCBP recommends that atleast four meetings of the board be held annually according to therequirements of the company and that its members convene at shortnotice if necessary.


In fulfilling their responsibilities, the members of the board have tocomply with the duties of care and of loyalty as well as the duty totreat shareholders equally. The duty of care requires the boardmembers to comply in their actions with standards of care as usualin a given professional or functional context. The duty of loyaltyrequires a director not to pursue his interests to the disadvantage ofthe company’s interests. Under Swiss law, the duties of care andloyalty are owed to the company rather than towards theshareholders. The duty of equal treatment requires the board totreat shareholders under the same circumstances equally.Deviations from equal treatment are permitted if such deviations arein the company’s interest and justified by a valid reason.In fulfilling its responsibilities, the board has to safeguard thecompany’s interests. The company’s interests as commonly definedin Switzerland encompass not only the interests of the shareholdersbut also the interests of other stakeholders such as the company’semployees (see question 4.1).Upon breach of the board’s duties, which has the consequence ofdamage to the company, the company or each of the shareholdersmay sue the directors; creditors are only entitled to sue the directorsfor damages incurred by the company if the company is bankrupt.If the board has delegated the management of the company incompliance with the statutory requirements, and the damage hasbeen caused by the management, the board is exempt from liabilityif careful selection, instruction and supervision of the managementcan be demonstrated.


According to the SCBP, the board is to provide leadership andcontrol to the company. It is responsible for the strategic directionof the company and should ensure that strategy and finances are in

harmony. Further, the board should ensure that management andcontrol functions are allocated appropriately.


In general, Swiss law does not require the disclosure of boardpractices. For listed companies, the SIX-CGD requires that theydisclose information on its internal organisational structure and onbasic principles regarding the allocation of responsibilities betweenthe board and the senior management. Such disclosure is to bemade in the annual report (see question 5.2).


The general view in Switzerland is that companies are permitted tomaintain insurance in respect of directors’ and officers’ liability tothe company and to pay for the premium. An undertaking of the company to indemnify directors and officersfor liabilities is likely to be held invalid except for costs incurred inconnection with lawsuits unsuccessfully brought against a directoror officer.



Neither Swiss company law, the Listing Rules (and anyimplementing directives enacted thereunder) nor the SCBP providefor specific rules with regards to corporate social responsibility.However, the board in determining the company’s best interest hasto consider not only the interests of the shareholders but also thoseof other stakeholders such as the employees of the company (seequestion 3.6).


Although unions have contributed to some extent to the recentdiscussion in Switzerland of corporate governance-related issues, inparticular with respect to board and management remuneration,employees do not play a prominent role in corporate governance. Inparticular, Swiss law does not require that employees berepresented on the board of a Swiss company.

5 Transparency


The ultimate responsibility for disclosure and transparency restsupon the board.


As regards financial reporting, companies listed on the mainsegment of SIX Swiss Exchange must publish audited annualfinancial statements and unaudited half-year interim financial

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statements in accordance with either IFRS or US GAAP and inline with the Listing Rules and the relevant directives. Special ordifferent rules apply to companies whose shares are listed on theEU compatible segment of SWX Europe in London, on thesegment of investment companies or real estate companies or onthe local cap segment of SIX Swiss Exchange. As regards theSWX Europe platform, however, SIX Swiss Exchange hasdecided to abandon this platform and to transfer trading of thecompanies concerned to the main segment of SIX Swiss Exchangeby mid 2009.As regards other information, listed companies have a duty todisclose potentially price-sensitive facts (ad hoc information) andto disclose in a separate section of their annual report information,amongst other things, on the group structure and shareholders, theboard and the senior management, basic principles and elementsof compensation and the share and option plans, changes ofcontrol and defence measures, and on information policy. Withrespect to such information the principle of “comply or explain”applies, i.e. the company must give specific reasons for eachinstance of non-disclosure to the extent it decides not to disclosecertain information. Further, listed companies have to disclose inthe notes to their financial statements the amount of compensationpaid to the members of the board and the senior management andthe shares in the company held by them (see question 3.3 andquestion 3.4).Copies of the articles of association may be requested from therelevant commercial register with which the articles of associationmust be filed. The SCBP recommends that the articles ofassociation be made available from the company in writing or in

electronic form at any time. The company’s organisationalregulations do not need to be made publicly available. However,the company must inform the shareholders upon their requestabout the organisation of the management (see question 3.8).Often, the articles of association as well as the organisationalregulations can be downloaded from the company’s website.

5.3 What is the role of audit and auditors in suchdisclosures?

The company’s auditors have to audit the annual financialstatements (but not the interim financial statements). In addition,as the information on remuneration and the shareholding interestsof the board and the senior management must be disclosed in thenotes to the annual financial statements, such disclosures in thenotes must be verified by the company’s auditors in the course oftheir ordinary audit activities. Further, the company’s auditorshave to verify whether an internal control system exists.


Listed companies are required to make the published annual andinterim financial reports available in electronic form on theirwebsite. Further, they must make available any ad hocinformation on the company’s website at the same time it isdistributed to SIX Swiss Exchange and electronic informationsystems such as Bloomberg or Reuters.



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SwitzerlandLenz & Staehelin

Patrick Schleiffer

Lenz & StaehelinBleicherweg 58CH-8027 ZürichSwitzerland

Tel: +41 58 450 8000Fax: +41 58 450 8001Email: [email protected]: www.lenzstaehelin.com

Patrick Schleiffer has been a partner with Lenz & Staehelin since2002 and heads the capital markets group of Lenz & Staehelin inZurich. His main areas of practice are capital markets, stockexchange and securities law, investment fund law, financial servicesregulation and corporate governance. Patrick Schleiffer holds lic.iur. and Ph.D. degrees from the University of Zurich and a MCJdegree from the New York University School of Law, New York. Hewas admitted to the Zurich Bar in 1995 and to the New York Bar in1997. Patrick Schleiffer is admitted as a recognised representativefor the listing of securities on SIX Swiss Exchange.

Andreas von Planta

Lenz & StaehelinRoute de Chêne 30CH-1211 Genève 17Switzerland

Tel: +41 58 450 7000Fax: +41 58 450 7001Email: [email protected]: www.lenzstaehelin.com

Andreas von Planta was born in Basel in 1955. He holds lic. iur.and Ph.D. degrees from the University of Basel and an LL.M. fromthe Columbia University School of Law, New York. He passed hisbar examinations in Basel in 1982. Since 1983, he has lived inGeneva, working for Lenz & Staehelin where he became a partner in1988. He specialises in corporate law, corporate finance, companyreorganisations and mergers & acquisitions. He is a member ofgoverning or supervisory bodies of several Swiss listed companiessuch as Holcim AG, National-Versicherungs-Gesellschaft AG andNovartis AG. Furthermore, he has been admitted as a recognisedrepresentative for the listing of securities on SIX Swiss Exchange,used to be chairman of the Geneva Association of Business Law andis a co-editor of the Swiss Review of Business Law. Since 2008,Andreas von Planta chairs the Regulatory Board (formerly theAdmission Board) of SIX Swiss Exchange, the independent bodyentrusted with the adoption of self regulation within SIX SwissExchange.

Lenz & Staehelin is the largest law firm in Switzerland with offices in Geneva, Zurich and Lausanne. The firm comprisesmore than 150 qualified lawyers and provides advice mainly to larger corporate clients in Switzerland and abroad ona wide range of legal matters. Lenz & Staehelin operates at both the national and international level. In Switzerland,it has a prominent position in the two main language areas and is equipped to provide its international clients withadvice on all relevant domestic and cross-border legal matters.



Chapter 32

Vasil Kisil & Partners

Ukraine



Among different companies which may be established in Ukraine,only joint stock companies established under the Companies Law,1991, issue shares as securities. Other companies (e.g., LLCs)cannot issue shares as securities. Currently there are two types ofjoint stock companies: “open”; and “closed”. Shares of a closedjoint stock company are distributed among its founders andshareholders (their shares cannot be listed at a stock exchange),while shares of open joint stock company are tradable at a stockexchange. On 29 April 2009 new Joint Stock Companies Law comes into forceproviding two other types of joint stock companies: public (whichcan have their shares listed at stock exchange); and private (theirshares, similarly to closed companies, cannot be listed). For twoyears starting from 29 April 2009 and up to 29 April 2011 thereshall be operating all four types of joint stock companies mentionedabove. By 29 April 2011 open and closed joint stock companiesestablished under Companies Law, 1991, shall cease to exist (to beconverted into public or private joint stock companies or any othertypes of companies). Passing by open or closed joint stockcompany a decision on a change of the charter capital, sharesdenomination or issuance of securities (i.e., shares or bonds), before29 April 2011, is subject to converting of the company into eitherpublic or private - i.e., one of the types of companies provided bythe new Law as well.Ten stock exchanges are registered in Ukraine; however, PFTSStock Exchange (“PFTS”) is the largest one and accounts for mostof the securities transactions executed at the stock exchanges inUkraine. Based on the above, only Public Joint Stock Companies listed atPFTS (the “Companies”) are subject to our further review.


The Civil Code, 2003, and the Commercial Code, 2003, as well asthe Law on Securities and Stock Market, 2006, provide basicregulation on corporate governance matters in Ukraine. New JointStock Companies Law (comes into force on 29 April 2009)represents the main piece of legislation on Companies’ corporategovernance. Development of a significant number of by-laws isstill required to specify and detail important provisions of the Law.The State Securities and Stock Market Commission of Ukraine (the

“SSSMCU”) is the principal state authority regulating activities ofthe Companies including corporate governance matters. Thus, in2003 the Commission passed the Principles of the CorporateGovernance, which, however, do not have the force of law andhave a recommendable nature only (National Bank of Ukraineissued the Methodological Guidelines on Improvement ofCorporate Governance in the Banks of Ukraine, 2007, which areto amplify the Principles developed by the SSSMCU). In 2008 theSSSMCU passed Model Regulation on Corporate Governanceof the Open Joint Stock Companies. The SSSMCU approved theRegulation on disclosure of information by issuers of securities,2006, which provides specific disclosure requirements.Considering introduction of the new Joint Stock Companies Law,all the above-mentioned regulations are subject to certain furtheradjustments and revision.General regulation is provided by the PFTS Rules which establishrequirements for listing at that stock exchange. Potentially,corporate governance matters can be regulated by resolutions of theCouncil of PFTS as well.The Articles of Association (Charter) is a mandatoryconstitutional document of any Company and is an importantsource of corporate governance regulation. It specifies the structureof the management bodies of the Company, division of powersbetween the management bodies, terms and procedures ofmanagement performance, etc. Shareholders’ Agreement (whichis optional and has limited applicability), inter alia, corporategovernance matters as well. According to the new Joint StockCompanies Law, a Shareholders’Agreement may impose additionalobligations on shareholders, including an obligation to participatein the shareholders’ meetings. Specific corporate governance matters may be covered by internalregulations of the Company, such as Regulations on Holding theShareholders’ Meetings, Regulations on Supervisory Board, etc. Court practice in Ukraine is considered neither legislation norprecedent; however, particular cases on corporate mattersconsidered by the Supreme Court of Ukraine, which is the ultimateinstance court, may serve as an official guideline on particular legalmatters as well as the court practice summaries which areoccasionally issued by the superior court authorities whichrepresent implementation of the legislation by the courts. Thus,Presidium of the Superior Commercial Court of Ukraine introducedRecommendations to the commercial courts regardingimplementation of the legislation on corporate matters, 2007.Plenum of the Supreme Court of Ukraine issued Resolution No. 13on Corporate Matters Disputes Practice, 2008, which addressesimportant corporate governance matters as well. New Joint StockCompanies Law provisions introduce brand new regulation of

Ivan Y. Yurchenko

Denis Y. Lysenko



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Vasil Kisil & Partners Ukraine

particular corporate governance matters, and therefore developmentof new court practice may follow.


Passed by the Parliament in 2008 the new Joint Stock CompaniesLaw had been expected to be introduced during the last 10 years. Itprovides more progressive corporate governance concepts incomparison with the currently effective Companies Law, 1991.Unfortunately, the new Law provides unclear and sometimesambiguous regulation of certain corporate governance matters aswell. Extremely limited clarifications on application of the Law areavailable so far. Development of significant number of bylaws isrequired by the Law; evidently, most of them shall be passed afterentry of the Law into force. State authorities recognise that for acertain period of time particular issues of operation of theCompanies, including issuance of shares, shall be regulated“manually” (i.e., on a case-by-case basis). One of the crucial matters with respect to introduction of the newLaw is whether it has a priority before the Companies Law, 1991,in regulation of the joint stock companies operating at the moment.Joint stock companies established under the Companies Law, 1991,shall bring their articles of association in compliance with the newLaw in two years after its coming into force; however, new Lawstipulates that all other laws and regulations are applicable to theextent they are in compliance with the new Law, which in practicemay make unclear regulation of the joint stock companiesestablished before the coming of the new Law into force.Rules of the stock exchanges are expected to be changed as well.The Companies are obliged to be listed at a stock exchange;however, current stock exchange internal requirements, includingPFTS Rules, restrict listing of the newly established companies, aswell as companies which do not have substantial financial results(e.g., sales revenue, net profit), and therefore need to be amended.

2 Shareholders


Shareholders themselves are not considered as a management bodyand do not perform direct management of the Company, howeverthey may enjoy particular rights, e.g., to participate in theshareholders’ meeting and to vote (with certain limitations for theholders of preference shares), to call for the shareholders’ meeting,to include items in the shareholders’ meeting agenda, to receivespecific information on operations of the Company, etc. The shareholders’ meeting is a supreme management body of theCompany and may consider any matter of the Company’s business.Although, by virtue of the Law, Articles of Association or byparticular decisions of the shareholders’ meetings certain powersare delegated to other management bodies of the Company (i.e.,supervisory board or management board). According to the law, particular issues are within exclusivecompetence of the shareholders’ meeting and may not be delegatedto any other management body, for instance:

revision of the Articles of Association (Charter); change of the registered capital of the Company;placement of shares; election and withdrawal of any member of the supervisoryboard and audit commission;

approval of the annual financial statements;approval of the principles of corporate governance of theCompany; andwinding up the Company.

Articles of Association may extend the list of the matters withinexclusive competence of the shareholders’ meeting, however,cannot reduce it. General description of procedure of holding theshareholders’ meeting is discussed in question 2.6 below.


Shareholders may hardly find themselves personally liable for anyacts or omissions of a Company, unless, and to the extent, they havenot contributed to the registered capital in full (if so provided by theArticles of Association of the Company). Shareholders who havenot contributed in full to the registered capital are jointly andseverally liable to the Company in the amount of the non-contributed capital.


Applicable legislation does not envisage any grounds fordisenfranchising of a shareholder, unless the procedure of issue ofthe shares is recognised invalid by the court.


Shareholders can initiate administrative or criminal proceedingsagainst members of the management bodies in case of respectiveadministrative/criminal offences by the latter; however,shareholders may hardly seek damages from the members of themanagement bodies in civil proceedings, but rather from theCompany itself. Ukrainian law does not provide specific enforcement actionsagainst particular members of the management bodies (i.e., themanagement board, supervisory board or audit commission). Members of the management board are considered to be employeesof the Company, and therefore are liable to the Company only.Employee’s (i.e., members of the management board) liability as arule is limited to an average monthly salary of such employee.Members of other management bodies may serve in a capacity otherthan employees and consequently may be fully liable.


There are no specific limitations on interest in shares of theCompany held by a shareholder; however, acquisition of 10% andabove interest in ordinary shares of the Company (including sharesheld or acquired by any affiliated persons) is subject to preliminarydisclosure to the Company, the SSSMCU, as well as the stockexchange where the Company’s shares are listed. Publishing ofrelevant notification in the designated official periodicals isrequired too.In case a person has acquired 50% and more of ordinary shares ofthe Company (including shares held or acquired by any affiliatedpersons), an offer to purchase the rest of the ordinary shares of theCompany shall be made to all the shareholders (unless the shareswere purchased in the process of privatisation of the state andmunicipal property).

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Any change of the shareholding amounting to at least 10% of theshares of a Company (including shareholdings held by the membersof the management body) is subject to disclosure by the Company. While acquiring a controlling shareholding in a Company (25% or50%), merger clearance issues should be considered as well.


A Company is to hold shareholders’ meetings annually, not laterthan on 30 April of each following year (annual meetings). Allother shareholders’ meetings are extraordinary. Shareholders’meetings (annual and extraordinary) are called by the supervisoryboard (where the supervisory board is not established - by themanagement board). Shareholders holding more than 10% of theordinary shares may require supervisory board to call theextraordinary shareholders’ meetings. In case the request to call themeeting is disregarded by the supervisory board, such shareholdersholding more than 10% of the ordinary shares may call the meetingthemselves.The shareholders are called to the meeting by relevant personalnotifications as specified in the Articles of Association (usually bysending a special registered mail). Notification shall be sent to thestock exchange as well. Companies having more than 1,000shareholders shall perform relevant notification in the designatedofficial periodicals. Personal notification must be performed notless than 30 days prior to the meeting and must include an agendaof the meeting. Issues not included in the agenda cannot beconsidered by the shareholders’ meeting. Any shareholder may suggest additional issues to be included in theagenda of the shareholders’ meeting not less than 20 days prior tothe meeting. It is mandatory that suggestions of the shareholdersholding more than 5% of the ordinary shares be included in theagenda. Notification with regard to amendments to the agendamust be delivered to the shareholders not less than 10 days prior tothe meeting. Respective notification shall be sent to the stockexchange as well. Extraordinary shareholders’ meeting shall be held within 30 daysfrom the date of respective request. Supervisory board may decideto hold the extraordinary shareholders’ meeting in 15 days after duenotification, provided that shareholders shall be restricted to includeany changes to the agenda of the meeting. If there is lack of thequorum, re-call of the shareholders’ meeting shall not be performedin such case.The shareholders’ meetings are considered to have quorum ifshareholders holding at least 60% of ordinary shares are registeredat the meeting. In case the agenda includes matters requiring votingof preference shares holders, the shareholders’ meeting shall beconsidered to have quorum on such matters if shareholders holdingat least 60% of preference shares are registered.Voting at the shareholders’ meetings requires either a simplemajority of votes of shareholders present at the meeting, or a specialmajority of more than 75% of all votes (all ordinary shares). Eachordinary share represents one vote. The matters where preferenceshares holders have a vote require either simple majority of votes ofshareholders (holding preference shares) present at the meeting, ormore than 75% of all votes of shareholders holding preferenceshares. Election of the members of the supervisory board/auditcommission is performed by cumulative voting, when the totalamount of the votes held by a shareholder is multiplied by thenumber of members of the management body, and so calculatednumber of votes may be distributed by the shareholder between thecandidates at his/her own discretion.

Shareholders may participate in the meetings in person as well as byproxy. The shareholders’ meetings are to be held in Ukraine within themunicipality where the legal seat of the Company is registered,unless 100% of the shares are held by non-residents.



Management of the Companies has three tiers: shareholders’meeting (discussed in question 2.6 above); a supervisory board; anda management board (as an executive body). An audit commission(or sole auditor) is established in a Company as a controlling body.A supervisory board is established to protect shareholders rights andto control and regulate the activity of the management board.Establishment of a supervisory board for Companies having morethan 10 shareholders is compulsory. The Joint Stock CompaniesLaw envisages particular issues to be within exclusive competenceof the supervisory board (they may not be delegated to themanagement board), including the following:

election and withdrawal of the head and members of themanagement board;taking decision on holding of the shareholders’ meeting;taking decision on issue of securities, other than shares; andtaking decision on execution by the Company of certainmaterial transactions.

Articles of Association (Charter) may provide for an extended listof the matters within exclusive competence of the supervisoryboard, however, cannot reduce the list provided by the Law, unlesscertain issues provided by the law to be within the exclusivecompetence of the supervisory board has been transferred to theshareholders’ meeting. Supervisory board shall hold meetings on at least quarterly basis,and it is considered to have quorum if at least 50% of the membersattend the meeting. Supervisory board may be called by themembers, by the management board as well as the auditcommission. Each member of the Supervisory board has one vote.Articles of Association of the Company may provide that head ofthe Supervisory board has the casting vote. The management board is subordinate to the shareholders’ meetingand to the supervisory board. There are no requirements as to theminimum or maximum number of members of the executivemanagement body; it can be either collective (management board)or sole (director) (herein generalised as the “management board”).The board shall have a chief executive officer who is considered tobe the manager of the Company acting for and on behalf of theCompany according to the decisions taken by the board without apower of attorney. The law does not envisage the possibility toappoint a non-executive director. All directors (members of themanagement board) are individuals only, and have to be employeesof the Company. Therefore, the local work permit should beobtained for appointment of a foreigner as director of the Company. The Companies having more than 100 shareholders holdingordinary shares shall establish an audit commission (otherwise it ispermitted to have a sole auditor). The Law does not providespecific requirements to the number of members of the auditcommission. It controls the financial and commercial activity ofthe management board. There is a prohibition to appoint a personas member of an audit commission simultaneously being memberof any other management body of the Company.



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Applicable legislation provides only general regulation of themanagement bodies operation, therefore their scope of powers,procedure of calling and holding the meetings, passing the decisionsand other issues can be detailed in the Articles of Association of theCompany.


The appointment and removal of members of the supervisory boardand the audit commission is within the exclusive competence of theshareholders’ meeting. Election of the members of the supervisoryboard/audit commission is performed by cumulative voting, whenthe total amount of votes held by a shareholder is multiplied by thenumber of members of the supervisory board, and so calculatednumber of votes may be distributed by the shareholder between thecandidates to such position at his/her own discretion. Members ofthe supervisory board/audit commission serve on a contractual basis,and their service can be terminated by the shareholders’ meeting asprovided by the respective contract. Shareholders cannot removeonly a particular member of the supervisory board elected by thecumulative voting, and if so decided by the shareholders’ meeting,all the members shall be removed simultaneously. The term of service of the members of the audit commission cannotexceed five years. Agenda of the shareholders’ meeting shallinclude the issue of appointment/removal of the supervisory board atleast once each three years. Management board is appointed and removed by the supervisoryboard, unless otherwise provided by the Articles of Association ofthe Company. Members of the management board are employees ofthe Company, and therefore general limitation to employment ofindividuals younger than 16 years applies. Legislation provides fora limited list of conditions for dismissal of the employees by aCompany which is beyond the scope of this review. A chiefexecutive officer (director) may enter into an employment contractwith the Company where additional causes/conditions for his/herdismissal may be provided. There are no specific requirements to members of the managementbodies of the Company, however the applicable legislation envisagesthat certain persons cannot be appointed as members of managementbodies of the Company, for instance: Members of Parliament andgovernment of Ukraine; chief officers of the state executiveauthorities; military personnel; officers of the prosecutor’s office,courts, public officers, etc.

3.3 What are the main legislative, regulatory and other sourcesimpacting on contracts and remuneration of members ofthe management body?

According to the new Joint Stock Companies Law, members of theboard of directors shall be employed with the Company.Remuneration conditions shall be approved by the supervisoryboard, unless such decision is transferred to the competence of theshareholders’ meeting. Regulation of the director’s contract andremuneration falls under the employment laws also which arebeyond the scope of this review. Members of the supervisory boardact based on a civil contract entered with the Company, and thereforeCivil Code shall be the main legislative source regulating suchrelationships along with the Joint Stock Companies Law.Contractual and remuneration conditions of the management bodymember can be specified by internal regulations as well. Membersof the audit commission may act based on the employment, as wellas civil contract.


There is no specific limitation in relation to the amount of shareswhich members of the management bodies may hold. Disclose ofthe amount of shareholding held by members of the managementbodies is required at their appointment as well as on a regular basisdiscussed in question 5.2. Members of the management bodies, as well as other individualshaving access to insider information, are prohibited from enteringinto any transactions relying on the non-disclosed insiderinformation.Other cases when disclosure is required, discussed in questions 2.5and 5.2 herein, are applicable to the shareholders being members ofthe management bodies as well.


There is no specific regulation on the procedure of meetings of themanagement bodies in the legislation; therefore procedures forcalling, holding and passing decisions by the management bodiesshould be stipulated in the Company’s Articles of Association.Procedures provided by law (e.g., 50% quorum requirements for thesupervisory board meetings), in most, cases can be adjusted by theArticles of Association.


The applicable legislation of Ukraine stipulates that the officers ofthe management bodies of the Company shall act for the benefit ofthe Company and may not disclose commercial secrets as well asconfidential information of the Company unless it is directlyprovided by the law. Certain recommendations are provided by theCorporate Governance Principles and limited provisions of theemployment laws which are beyond the scope of our review. Theseduties, however, may be specified by the Articles of Association ofthe Company, internal regulations as well as by contracts enteredwith the members of the management bodies.


Ukrainian legislation does not provide specific corporategovernance responsibilities/functions of members of themanagement bodies but of the management bodies itself.According to the new Joint Stock Companies Law the supervisoryboard is established to protect shareholders rights and to control andregulate the activity of the management board; the managementboard is responsible for management of day-to-day activities of theCompany, providing access to the information to the shareholders;the audit commission is established to audit the financial andcommercial activities of the Company. There is a generalperception that functions of the management bodies determineduties of the officers thereof. Articles of Association of theCompany, internal regulations as well as contracts entered with themembers of the management bodies may specify the duties of themanagement bodies.

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Companies are obliged to disclose to the public as well as to theSSSMCU their annual (quarter) reports on operations of theCompany, which include the list of members of the managementbodies of the Company, shares held by members of the managementbodies, etc. Additionally, the Company is obliged to announce anychange within the management bodies. The disclosures areperformed as discussed in question 5.2.


There are no restrictions to have insurance in respect of the liabilityof members of the management board of the Company. As discussed above, according to Ukrainian laws, members of themanagement board are considered to be employees of the Companyand are therefore liable before the Company only. Employee’s (i.e.,members of the management board) liability as a rule is limited toan average monthly salary of such employee. Members of othermanagement bodies may be fully liable.



Currently, there are no statutory requirements for corporate socialresponsibility. In practice Companies may implement specificprograms as part of their internal social responsibility programme.


Currently, employees are not effectively involved in corporategovernance in Ukraine. According to the new Joint Stock Companies Law, representativesof the trade union (or another body entering into the collective(bargaining) agreement on behalf of the employees) are authorisedto attend the management board meetings as well as participate inthe meetings of the supervisory board upon invitation of the latterwith a consultative vote only.

5 Transparency


A Company is obliged to disclose particular information (regularand special) on its activity to the public and SSSMCU (discussed inquestion 5.2). Shareholders or persons contemplating acquisition ofshareholding in the Company may be requested to disclose specificinformation as well (discussed in questions 2.5 and 3.4).


Companies must disclose two types of information: regular andspecial.Regular announcements include annual (quarterly - for Companieswhere the Ukrainian State holds at least 25% of the shares) reportswhich include business review, information on the shareholders,number and value of the Company’s shares, members of themanagement bodies, auditors’ reports, financial statements, etc. Special announcements shall include information which may havea significant impact on the price of the Company’s shares, forinstance: some material transactions with regards to shares of theCompany, significant borrowings of the Company, changes in themanagement bodies, decrease of the registered capital, bankruptcyproceedings, etc. Information is considered to be disclosed if (i) it has been includedin the news line of the State Securities and Stock MarketCommission of Ukraine, (ii) it has been filed as a report thereto, and(iii) it has been published in the designated periodicals. TheCompany may place relevant information on its own website onlyonce the required disclosures have been accomplished.As discussed in question 2.5 above, acquisition of 10% and aboveinterest in ordinary shares of the Company (including shares held oracquired by affiliated persons) is subject to preliminary disclosureto the Company, SSSMCU, the stock exchange where theCompany’s shares are listed as well as to publishing of relevantnotification.


Annual financial statements disclosed by the Company must beapproved by independent auditor. According to the new Joint StockCompanies Law, a person who is affiliated with the Company orwith any of the Company’s members of the management bodies, aswell as a person providing consultancy services to the Company,shall not be considered an independent auditor. The audit report shall include the data required by the auditstandards as well as information on violations of law occurred in thecourse of conducting of the commercial and financial activities bythe Company.


The Joint Stock Companies Law provides that any Company shallhave a website where information subject to disclosure shall beavailable as well. No specific clarification on these matters isavailable at the moment. According to effective regulations of theSSSMCU, information may be voluntarily published at theCompanies’ websites; placement of any significant information,which is subject to disclosure to the SSSMCU, on the website maybe performed only when the respective disclosure has beenperformed.

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Denis Y. Lysenko

Vasil Kisil & Partners17/52A Bogdana Khmelnytskogo St.Kyiv 01030Ukraine

Tel: +38 044 581 7777Fax: +38 044 581 7770Email: [email protected]: www.kisilandpartners.com

Denis Lysenko has been a partner at Vasil Kisil & Partners since2006; he joined the firm in 1999. His practice focuses on mergersand acquisitions, banking and corporate law, antitrust law,investments, and privatisation. Mr. Lysenko has extensive experience in representing the interests offoreign investors (lenders) in cross-border transactions involvingUkrainian assets, as well as in assisting Ukrainian companies -strategic investors in privatisation projects in the Central and EasternEurope. He cooperated with the European Commission on variouscompetition matters. Mr. Lysenko successfully led a team of thefirm’s lawyers in multiple M&A and investment projects in thefollowing industries: banking and insurance, real estate, steel,machine and shipbuilding, telecommunications, media, pulp &paper, agricultural and consumer goods sectors, etc. Hisrepresentative client roster includes: Central European MediaEnterprises (USA), SEB Group (Sweden), Standard Chartered Bank(UK), Energy Standard Group (Russian Federation), Royal PhilipsElectronics (the Netherlands), Google Inc. (USA), Swisscom AG(Switzerland), Salzgitter AG (Germany), Continium Group (Ukraine),Prominvestbank (Ukraine), and Kulczyk Holding S.A. (Poland).IFLR 1000 2009 edition recommends Denis Lysenko as one ofUkraine’s leading lawyers with the best track record for advising incorporate and M&A matters.

Ivan Y. Yurchenko

Vasil Kisil & Partners17/52A Bogdana Khmelnytskogo St.Kyiv 01030Ukraine

Tel: +38 044 581 7777Fax: +38 044 581 7770Email: [email protected]: www.kisilandpartners.com

Mr. Yurchenko has been a senior associate at Vasil Kisil and Partnerssince 2008; he joined the firm in 2007 fromPricewaterhouseCoopers Ukraine. Mr. Yurchenko has eight years ofsuccessful experience in servicing multinationals and localcompanies and specialises in corporate and tax law, mergers andacquisitions, as well as commercial, real estate, land and labour lawmatters. He advises the firm’s foreign and domestic clients on M&Aand tax structuring matters and documentation, as well assuccessfully providing continuous transaction support, being part ofthe firm’s corporate and M&A practice group.

Vasil Kisil & Partners is a market leader and one of the long-established law firms in Ukraine with an impeccablereputation and a unique expertise in providing top quality services to its clients.

Founded in 1992, the firm has assembled a talented team of experienced and skilled lawyers dedicated to the higheststandards of legal excellence and true to internationally-accepted professional ethics. VKP is consistently recognisedby independent international legal directories, such as European Legal 500, Chambers Global, The World’s LeadingLawyers, Chambers Europe, IFLR1000 and PLC WHICHLAWYER? YEARBOOK.

As a multidisciplinary law firm, VKP is well known, both locally and internationally, for its experience and practice inthe following areas: Antitrust & Competition, Banking & Finance, Corporate / M&A, Dispute Resolution, Energy &Natural Resources, PPP & Infrastructure Projects, Intellectual Property, International Trade, Labour & Employment, RealEstate and Construction, and Tax. Our industry expertise includes Agriculture & Food, Banking & Finance, Chemicals,Commodities and Raw Materials, Hotels & Leisure, Insurance, Media, Oil & Gas, Pharmaceuticals, Real Estate &Construction, Shipbuilding, Steel, Telecommunications and Transport.



Chapter 33

Al Tamimi & Company

United ArabEmirates



Corporate governance is relevant to all forms of companies.However, answers below will cover public joint stock companieswhose shares are eligible for listing on one of the UAE exchanges.Public joint stock companies and private joint stock companiesshare a similar regulatory regime. We note, however, that in this survey we will not cover companiesestablished in the Dubai Financial Centre eligible for listing on theDubai International Financial Centre exchange (“NASDAQDubai”) which is organised under a separate common law regimewithin the UAE and would require a separate survey.


The primary sources of law relating to corporate governance in theUAE are Federal Law No. 8 of 1988 on Commercial Companies asamended (the “CCL”) and Federal Law No. 51 of 2004 concerningthe Emirates Securities and Commodities Authority. In addition,there are certain rules and regulations including, but not limited to:Council of Ministers Resolution No. 12 of 2000 concerning theRegulations for Listing Securities and Commodities Authority (theAuthority) as amended, the Authority’s Board of DirectorsResolution No. 3 of 2000 concerning the Regulations as toDisclosure and Transparency, the Authority’s Board of DirectorsResolution No. 7 of 2002 concerning the listing of ForeignCompanies as well as the listing rules of the Dubai FinancialMarket (the “DFM”) and the Abu Dhabi Securities Market(“ADX”). The Authority promulgated a decision No. R/32 of 2007on Corporate Governance Code for Joint Stock Companies andInstitutional Discipline Criteria (the “Decision”). This Decision isapplied by the Authority as a binding regulation in respect of listedand public joint stock companies but not in respect of private jointstock companies. There are other regulations relevant to corporategovernance in the Dubai International Financial Centre (“DIFC”),which will not form part of this review as noted above. In line with the above, any company’s article/memorandum ofassociation must be drafted in line with the regulatory requirements.


In a world post the global financial crises in the UAE, in line with

many other jurisdictions, issues pertaining to remuneration ofdirectors, form of boards and appointment of independent members,all became very pressing topics. Further, the formation ofspecialised committees (audit etc.) also represents one of the keytopics being addressed in the UAE. At present, the UAE Commercial Companies Law is under revision,but there has been no public detail of the proposed overhaul of thelegislation.

2 Shareholders


The shareholders are the ultimate authority in any company. Theshareholders have the right to appoint and remove directors. Thenormal practice for appointing and removing directors is containedin the articles of association and statutes of the company ordetermined at general meetings of the shareholders. Typicallyshareholders delegate key management functions to the board ofdirectors, save for matters requiring shareholders resolution asmandated by law or the applicable listing regulations. By way ofexample, the shareholders have the exclusive right to passresolutions on the following matters:

ratifying the company’s business report and financialaccounts;deliberating and ratifying the company’s balance sheet andprofit and loss account;appointing board members and the company’s auditor;considering board recommendations in respect of dividendpayments;discharging board members and the company’s auditor orresolving to bring a claim against any of them;varying the capital of the company;winding up of the company, appointment of a liquidator,merger of the company with another company ortransforming its legal form; selling or in any way disposing of the company’s primaryproject; andextending the company’s term.


The liability of shareholders is limited to the par value of theirshareholding in the company. If a shareholder is involved in the

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company’s management, he would be liable for his acts as amanager during his term of office, although not in his capacity as ashareholder.


There is no machinery for expulsion of shareholders in the UAE.Shareholders’ rights are protected under the UAE regime andcannot generally be disenfranchised.


The company or the shareholders, if the company does not bring anaction, may bring an action against defaulting directors.


Pursuant to the CCL, in general, UAE companies must be at least51% owned by UAE persons.In addition, Resolution No (3) of 2000 regarding the Regulations asto Disclosure and Transparency (the “Regulation”) issued by theSCA specifically covers shareholding disclosure requirements. Therequirements outlined in the Regulation are threefold requiringdisclosure in respect of stakes of 5% or more, exceeding 10% and30% or more; in particular, specific announcement obligations areexpected of: i) the investor; ii) the market; and iii) the listedcompany.


There are typically two forms of shareholders meetings. The firstis ordinary meetings, in which shareholders resolve upon annualperiodical decisions such as appointment of auditors and boardmembers. While the second form of meetings are the extra-ordinary meetings to resolve upon reserved matters such as increaseor reduction of capital and amendments of the articles of associationof the company and other strategic decisions.



The board of directors is the body responsible for management ofthe company. The board’s primary legal responsibilities are set outin article 103 of the CCL. Mainly, the board deals with resolutionsto pursue the company’s corporate objectives save for mattersreserved to the shareholders. However, the board may not enter intoloan agreements for terms exceeding three years nor can the boardsell the real estate properties owned by the company or mortgagethe same without authorisation from the shareholders. The board isalso not permitted to discharge the company’s debtors from theirliabilities or to enter into settlements or agree to arbitration.However, if these acts are authorised in the company’s by-laws orform part of the company’s objective the board would be entitled toundertake the same. The customary practice is to authorise theboard to act on such matters. There is a great deal of flexibility in the UAE with respect to theboard delegating responsibilities to management, board committeesor persons. It is possible for the board to appoint a general manager,

form committees or delegate certain authorities to individual boardmembers, management or other persons. Of course, the boardshould supervise the acts of committees or individuals which theboard decides to delegate authority to.


The shareholders are responsible for appointment of the board,while the board is responsible for appointment of any othermanagement parties. However, the board’s authority does notsupersede the shareholders authority, subject to securing therequired majorities for the designated decisions.


Article 118 of the CCL provides that the board of directors’remuneration should not exceed 10 per cent of the company’s netprofits after distributing not less than five per cent of the company’scapital as a first dividend payment. Unless senior managers are members of the board, appointed asdirectors, there are no regulations within the CCL that specificallyapply to senior management as such. Broadly, senior managementare deemed to be employees of the company, and consequently theirconduct is generally governed by the Federal Labour Law.Therefore, the company’s directors would contractually agree withthe senior management the terms of their remuneration.


Interests held in publicly listed companies by board of directorsmust be disclosed to the SCA and the pertinent market on whichthey are listed. In addition, the general disclosure of interestoutlined under question 2.5 would also apply to board of directors’members.


Board of directors meetings are the form for meeting of directors.The CCL does not require a specific number of board meetings tobe convened. The board or the chairman decide, at their discretion,to convene meetings, depending on the needs of the company.However, Article 3. (6) of the SCA Decision provides that boardmeetings are to be convened at least once every two months uponwritten convocation of the chairman or upon a request submitted byat least two thirds of the directors.


The board’s primary legal responsibilities are set out in article 103of the CCL. Mainly, the board deals with resolutions to pursue thecompany’s corporate objectives save for matters reserved to theshareholders. However, the board may not enter into loanagreements for terms exceeding three years nor can the board sellthe real estate properties owned by the company or mortgage thesame. The board is also not permitted to discharge the company’sdebtors from their liabilities or to enter into settlements or agree to

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arbitration unless these acts are authorised in the company’s by-laws or form part of the company’s objective. The board is assumed to act with the care and diligence to beexpected from its members considering their respective individualexperience and knowledge. The board members represent the company and the shareholderswhom appointed them. The board is responsible towards thecompany and the shareholders. The chairman represents thecompany before courts and is the signatory authority on its behalf.The chairman is responsible for implementing board resolutions.


The board of directors is generally assumed to be responsible forfollowing up on proper application of corporate governancepractises and report any irregularities. In addition, theresponsibilities of the board members assume their integrity andadherence to legal requirements. Article 111 of the CCL providesthat board members will be held responsible for acts of fraud, abuseof power, violation of the law or the company’s by-laws, wrongfulmanagement. The company or the shareholders, if the companydoes not bring an action, may bring an action against defaultingdirectors.


Disclosure requirements affecting board practices will depend onthe purpose for which the company has been established. As such,each company would normally have certain reporting obligations tothe authority that supervises its activity. There are no specific rulesgoverning the disclosure of board practices for all companiesoperating within the UAE. However, the CCL requires joint stockcompanies to provide the Ministry and the competent authority withan annual list setting out the names, capacities and nationalities ofboard members. The CCL also requires minutes to be kept of allboard meetings and these (together with all company books anddocuments) may be reviewed by shareholders with the permissionof the board or the general assembly subject to any specificprovisions in the articles of the company.


Although not a requirement, there is nothing under UAE lawprohibiting a company from indemnifying directors againstliability. To the extent possible, a company may seek to reduce itsexposure under such an indemnity by appropriate insurancecoverage. It should be noted that such an indemnity may beconsidered at board or shareholder level (subject to any restrictionsin the company articles) but if considered at board level then anydirectors benefiting from the indemnity would be prohibited fromvoting on that issue. It follows that a blanket indemnity relating toall directors would need to be passed by shareholder resolution forthis reason.In any event indemnities awarded to directors must adhere toprovisions of article 115 of the CCL outlined below. Article 115 of the CCL allows shareholders to absolve the board ofresponsibility for acts previously undertaken by them in theircapacity as a board. The extent of any such absolution is as follows:(i) the board cannot be absolved of responsibility towards third

parties (as clearly the shareholders cannot waive rights on behalf ofthird parties); (ii) the board can be absolved of responsibility forcivil actions that could otherwise have been brought against themby the shareholders provided, however, that one year has passedsince the date of the resolution absolving the board (i.e., theshareholders may bring an action against the board within a year ofthe passing of such a resolution but thereafter are time barred); and(iii) the board cannot be absolved of responsibility for criminalactions unless such a claim is time barred by the statute oflimitations applicable to any such criminal action (as would be thecase with regard to any criminal action).



No particular laws, only general principles of law that may touchupon certain aspects of corporate social responsibility.


Under the UAE corporate and federal labour laws, there are nospecific provisions requiring the participation of employees ingovernance of the company.

5 Transparency


The company and the board of directors if they become aware ofany matters which should be disclosed in financial accounts ornotified to the financial market (where the company is listed).


Generally, there are obligations imposed on companies to disclosethe contents of its articles of association and by-laws and anyamendments thereto, as well as details of the composition of itsboard and the nomination of a legal representative to the relevantChamber of Commerce, Department of Economic Developmentand the relevant Ministry that registered their company.Further, listed companies are under additional regulatoryframeworks that require disclosure of material information that mayaffect their shares as well as other disclosure requirementsmandated by the relevant authority’s regulations and the applicablestock market regulations including disclosures relating tosignificant shareholdings and other disclosure requirementscommon on other international exchanges. To fulfil their disclosureobligations listed companies must:

update the relevant Authority and the market on any materialdevelopments that affect the prices of the listed securities assoon as the developments occur; publish in both the Arabic and English papers, wheneverrequested to do so, any information relating to its status andactivities which ensures fair dealing and conference ofinvestors;notify the relevant authority and the market of the shares heldby its board members within 15 days from the date ofcommencement of their tenure and at the end of each



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financial year, and of any trading carried out by its boardmembers and executive management; notify the market of its board of director’s decision regardingthe distribution of profits to the shareholders or theannouncement of profits and losses, to obtain the approvalfor the publication thereof; notify the market’s administration immediately in respect ofthe details of sale or purchase of significant assets, whichaffects its position; andnotify the relevant Authority and the market immediately ofany changes to its board of directors and executivemanagement.


Auditors must approve accounts and revise same to outline anyirregularities they may discover, thus, their role is vital for adoptingsound corporate governance practises particularly in respect tofinancial reporting.


No mandatory requirements are applicable in this regard.

Gary Watts

Al Tamimi & CompanyDubai International Financial Centre6th floor, Building 4 East, Sheikh Zayed RoadPO Box 9275, Dubai UAE

Tel: +971 4 364 1641Fax: +971 4 364 1777Email: [email protected] URL: www.tamimi.com

Gary is head of Al Tamimi & Company’s Corporate and CommercialDepartment. Gary is a highly experienced Corporate Counsel whohas practised corporate law in both advisory and transactionalsettings for more than 20 years. Gary was previously the seniorcorporate partner for a regional Australian law firm (Fisher Jeffries)with an excellent corporate and institutional client base. Gary is aspecialist in corporate and securities law and corporate governance.Gary’s professional experience in UAE encompasses majoracquisitions, IPO’s, due diligence enquiries, corporate restructuringsand complex shareholder and private equity agreements.Gary was appointed Chairman of the Law Council of Australia’s peaktechnical committee on corporate law matters and a member of theAustralian Government’s Takeovers panel. He also served as amember of the statutory advisory committee advising the AustralianGovernment on the reform of corporate and securities law.

Mohamed Khodeir

Al Tamimi & CompanyDubai International Financial Centre6th floor, Building 4 East, Sheikh Zayed RoadPO Box 9275, Dubai UAE

Tel: +971 4 364 1641Fax: +971 4 364 1777Email: [email protected] URL: www.tamimi.com

Mohamed Khodeir is admitted before the Egyptian courts of appeal.Before joining Al Tamimi and Company, Mohamed practiced law inEgypt from 1999 until 2004 with a leading law firm. During hispractice in Egypt, Mohamed was involved in several deals (includingone of the largest listings of shares on the Cairo and AlexandriaStock Exchange in 2003). He also represented vendors andpurchasers in many M&A deals which were successfully completed. Mohamed has a diversified practice in advising and representingGCC and International clients in respect to company, securities, civiland commercial law matters as well as regulatory compliance andlegislation drafting. Mohamed has been extensively involved inmajor deals in the UAE.Mohamed has received two awards from the Asialaw LeadingLawyers’ Survey, based on an international client survey, recognisingMohamed as one of the leading lawyers in the region in the field ofGeneral Corporate Practice for 2 consecutive years (2008 and2009).

Established in 1989, Al Tamimi & Company is the largest law firm in the Middle East region today. We employ morethan 360 staff, with offices throughout the UAE in Dubai, Abu Dhabi and Sharjah as well as offices in Qatar, Iraq, TheKingdom of Saudi Arabia and Jordan.

Al Tamimi & Company specialises in Banking & Finance, Construction & Engineering, Corporate Commercial, DisputeResolution, Family Business & Private Client Practice, Information Technology, Intellectual Property, Maritime, Aviation& Insurance, Media, Projects, Property, and Telecommunications. An international team of high calibre lawyers ablyserves clients from the United Kingdom, North America, Europe, the United Arab Emirates and several other Arabcountries. Each member of our team of professionals and qualified administrative staff is fully committed to providingour clients with accurate, thorough and cost effective advice.



Chapter 34

Ashurst LLP

United Kingdom



Although corporate governance is relevant to all types of companiesand no less so to private companies, the companies covered in thebelow answers are (i) officially listed public limited companieswhose securities are admitted to listing on the Official List of theFinancial Services Authority and to trading on the Main Market ofthe London Stock Exchange (“listed companies”) and (ii) AIMquoted public limited companies whose securities are admitted totrading on AIM (“AIM companies”). The London Stock Exchange’s (“LSE”) Main Market is its flagshipinternational market for established companies across all sectors,home to approximately 1,500 companies from 60 countries, andunderpinned by globally-respected standards of regulation andcorporate governance. AIM is LSE’s more lightly regulated marketfor smaller growing companies, home to over 1,500 internationaland domestic companies.


The law is as stated at 1 March 2009.As regards all UK limited companies, the primary corporatelegislation is contained within the Companies Act 2006 (the “2006Act”) and the Companies Act 1985 (the “1985 Act”) (together the“Companies Acts”). UK company law is currently, and has for afew years been, undergoing a substantial review and modernisation.Some of the 2006 Act is already in force, and the remainder will beimplemented on 1 October 2009 and will, at that time, replace the1985 Act entirely as regards its company law provisions.All companies have articles of association prescribing regulationsfor the company. These reflect the contract and relationshipbetween shareholders and contain the overarching rules for thecompany including rules on, for example, shareholder meetings,borrowing powers, powers and duties of directors and many otheraspects relating to the governance, in its widest sense, of thecompany. Articles should be consulted in relation to all governanceissues because whilst statute, including the Companies Acts, willgenerally prevail over articles on matters where they conflict, anexception to this is where the Companies Acts specifically providethat provisions in articles should prevail (for example, that articlesmay provide a longer notice period or that a particular section of theCompanies Acts has effect subject to the company’s articles).Listed companies must adhere to a number of additional rules and

regulations, including various rules of the independent body thatregulates the financial services industry in the UK, the FinancialServices Authority (the “FSA”), as well as further best practicecodes and guidance issued by others. These include:

the FSA Disclosure Rules and Transparency Rulesgoverning, amongst other things, disclosure and control ofinside information by issuers, disclosure by personsdischarging managerial responsibilities, periodic financialreporting, vote holder and issuer notification rules and someother continuing obligations (the “DTRs”);the FSA Listing Rules, containing, amongst other things,some of the continuing obligation rules in areas such ascorporate governance and transactions requiring shareholderapproval (the “Listing Rules”); the Combined Code on Corporate Governance, issued andregularly reviewed by the independent regulator responsiblefor promoting confidence in corporate reporting andgovernance - the Financial Reporting Council (the“Combined Code”). The Combined Code is the principalregulation on corporate governance for UK incorporatedlisted companies. It contains a Code of Best Practicecovering a very wide range of areas including board balance,independence and remuneration, relations with shareholdersand the need to maintain a sound system of internal controlincluding effective risk management systems. TheCombined Code is voluntary. However, the Listing Rulesrequire UK incorporated listed companies, in their annualaccounts, to (i) report on how they apply its main principlesand (ii) either confirm that they comply with its detailedprovisions or explain their non-compliance (known as the“comply or explain” basis). The strength of the CombinedCode is considered to be that whilst voluntary and soflexible, it represents best practice and most companies willendeavour to comply with it, so that they do not have toexplain non-compliance publicly. When they cannot comply,they should produce detailed explanation as to why they arenot complying, which investors should carefully evaluateand judge; andguidance and pronouncements of investor protection groups,such as the Association of British Insurers and the Pre-emption Group, which whilst not having force of law, areadhered to by companies because such groups represent largeinstitutional investors in UK companies. For example, thereare guidelines that companies are expected to abide byconcerning remuneration of directors and share capitalmanagement. Such groups would highlight to members ifthese guidelines were being ignored by a company and,generally as a last resort, could recommend that theirinvestor members vote against resolutions being proposed bythe company. Most listed companies can be expected to seekto adhere to such investor protection group guidelines (orengage with them, where they propose not to).

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Ashurst LLP United Kingdom

AIM companies are more lightly regulated than listed companiesalthough they too have their own additional rules to comply with:

the AIM Rules for Companies (“AIM Rules”), which,though considerably less onerous than the Listing Rulescontain provisions, for example, on the need to appoint anominated adviser, disclosure requirements and restrictionson dealings in shares; as regards the DTRs, for AIM companies incorporated in theUK, only the notifications of major shareholdings rules apply(see question 2.5 for more); as regards the Combined Code, whilst it is only strictlyapplicable to listed companies, AIM companies often chooseto comply with it, or at least parts of it, voluntarily, for avariety of reasons - perhaps because their nominated advisersrequire them to, perhaps because they wish to be seen toobserve best practice and, more recently, with pressure frominstitutional investors to do so; and as regards guidance of investor protection groups, with AIMcompanies increasingly attracting the interest of institutionalinvestors, whilst they are not generally required to adhere tothese in the same way as listed companies, more of them arelikely to try to adhere to the guidelines of these groups (or,again, engage with them where they propose not to).

Corporate governance regulation and practice is deeply-routed in theUK. Many of the sources mentioned above, or their precursors, havebeen in existence for a very long time. The first mainstream bestpractice corporate governance codes were published in the early1990s and there has been a Combined Code against which listedcompanies have to report, on the comply or explain basis, since1998. Key aspects of corporate governance in the UK, which willbe discussed in more detail below, are typified by:

a single board with checks and balances;effective rights for shareholders;transparency; and a best practice code on corporate governance, operating on acomply or explain basis.


Many aspects of corporate governance in the UK, while having beenin existence for some time, remain topical and important. With therecent and ongoing global economic crisis, particular aspects ofcorporate governance such as risk management, internal control, thesupervisory role of non-executive directors, the role of the auditcommittee, the need for shareholders to hold boards more toaccount, the role of remuneration as regards risk-taking as well asdirectors’ obligations in insolvency situations (for more on this topic,see our article at the front of this guide), in all companies, butespecially those in the banking sector, are now highly topical and insome cases, under review.

2 Shareholders


Whilst shareholders are the owners of companies, and control thecomposition of the board (see question 3.2 below), generallyshareholders, through the articles of association, entrust and delegatethe operation and management of their companies to the board,thereby limiting their own role. However, law and regulationreserve certain rights and powers to shareholders largely through the

requirement for shareholder approval through the passing ofshareholders’ resolutions. For example, the 2006 Act requiresshareholder approval for substantial property transactions involvingdirectors and their connected persons, and loans to directors andtheir connected persons above a specified value. Several otherissues cannot be dealt with other than by appropriate shareholderresolution, for example, changing a company’s name, altering itsarticles of association and authorising directors to allot shares. Also,see question 2.6 below as to the limited circumstances in whichsufficient shareholders may call meetings and/or requisitionresolutions. Additionally, for listed companies, examples of where shareholdersmust approve specific transactions are set out in the Listing Rulesand include acquisitions and disposals of a certain size by referenceto pre-set calculation methods, as well as transactions with relatedparties, including directors and their associates. For AIM companies, the AIM Rules provide that companies aretypically required to notify certain details of transactions to themarket rather than seek shareholder approval, although there aresome examples requiring shareholder approval (e.g. disposalsresulting in a fundamental change of business).


The basic premise of limited liability companies is that the liabilityof shareholders is limited to the amount of their capital contributionon the shares for which they have subscribed or agreed to subscribe.This, allied with the principle of separate corporate personality, i.e.that a company is distinct from, and not (subject to very fewexceptions) agent for, its shareholders, means that only inexceptional circumstances will the English courts seek to ‘pierce thecorporate veil’ and hold shareholders liable. Whilst none of these circumstances are likely in respect ofshareholders of a listed or AIM company, they include certaininstances provided for in statute, for example, a company engagingin fraudulent trading with intent to defraud creditors where theshareholder is knowingly party to that, as well as instances providedfor in case law, such as involving fraud. On a related note, if ashareholder were found to be acting as a shadow director (that is aperson in accordance with whose directions or instructions thedirectors of a company are accustomed to act), then he or she couldhave the same liability as a director on certain issues includingpotential personal liability. (See our article at the front of this guide,entitled “Directors’ Duties in the “Zone of Insolvency”” for adiscussion of directors’ duties and potential liabilities in insolvency.)


Shareholders of listed and AIM companies can be disenfranchisedonly in very limited circumstances. For example, upon a takeover ofa company, where 90 per cent of the shares to which the offer relateshave been acquired by a bidder, the remaining 10 per cent may becompulsorily purchased by that bidder, subject to compliance withprescribed procedures. Also, where registered shareholders fail torespond to specific notices from the company asking for details ofultimate ownership of their shares, the company can ask a court toimpose restrictions on transfer and on voting of the shares inquestion. A further example is in relation to certain related partytransactions, where the related party shareholder in question (and itsassociates) should not vote on the relevant shareholder approvalresolution.

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The basic premise is that the proper claimant in an action in respectof a wrong done to the company is the company (not theshareholders) and, linked to this, that courts will not interfere withthe internal management of companies. There are, however, limited exceptions to this. For example, forboth listed and AIM companies, the 2006 Act contains a derivativeclaim procedure which confers on shareholders the right to bring anaction on behalf of the company (so that any damages are payableto the company) against directors for breach of duty (includingnegligence) in certain circumstances. To prevent abusive claims,the 2006 Act provides a two stage procedure whereby the approvalof the court must be sought to continue the claim. Other instanceswhere shareholders may seek enforcement action may includewhere there has been unfairly prejudicial conduct against membersor some of them, and where there has been a ‘fraud on theminority’, although these are unlikely as regards listed or AIMcompanies.

2.5 Are there any limitations on, and disclosures required inrelation to, interests in securities by shareholders?

There are no statutory limitations on the number of securities ashareholder can hold, or the speed with which he or she can build astake in a company. (However, takeover rules, which are beyondthe scope of this publication, must be considered and have crucialrepercussions if certain thresholds or rules are breached prior to, aswell as during, an offer period.) Articles of association should be consulted. Although there arevery few UK listed or AIM companies that cap the amount of sharesthat investors are permitted to have, a few companies in certainindustries (for example, where the grant of licences is needed and isdependent on its level of UK or EU shareholders) may havelimitations on share ownership (e.g. British Airways plc andEasyJet plc).As regards disclosure, briefly, as set out in DTR5, a shareholder inboth a listed and an AIM company must notify the company of thepercentage of voting rights held as shareholder or through direct orindirect holdings of certain qualifying financial instruments, if thatpercentage reaches, exceeds or falls below, in the case of a UKissuer, 3 per cent and each 1 per cent thereafter, and must do so, onprescribed Form TR1 within two trading days of the event orknowledge of it. The company itself is then obliged to makeregulatory announcements of this information. (Note there aredifferent thresholds and timings for non-UK incorporatedcompanies.)The FSA has also announced, that effective as of 1 June 2009, it willbe extending the DTR5 disclosure regime to include, broadly,disclosures of long positions in financial instruments (for example,but not limited to, contracts for differences) which give legal rightsto acquire the underlying shares or have similar economic effects toshares. The FSA state in their press release - “This will ensure theyare not used covertly to influence corporate governance and/orbuild up stakes in companies.”


Shareholder meetings are known as general meetings. Listed andAIM companies need to hold a specified annual general meeting(“AGM”) within six months of the year end. For listed companies,

since the DTRs require annual accounts to be made public withinfour months of the year end, and are invariably sent to shareholdersat the same time as the notice of AGM, the AGM is generally heldwell within the six-month 2006 Act deadline. AGMs commonly include the following business to be voted on byshareholders - laying and receiving of accounts, declaring ofdividends, appointing/reappointing of auditors and directors,approving of directors’ remuneration reports, authorising ofpolitical donations, allotments and buybacks of shares andamending articles of association. Companies may hold othergeneral meetings as and when they need to (e.g. to approve specificcorporate actions). Although the default position is for the board to call shareholdermeetings, shareholders of both listed and AIM companies have alimited number of rights set out in the 2006 Act, subject to meetingcertain thresholds in terms of either shareholder numbers orpercentage of voting rights. These include the right to:

require circulation of resolutions for the annual generalmeeting;require the company to circulate a statement of up to 1,000words; and require the directors to call a general meeting.

Shareholders are entitled to receive notices of all general meetings.Under the 2006 Act, companies may formally ask shareholdersabout the method by which they wish to receive communications(e.g. communications of notices of meetings and annual accounts).They may use electronic communications for those shareholderswho either agree to communications in this way, or who fail torespond to the request within the given time. Shareholders mayrespond to this request and say they wish to continue to receivepaper copy communications, and it is also possible at any later pointfor them to change their mind and ask for paper copies.Voting at general meetings either requires an ordinary resolution(requiring a simple majority of those voting in person or by proxy),or a special resolution (requiring a majority of not less than 75 percent of those voting in person or by proxy). The 2006 Act introduced certain rights for indirect shareholders ina company (that is the beneficial owners of shares who hold throughan intermediary (such as a nominee), where it is the intermediaries’name that appear on the register of members). Briefly, absentspecific alternative provisions in articles of association,shareholders on the register of members of listed companies (butnot AIM companies) can nominate any person on whose behalf theyhold the shares, to, instead of them, receive copies ofcommunications sent by the company, for example annual reportsand accounts and shareholder circulars. These, and other newprovisions are intended to serve the needs of the increasing numberof investors who hold their shares through nominees.



All companies are managed by a single, one-tier board of directors(the “board”). By virtue of the Combined Code, within the boardthere are two categorisations of director - executive directorsperforming executive functions concerned with the day to dayrunning and operation of the company, and, as a key part of thechecks and balances designed to ensure boards operate well, non-executive directors performing more of a supervisory, monitoringand strategy role. Whilst executive and non-executive directorsperform different functions within the board, the 2006 Act does not



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distinguish between them depending upon whether they areexecutive or non-executive. Often, companies are headed by a non-executive chairman who isresponsible for leadership of the board, together with a chiefexecutive responsible for day to day operations. Other than inexceptional cases, the Combined Code provides that the roles ofchairman and chief executive should not be combined.For listed and AIM companies, the 2006 Act provides that they musthave at least two directors, but does not provide for a maximum.The company’s articles of association often provide for a minimumand maximum. The Combined Code provides that boards shouldcontain a balance of executive and non-executive directors(including independent (as defined) non-executive directors) so thatno one individual or group can dominate board decisions. Inparticular (except for smaller companies), at least half the boardshould be comprised of independent non-executive directors, ofwhom one should be designated as a senior independent non-executive director having certain prescribed skills. Committees which boards are required, by the Combined Code, toestablish (although it is always the board that remains responsiblefor ultimate decisions) are:

a nomination committee, to lead the process for boardappointments;a remuneration committee, responsible for recommendationson remuneration strategy and policy for executive directorsand senior management; and an audit committee, with wide responsibilities includingmonitoring the integrity of the company’s financialstatements, reviewing internal financial controls and broaderinternal controls and risk management systems as well as thecompany’s relationship with its auditors.


Shareholders control board appointments. Shareholders appoint theinitial board on incorporation. Whilst appointments during the yearmay be made by the board itself (upon the recommendation of thenomination committee and possibly after prior consultation withkey shareholders), the Combined Code provides that shareholdershave the opportunity at annual general meetings, by way ofordinary resolution, to vote for or against (i) the re-appointment ofany director newly appointed by the board during the course of thepreceding year and (ii) the re-appointment of each director atregular intervals of no more than three years. The Combined Codealso contains provisions designed to ensure effective appointmentsand re-appointments of directors, including requirements forrigorous review of directors being re-appointed for more than acertain number of terms and, for non-executive directors who haveserved longer than nine years, there should be annual re-election.There are no nationality restrictions on who may be appointed as adirector. The 2006 Act contains a minimum age restriction of 16 forall directors. As to removal of directors, whilst articles of association commonlyprovide for situations when the office of director must be vacated,which may include where a director’s resignation is requested by allother directors, generally the power to remove directors lies withshareholders who may, by ordinary resolution, remove a director.In practice, if enough shareholders come together expressingdissatisfaction with a director and requesting his removal, anycompany will have to consider this, and it may be that a boarddecision is taken to ask the director to resign, so that a shareholdervote is not required.

A very recent related development concerns a relaxation by theAssociation of British Insurers in the context of rights issues.Listed companies are now permitted by the ABI to take authority,commonly at their AGMs, to allot further shares by way of rightsissues, with statutory pre-emption excluded, up to two thirds oftheir existing issued share capital. This is one part of the jigsaw(along with a reduction in rights issue offering period to 10 businessdays as calculated in accordance with the relevant rules (previously21 days)) to enable speedier recapitalisations for companies who, inthe current economic and banking crisis, may be seeking to replacedebt with equity or just simply seeking to raise equity. However, asa string to this relaxation, intended as a safeguard for shareholders,the ABI require that where such a two thirds authority for rightsissues is taken and subsequently used and the aggregate actualusage of the authority exceeds one third of issued share capital withthe monetary proceeds raised exceeding one third of the company’spre-issue market capitalisation, then all members of the boardwishing to remain in office must put themselves up for re-electionby shareholders at the next annual general meeting.


The 2006 Act provides for all companies that directors’ servicecontracts with a fixed term of over two years must be approved byshareholders. In practice, directors’ service contracts of more thana two-year fixed period are rare for listed companies as theCombined Code suggests that notice periods be set at one year orless.The Combined Code contains a section on remuneration based onprinciples such as avoidance of excessive remuneration and linkingrewards to performance. Additionally, the Association of BritishInsurers has published guidelines for listed companies which dealwith such things as: base pay, bonuses, pensions, contracts,severance and share-based incentive schemes.Whilst shareholders do not pre-approve individual directors’remuneration packages, listed companies are required by the 2006Act to put a resolution at their AGM for shareholders to approve thedirectors’ remuneration report - a report setting out the company’soverall policy on remuneration as well as details of individualremuneration packages and service contracts on a named directorbasis. The validity of remuneration packages is not dependent uponthis resolution, which is advisory only, but by voting against thereport, shareholders would be sending a strong message ofdisapproval to their boards. AIM companies are not required by the2006 Act to do this, but due to investor pressures, may propose sucha resolution.Generally, on remuneration, there have been a number ofindications recently from various investor representative bodiesthat, in the current economic crisis, investors will focus morekeenly on the key issues mentioned in the Combined Code and inthe various guidelines on remuneration when reviewingremuneration disclosures. As evidence of this, the UK has recentlyseen its first example for some time of a company’s remunerationreport vote being defeated by shareholders.


For listed and AIM companies, directors are permitted to ownshares in their companies.

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As regards dealings in those shares, directors of listed companies arerequired by the Listing Rules to adhere to a code, known as the ModelCode, which prohibits and regulates their dealings at certain times,the purpose of which is to ensure that they do not abuse, or placethemselves under suspicion of abusing, inside information. Dealingsare defined in a non-exhaustive list of examples in the Model Codeand include, for example, the granting of security over shares. As to disclosure, the major shareholder notification requirements ofDTR5 already mentioned at question 2.5 apply equally to directorshareholders of both listed and AIM companies if they meet therelevant thresholds. Also, there are specific disclosure rules relating to listed companiesin DTR3 relating to “persons discharging managerialresponsibilities”, including directors and their connected persons,who are required, within four business days of the transaction inquestion, to notify their company of all transactions conducted ontheir own account in the company’s shares or relevant financialinstruments. The company, in turn, must notify the market by wayof regulatory announcement as soon as possible and by not later thanthe end of the business day following receipt of the information. TheFSA have recently confirmed that the granting of security overshares in the company by directors and their connected persons fallswithin the DTRs and such persons must disclose such transactions totheir companies, which in turn should disclose to the market. As regards AIM companies, the AIM Rules generally prohibitdealings by directors and their families in periods precedingfinancial announcements or when the company has unpublishedprice sensitive information. Whilst, unlike for listed companies,there is no obligation to have an internal code for directors’ dealings,it is likely that most AIM companies do have, and require directorsto follow, such an internal code on dealings. The AIM Rules alsohave provisions requiring AIM companies to make regulatorydisclosures of certain information provided to them in relation todirectors’ dealings. Other areas of law which will affect the ability of all directors to dealin their securities, but which are beyond the scope of thispublication, include insider dealing provisions under the CriminalJustice Act 1993 and market abuse provisions under the FinancialServices and Markets Act 2000.


Board meetings are called whenever required, by giving notice to alldirectors as required by the company’s articles of association. Thereis no statutory minimum number of board meetings, although theCombined Code requires that the board should meet sufficientlyregularly to discharge its duties effectively. Every year thecompany’s annual report should set out the number of boardmeetings (and committee meetings) held as well as individualattendance by directors.

3.6 What are the principal general legal duties and liabilities ofmembers of the management body?

Directors of companies incorporated in England and Wales aresubject to overarching fiduciary duties that they owe to theircompanies. These duties are the same for, and apply to both,executive and non-executive directors, whether of listed or AIMcompanies. The 2006 Act has codified the main general dutieswhich directors owe to the company. Directors need to be aware andmindful of complying with these general duties at all times. Theseduties are:

to act within their powers;to promote the success of the company;to exercise independent judgment; to exercise reasonable care, skill and diligence;to avoid conflicts of interest;not to accept benefits from third parties; and to declare interests in proposed transactions or arrangements.

It is not possible within the confines of this publication, to look inany detail at these general duties, so we will outline just one of them.The duty to promote the success of the company requires that adirector of a company must act in the way he considers, in goodfaith, would be most likely to promote the success of the companyfor the benefit of its members as a whole, and in doing so haveregard (amongst other matters) to a number of factors including:

the likely long-term consequences of any decision;the interests of the company’s employees;the company’s business relationships with suppliers,customers and others;impact on the community and the environment;maintaining a reputation for high standards of businessconduct; and the need to act fairly as between members of the company.

This enshrines the concept of “enlightened shareholder value” - thatdirectors should first act in a way they consider in good faith wouldpromote the success of the company, but that directors are morelikely to achieve long term sustainable success if they also payattention to a wider range of matters. “Success” is not defined, butit is considered that, for a commercial company, it is long-termincrease in value. The above are directors’ principal general duties. Directors of listedand AIM companies have many other specific duties, whether underhealth and safety legislation, employee rights legislation, the ListingRules, the AIM Rules, the DTRs and much other law and regulation.(See also our article at the front of this guide entitled “Directors’Duties in the “Zone of Insolvency””, which looks at the significantshift in directors’ duties when a company is faced with the risk ofinsolvency.)


As regards corporate governance, the following are some (but by nomeans all) of the responsibilities of directors as set out in theCombined Code:

collective responsibility for the success of the company: byproviding entrepreneurial leadership within a framework ofprudent and effective controls;internal control: by maintaining a sound system of internalcontrol to safeguard shareholders’ investment and thecompany’s assets, which should include, at least annually,conducting a review of the effectiveness of the group’s systemof internal controls (covering all material risks, includingfinancial, operational and compliance risks, and riskmanagement systems), and reporting to shareholders, in theannual report, that this has been done;financial reporting: by presenting a balanced andunderstandable assessment of the company’s position andprospects; andrelationships with shareholders: by maintaining dialogue withshareholders based on the mutual understanding ofobjectives.





Briefly, specific areas of board practice on which the CombinedCode requires disclosures in the annual report include thefollowing:

how the board operates including which decisions the boardtakes and which are delegated;identification of the chairman, deputy chairman, chiefexecutive, senior independent director and members of thecommittees and any director considered to be independent(as defined); andwhat performance evaluation has been done on the board, itscommittees and individual directors.

There are also notification requirements under both the Listing andAIM Rules, for example as to any change to the board includingappointments (together with prescribed details concerning the newdirector), resignations and dismissals.


Yes. Although a company cannot indemnify directors in respect ofbreaches of their duties to the company itself, it can indemnify themin respect of liability to third parties (other than criminal liabilityand regulatory penalties). Also, costs of defence can beindemnified, regardless of whether the action is by the company ora third party, subject to certain exceptions (in particular, where theaction is by the company and judgment is given against the director,the costs must be repaid). Companies are also permitted to maintaininsurance for directors in respect of liability to the company.



As regards corporate social responsibility (“CSR”), the UKGovernment has stated that it has an ambitious vision for CSR andthat its approach is to foster best practice by firstly ensuring, as abase, compliance by companies with relevant laws (includinginternationally agreed guidelines), and then by encouraging actionthat goes beyond compliance, integrating socially responsiblebehaviour and ethical values into the core values of organisations.On 1 October 2007, the 2006 Act enshrined in law the concept of“enlightened shareholder value” which recognises that directorswill be more likely to achieve long term sustainable success if theircompanies pay regard to wider matters (see the matters listed inquestion 3.6 for example). Allied with this is the preparation andsubmission to shareholders, as part of the annual reports, of abusiness review which, for listed companies requires them, to theextent necessary for an understanding of the company’s business, todisclose information on environmental, employee, social andcommunity matters amongst others.In practice, many of the larger companies have been voluntarilyacting and reporting on CSR issues for some time. So, for example,environmental and sustainable development reporting, committeeson ethics and environmental matters and statements concerningCSR matters (including effect on and integration with communities,sourcing products and response to climate change) have longfeatured in reporting by some companies.


Employees do not have a specific role in corporate governance.There is, for example, no requirement to have employeerepresentatives on the board of UK companies. Absent specificemployment related situations (e.g. large redundancy programmes)where employees may have information and consultation rights,there is no specific role for employees in corporate governance.However, best practice would be for companies to havewhistleblowing policies and procedures in place. Also, theCombined Code provides that companies’ audit committees shouldreview arrangements by which staff may, in confidence, raiseconcerns about possible improprieties in matters concerningfinancial matters or other matters, and should ensure proportionateand independent investigation of such issues raised and appropriatefollow-up action.

5 Transparency


Transparency and disclosure is a key plank of corporate governancebest practice in the UK, allowing shareholders access to relevantinformation so that they can assess whether or not they are satisfiedwith the way that their company’s affairs are being conducted. Inaccordance with the principle of collective responsibility, it is theboard as a whole, not any one individual director, that is responsiblefor transparency and disclosure. For example, the annual reportsand accounts of companies are a key component of a company’scommunications with shareholders and the market (see question 5.2for more), and the DTRs require a responsibility statement to beincluded within them by “persons responsible with the issuer”. Alldirectors of the company will make the necessary confirmationsthat make up the responsibility statement that appears in thecompany’s accounts.


As regards financial reporting, all companies must prepare andpublish annual accounts in accordance with the Companies Acts.These, as well as requiring prescribed financial information anddirectors’ and auditors’ reports, must contain a detailed narrativebusiness review. The purpose of the business review is to helpshareholders assess how directors have performed their duty topromote the success of the company. It must contain a balanced andcomprehensive analysis of the development and performance of thebusiness during the financial year and the position of the businessat the year end and also a description of the principal risks anduncertainties facing the company. Listed companies must also nowinclude further information, commonly known as the enhancedbusiness review, such as trends and factors likely to affect futuredevelopment as well as information on environmental matters,employees, social and community issues and essential contractualor other arrangements. As regards specific corporate governance arrangements, theCombined Code also requires additional specific disclosures inannual reports. These are often done by way of a specific corporategovernance section or report covering matters such as statements asto compliance or not with the Combined Code, disclosures on boardpractices (see question 3.8 for some of these), descriptions of thework of the nomination, remuneration and audit committees, a report

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Andrew Edge

Ashurst LLPBroadwalk House5 Appold StreetLondon, EC2A 2HAUnited Kingdom


Andrew Edge is a partner in the corporate department in London,specialising in mergers and acquisitions and corporate finance. Hehas particular expertise in the healthcare sector. Andrew wasseconded to Ashurst’s Frankfurt office, from January 2002 to May2005. In the past year he has acted for United Company Rusal, theworld’s largest aluminium company, on its acquisition of a 25 percent state in Norilsk Nickel, and for Protherics plc, on its acquisitionby BTG plc, to form the UK’s largest quoted biopharmaceuticalcompany.

Vanessa Marrison

Ashurst LLPBroadwalk House5 Appold StreetLondon, EC2A 2HAUnited Kingdom


Vanessa Marrison is a director of professional development in thecorporate department in London. As part of the professionaldevelopment team supporting and developing technical excellencewithin the firm, Vanessa works on internal and client-facingdocuments, is involved in training and also helps generally ontechnical legal matters, all across a wide-range of public companyrelated areas, including corporate governance, Companies Acts andothers.

Ashurst is an elite law firm advising corporates, financial institutions and governments, with core businesses in mergersand acquisitions, corporate and finance. Our strong and growing international presence is built on extensive experiencein working with our clients on the complex legal and regulatory issues relating to cross-border transactions. With ateam of over 200 partners and some 800 lawyers worldwide, we provide advice of the highest quality to organisationsaround the world.

We have designed our business to meet our clients’ needs around the world, where the changing corporate andregulatory environment is increasing the complexity of the business landscape and the need for timely and well-judgedresponses. With our focus on M&A and corporate and finance, we provide a comprehensive range of complementaryintegrated practices in areas including antitrust, real estate, tax, litigation, energy, transport and infrastructure.


that the board has conducted a review of the effectiveness of thegroup’s system of internal controls as well as many other matters. For listed companies, disclosure is also regulated by the DTRs andthe Listing Rules. The DTRs, for example, require the regularreporting of not only an annual financial report, but also a half-yearly financial report and an interim management statement. Asregards all information (not specifically financial), the DTRs alsogovern the disclosure of inside information likely to have asignificant effect on the price of the issuer’s securities and require alisted company to make regulatory announcements as soon aspossible of any inside information directly concerning it, unlessspecified exceptions apply. The Listing Rules also requireregulatory notifications in many specific situations, for examplewhere significant transactions are entered into, where articles ofassociation are amended and where changes are made to the boardof directors.AIM companies, by virtue of the AIM Rules, have their own, notdissimilar, disclosure obligations.


All companies must have their annual financial accounts auditedunless they are exempt as a small company or a dormant company,and must appoint auditors on an annual basis to prepare an auditreport to accompany these accounts. The auditors’ report mustcover amongst other things (i) the way in which the accounts have

been prepared, (ii) whether, in the opinion of the auditors, theannual accounts give a “true and fair” view of the state of affairs ofthe company in question, and (iii) certain of the company’scorporate governance statements under the Combined Code.


Listed companies need, by virtue of a combination of the CombinedCode and the 2006 Act, to publish: (i) the terms of reference of theirnomination, remuneration and audit committees; (ii) the terms andconditions of appointment of their non-executive directors; and (iii)for all resolutions after a vote has been taken, prescribedinformation about the results of the voting. Many listed companiesin fact voluntarily publish much more, often in the “investor”section of their websites, which, for the larger listed companies,may include past annual reports and accounts, past tradingstatements and regulatory announcements, annual general meetingmaterials, governance reports and corporate social responsibilitystatements/reports.AIM companies too, by virtue of the AIM Rules, have to maintaina website on which prescribed information should be availableincluding a description of the business, names of directors, adescription of the board’s responsibilities and any committees,copies of constitutional documents and most recent annual and halfyearly reports.

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Because the majority of U.S. publicly-traded companies areincorporated in Delaware (more than 50% of all publicly tradedcompanies, and approximately 63% of the Fortune 500 companies,are incorporated in Delaware. Source: Delaware Department ofState, Division of Corporations), this article focuses on Delawarecorporations with shares registered with the U.S. Securities andExchange Commission under the U.S. Securities Exchange Act of1934, and listed and traded on The New York Stock Exchange(NYSE), the world’s largest equity market, and/or the Nasdaq StockMarket, the other major U.S. exchange.


The U.S. regulatory scheme applicable to public companies iscomprised of a mix of state and national legislation, as well as therules and regulations of quasi-governmental institutions such asstock exchanges. The principal sources of corporate governancerelated requirements are as follows:1. State law of a company’s state of incorporation. U.S.corporations are incorporated under the laws of the individualstates, and accordingly every U.S. corporation is governed in thefirst instance by the laws of its state of incorporation andcorresponding case law interpreting these laws. A corporation neednot have any other connection to its state of incorporation. As notedabove, this chapter will focus on the requirements of the DelawareGeneral Corporation Law (the “DGCL”) and the Delaware case lawinterpreting the DGCL because of the widespread use of Delawareas a state of incorporation. However, each state has its own distinctset of statutes and case law applicable to corporations formed underits jurisdiction, and in cases where the state of incorporation is otherthan Delaware, the law of that jurisdiction must be consulted.2. Federal statutes and the rules and regulations adopted pursuantto these statutes by the U.S. Securities and Exchange Commission(the “SEC”). All public companies, wherever incorporated, aresubject to regulation by the SEC pursuant to two principal statutes:(i) the Securities Exchange Act of 1934 (the “Exchange Act”); and(ii) the Securities Act of 1933 (the “Securities Act”). The ExchangeAct imposes annual, quarterly and periodic reporting requirementson public companies, requires stockholders of such companies to filereports upon crossing certain ownership thresholds, and regulates, inpart, the process by which stockholder votes are solicited. TheSarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which imposed

additional corporate governance-related and other requirements onpublic companies, is part of the Exchange Act. The Securities Actapplies principally to the offer and sale of securities, and regulatesthe form and content of disclosure to investors in connection with asale of securities to the public. The SEC, acting through its Divisionof Corporation Finance, issues rules and regulations under theExchange Act and the Securities Act.3. A corporation’s organisational documents. An additionalimportant source of corporate governance procedures andrequirements is the organisational documents of the corporation.Each Delaware corporation will be governed by a minimum of twodocuments: the certificate of incorporation, sometimes referred toas a “charter”, and the bylaws. Either or both of these documentswill contain important provisions regarding board composition,annual meetings, stockholder rights, and other aspects of theentity’s corporate governance. In addition, reporting companieswith listed securities are required to have written charters forvarious committees of the board of directors that specify thefunctions of such committees in detail, and in some casescompanies may have additional governing documents setting outadditional rights and obligations of stockholders, such as thedocuments governing a particular class of shares or convertiblesecurities. 4. Other sources. The New York Stock Exchange, NASDAQ andother exchanges require companies with securities that trade onthese exchanges to abide by certain corporate governance standardsand regulations. Additionally, industry groups, stockholderadvisory services (which provide advice to large institutionsregarding how to vote at stockholder meetings) and, in some cases,institutional investors may also publish non-binding corporategovernance guidelines and recommendations.


General Trend. In recent years the U.S. has witnessed a generaltrend towards the institution of corporate governance policies andpractices that are more responsive to stockholder influence oncorporate affairs. Initially, this trend took the form of the removalof shareholder rights plans, the de-classification of boards ofdirectors (allowing for election of the entire board in a single year),the use of majority, rather than plurality, voting standards, andincreased emphasis on disclosure surrounding executivecompensation. With some exceptions, this trend has continued andnow encompasses a movement in favour of greater stockholderaccess to company proxy materials, stockholder approval ofexecutive compensation (the “Say on Pay” initiatives described

Marc Weingarten

David E. Rosewater

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below) and other changes. Proxy Access. Common practice for public companies in the U.S.is to solicit “proxies” - which are essentially written votinginstructions - from stockholders by mail, at company expense, priorto the annual meeting. Stockholders may, but do not typically,attend the annual meeting: instead they indicate on the company-circulated proxy which directors they would like to vote for.Stockholders are entitled to solicit proxies in support of alternatecandidates on their own initiative, but such solicitations aregenerally expensive, and as a result incumbent boards typically gounchallenged in the ability to be the sole body to nominatecandidates for election to the board of directors. However, the SEChas indicated that it intends to propose for public comment newrules that would allow stockholder-nominated candidates for theboard of directors to appear on the company’s proxy materials,whether or not agreed to by the company. It is unclear at this pointwhat form these proposals will take, or whether they will ultimatelybe formally adopted. Advance Notice Bylaws. Advance notification bylaws requirestockholders to notify a board of directors, a reasonable time inadvance of a company’s annual meeting, of the stockholder’sintention to nominate directors or raise other business at the meeting,and to provide information about the proponent and any nominees.The commonly accepted justification for these bylaws is that theyprovide sufficient time to allow the company to conduct an orderlyelection process and to evaluate proposals. During the past year,however, companies have begun to adopt new forms of advancenotice bylaws, sometimes referred to as “Second Generation”advance notice bylaws, that typically require more extensivedisclosure than what has previously been customary or impose otherrequirements. Some commentators have expressed concern that theseSecond Generation bylaws may function as an impediment tostockholder participation in the corporate governance process.Discretionary Voting by Brokers - Proposed Change to New YorkStock Exchange Rule 452. Current NYSE rules permit brokers tovote client shares regarding matters deemed to be “routine” -including uncontested elections - at their discretion if they have notreceived voting instructions from their clients before an annual orspecial meeting of stockholders. “Just vote no” campaigns, inwhich stockholders urge fellow stockholders to withhold theirsupport from a particular director or directors, are not considered“contested elections” under current rules. Accordingly, brokers arepermitted to vote uninstructed shares in such campaigns, and as amatter of practice they typically vote in favour of incumbentdirectors. The proposed rule change, which if approved by the SECwould apply starting in 2010, would eliminate the ability of brokersto vote uninstructed shares in all director elections, contested or not.This change will arguably have the effect of increasing thelikelihood that “just say no” campaigns will succeed. This changewill have added significance for those companies that have adopteda majority voting standard, in which directors must receive amajority of favourable votes, because in light of typically low voterturnout, an absence of broker discretionary votes may make it moredifficult for directors to receive a clear majority.Director and Senior Executive Compensation. While an area ofgreat public and institutional investor interest for a number of years,in light of the U.S. government’s Troubled Asset Relief Program(“TARP”) and other “bailouts” of large corporations, public andlegislative interest has again focused on director and, in particular,senior executive compensation. For example, recipients of TARPfunds are subject to limits on executive compensation, and thepropriety of bonus payments to AIG executives was hotly debatedboth in the U.S. House of Representatives and among the generalpublic (AIG was a large recipient of TARP funds). The possibility

of future legislative action in the area of executive compensation,both for TARP-fund recipients and for public companies generally,cannot be discounted. “Say on Pay” Proposals. Related to legislative interest inexecutive compensation generally is the “Say on Pay” movement.Initially, “Say on Pay” began as an attempt by certain stockholders- principally unions and investors known to focus on corporategovernance - to compel large public companies to adopt a policy ofsubmitting their compensation policies and practices to annual,non-binding, advisory stockholder votes. This movement hasexisted for several years, but so far has met with mixed success.However, such proposals continue to be popular (published reportsindicate that approximately 100 companies have received “Say onPay” proposals this year), and there are clear signs that the Say onPay movement is spreading beyond the purview of the small groupof activist stockholders that began the movement.Significantly, companies receiving TARP funds (approximately 400companies) are required, by later-added legislation, to providestockholders with an advisory vote on their executive compensationprogrammes - in effect, government mandated “Say on Pay”. Somecommentators believe, and there are indications, that this TARPrelated requirement will lead to further, possibly universal adoptionof stockholder compensation approval policies at all publiccompanies. For example, the U.S. House of Representatives passeda bill in April by a wide margin that mandates “Say on Pay” votesat all public companies, though this measure will not become lawunless and until it is also passed by the Senate and signed by thePresident. In addition, two of the five SEC Commissioners havepublicly stated their support for a rule mandating a “Say on Pay”stockholder vote. Although it is too early to know for sure, it seemslikely in light of these developments and the general economic andpolitical climate that proposals supportive of “Say on Pay” voteswill meet with greater success this year than in previous years, anda “Say on Pay” vote may become generally applicable to all publiccompanies in the not too distant future. Stockholder Power to Amend Corporate Bylaws. In 2008 theDelaware Supreme Court issued an important decision (CA, Inc. v.AFSCME Employees Pension Plan, 953 A. 2d 227 (Del. Supr. July17, 2008)) regarding the permissible scope of stockholder-initiatedamendments to the bylaws of a Delaware corporation. While thestatutory authority of stockholders to amend corporate bylaws isclear, this power is circumscribed by the equally clear statutoryprovision granting the board of directors the power to manage thebusiness and affairs of the corporation. The CA decision disallowedthe stockholder proposed bylaw that was the subject of the litigation(which would have mandated reimbursement by the company ofproxy contest expenses incurred by a non-management proponent)on the grounds that it impermissibly interfered with the board’sexercise of its fiduciary duty. While the decision was seen by somecommentators as a vindication of the rights of boards of directors,other commentators have focused on the court’s statement that“process-oriented” bylaws are permissible, and have noted that thisdistinction may have opened the door to greater stockholderinfluence over the corporation.

2 Shareholders


Delaware law provides that the corporation shall be managed by orunder the direction of a board of directors, and accordinglystockholders generally have little direct influence over the operation



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and management of a company on the day-to-day level. Theoperation and management of a corporation is the responsibility ofthe corporation’s officers, and such officers are in turn selected byand overseen by the board of directors. Stockholders primarilyimpact the management of a corporation through their ability toelect directors at the corporation’s annual meeting, including theirability to nominate their own slates of director candidates. Until theeconomic collapse in the fourth quarter of 2008, activiststockholders had increasingly nominated “minority” slates (for lessthan half of the director seats) as a way to further influence themanagement and policies of the company. Activists have pulledback on these efforts in the current year, although the proxy accessmovement described above may once again accelerate this trend. In addition to the right to elect directors, stockholders are providedwith certain statutory rights under the DGCL. These rights includethe right:

to approve, by majority vote, an amendment to the certificateof incorporation, for example to increase or decrease thecorporation’s authorised capital stock (however, importantly,all charter amendments must be initiated by the board ofdirectors);to approve, by majority vote, a merger or consolidation of thecorporation or a sale of all or substantially all its property orassets;to amend the bylaws of the corporation, subject to the boardof directors’ power to manage the corporation; to remove a directors or directors, generally with or withoutcause (though this right may be limited by proceduralimpediments to stockholder action, such as a prohibitionagainst acting by written consent); andif authorised in the certificate of incorporation or the bylaws,to call a special meeting of stockholders.

In general, U.S. federal law provides stockholders with fewsubstantive rights - substantive corporate governance has historicallybeen viewed as an area of state law. However, the Exchange Act doesprovide stockholders meeting certain minimum ownership thresholdswith the right to compel a public company to include proposals foraction in certain areas in the company’s proxy statement. This rule,Rule 14a-8 under the Exchange Act, effectively allows theproponents, if not successfully challenged by the company, to “freeride” on the company’s proxy statement, and as a result removes amajor barrier to stockholder action - the costs associated with anindependent proxy solicitation. However, the topics that arepermitted to be addressed by the stockholder proposals are somewhatcircumscribed, and the rule provides companies with a number ofgrounds on which to challenge their obligation to include thestockholder proposal. Nevertheless, this rule can be a powerful toolfor stockholder influence in certain areas, and is often used by statepension funds, unions, church groups and others to promote socialand corporate governance issues, such as Say on Pay proposals,majority vote requirements (which replace the typical pluralitystandard applicable in most corporate elections with a requirementthat the nominee receive a majority), or other issues.The New York Stock Exchanges and Nasdaq also mandatestockholder approval of certain corporate actions, including, forexample, the issuance of securities representing 20% or more of theoutstanding voting power of the company, with certain exceptions.


Generally, no: the basic premise of the corporate entity is thatstockholders’ liability for acts or omissions of the corporation islimited to the amount invested by each stockholder. There are

limited circumstances in which the courts may hold stockholderspersonally liable for the acts or omissions of the corporation (themost common of which is referred to as “piercing the corporateveil”), but these are generally in the context of smaller privately-held companies.


Corporations may issue non-voting stock, or use a dual class sharestructure, in which one class of shares is entitled to one vote pershare while a second class, often owned by a founding family, isentitled to a greater number of votes per share. Generallycorporations cannot take away voting rights once they have beengranted. However, they can dilute the impact of those rights in somecases by the issuance of additional, including high vote, securities.In limited instances, stockholders are not granted a vote on a majortransaction. The most common example is the case of a “squeeze-out” or short-form merger, pursuant to which a parent corporationowning 90% or more of a subsidiary may acquire the minorityinterest without any vote by stockholders of the subsidiary.


Yes, stockholders can seek enforcement against directors or officersthrough either a derivative claim or a direct claim.A derivative claim is brought by a stockholder on behalf of thecorporation to assert a claim belonging to the corporation. Ifsuccessful, relief granted is awarded to the corporation, though theplaintiff stockholder is entitled to reimbursement for litigationexpenses. Procedurally, the stockholder generally must firstdemand that the board of directors initiate the action beforebringing a derivative claim.A direct claim is brought by a plaintiff seeking to enforce rightsbased on his or her status as a stockholder, such as voting or otherstatutory rights. Direct claims are often filed as class actions.In either case, claims against the board of directors are oftenunsuccessful, because of the protection afforded by the businessjudgment rule. As discussed in more detail in question 3.6, thebusiness judgment rule is a legal presumption that business decisionsare made by disinterested and independent directors on an informedbasis and with a good faith belief that the decision will serve the bestinterests of the corporation. If directors are sued with respect to abusiness decision, a court will examine the decision only to the extentnecessary to determine whether the plaintiff has alleged and provenfacts that overcome the business judgment rule presumption.


Yes. The Exchange Act has two sections that impose reportingrequirements on stockholders of public companies upon crossinglegally mandated ownership thresholds. Section 13(d) of the Exchange Act and the related rules require anystockholder or group of stockholders that acquire beneficialownership of 5% or more of a voting equity security of a publiccompany to report the acquisition, and in some cases, the purposeof the acquisition and the acquirer’s plans with respect to itsinvestment, to the SEC (and thereby to the public) and the company.This disclosure must be amended on an ongoing basis to reportmaterial changes to the information reported, including theacquisition of additional shares or a change in the acquirer’s plans.

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In addition, Section 16 of the Exchange Act and the related rulesrequire any stockholder or group of stockholders that beneficiallyown more than 10% of the outstanding stock of a public companyto report the acquisition, and subsequent purchases and sales, to theSEC and to the company. Persons or groups subject to Section 16are also prohibited from entering into short sales. Section 16 alsoapplies to directors and executive officers of a public companyregardless of their ownership level. As discussed below, purchasesand sales made while subject to Section 16 may be subject to profitdisgorgement.In addition, the Exchange Act requires public companies to reportthe ownership of their shares, if any, by (i) each member of theboard of directors, (ii) the five most senior executive officers, (iii)all directors and executive officers as a group, and (iv) holders ofmore than 5% of outstanding shares. This disclosure is typicallyincluded in the proxy statement distributed to stockholders prior tothe annual meeting. In addition to the disclosure requirements of the Exchange Act,other statutes may require disclosure of, or place limitations on,significant acquisitions of company securities. In particular, theHart-Scott-Rodino Anti-Trust Improvements Act of 1976 requiresprospective purchasers of publicly traded securities that exceedstated dollar or percentage thresholds to notify the Federal TradeCommission and the U.S. Department of Justice of the acquisitionin order to give those agencies the opportunity to challenge theacquisition on anti-trust grounds. Separately, Section 203 of theDGCL may restrict an acquirer of a significant portion of acorporation’s stock (generally, 15% or more) from engaging in abusiness combination with the corporation for a period of threeyears from the acquisition, unless the acquisition of the shares ispre-approved by the corporation’s board of directors. Furthermore, numerous public corporations have adopted“shareholder rights plans”, also known as “poison pills”. Theseplans drastically dilute the stock ownership of any purchaser orgroup of purchasers of corporate shares who makes purchases inexcess of a stated threshold without the prior approval of the boardof directors.Lastly, companies in certain regulated industries, such as financialservices companies or real estate investment trusts, are subject tostatutes that prohibit or significantly regulate the acquisition ofmore than a specified percentage of company stock by any singlestockholder or group of stockholders.


A public company is typically required to hold an annual meetingof stockholders. As noted above, most stockholders do not attendthe meeting, but express their vote by submitting a proxy. Under Delaware law, special meetings of stockholders may becalled by the board of directors, but not by stockholders unless theyare so authorised in the corporation’s certificate of incorporation orbylaws. In certain other states, state law gives stockholders owningin excess of a specified threshold the right to call special meetings.Stockholders have a right to attend the meeting and to vote theirshares. If the company does not have an advanced notice bylaw(described in question 1.2), stockholders present at the meeting maynominate individuals to serve on the board or present other businessfor consideration by stockholders. However, as a practical matter,in most cases such floor nominations or motions are unlikely tosucceed because the company will have collected proxiesauthorising it to vote in favour of the nominated directors prior tothe annual meeting.



The board of directors is charged with the responsibility foroverseeing the business, while the officers of the corporationmanage the business of the company on a day-to-day level. Theboard appoints and supervises the officers.Delaware law imposes few substantive restrictions or obligations onthe board, beyond providing that the business and affairs of thecorporation shall be managed by or under the direction of a boardof directors and imposing the fiduciary duty described below. TheDGCL requires only that the board consist of one or more directors,with the actual number fixed by, or in the manner provided in, thecertificate or bylaws of the corporation.However, significant substantive obligations and restrictions areimposed by the exchanges. In particular, the NYSE and Nasdaqrequire companies listed with either body to have a board ofdirectors consisting of a majority of independent directors. Inaddition, both NYSE and Nasdaq require the board to have certaincommittees composed entirely of independent directors. Thesecommittees are (i) a Nominating/Corporate GovernanceCommittee, (ii) a Compensation Committee, and (iii) an AuditCommittee. All such committees must have written charters thataddress, among other things, the committees’ purpose andresponsibilities.In addition, under NYSE rules, listed companies must adopt anddisclose corporate governance guidelines that cover, at a minimum,director qualification standards and responsibilities, director accessto management and independent advisors, director compensation,management succession and an annual performance evaluation ofthe Board of Directors. Nasdaq requires companies with listedsecurities to adopt a code of conduct for all directors and employeesand make it publicly available.


As discussed above, the board of directors is elected bystockholders, typically at a company’s annual meeting. Voting istypically done by proxy, following distribution by a company of aproxy statement meeting the requirements of the Exchange Act. Acompany’s certificate or bylaws will often state that in cases ofdirector resignation or removal, replacement directors can benamed by the existing board to serve until the next election. And insome cases a charter or bylaws may authorise a board to expand thenumber of directors that comprise the board and to appoint directorsto fill the new positions.In some cases, if provided in the certificate of incorporation, an initialbylaw, or a bylaw authorised by a vote of the stockholders, acorporation may have a classified board, consisting of one, two orthree classes. In the case of a classified board, directors serve forstaggered terms of two or three years, and only one class of directorswill be elected each year. As a result, it requires two or three annualelections to entirely change the composition of the board.In addition, with certain exceptions, directors may be removed byholders of a majority of shares entitled to vote at an election, withor without cause. In the case of a classified board, directors may beremoved only for cause (unless the charter otherwise permits).However, as noted above, as a practical matter the right to removedirectors may be difficult to exercise if stockholders are notpermitted under the certificate of incorporation or bylaws to call



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special meetings of stockholders or to act by written consentwithout a meeting.


There are no limitations under Delaware law on the remuneration ofdirectors. The DGCL provides that unless otherwise restricted bythe certificate of incorporation or the bylaws, the board of directorsshall have the authority to fix the compensation of directors. Similarly, except as discussed below, there are no statutory limits onofficer compensation, which is set by the board of directors. However,U.S. tax law generally limits the deductibility by a public company ofexecutive compensation in excess of $1 million annually unless suchexcess compensation is tied to a performance standard. Furthermore,senior executives at companies that received funds under the TARPprogramme are subject to limitations on compensation.The Exchange Act requires director compensation to be disclosed indetail, in tabular form, in the annual report or the proxy statementcirculated by the corporation to stockholders prior to its annualmeeting. In addition, as noted above, management compensation has been anarea of great public and institutional investor interest. A number ofprominent companies have had to address “Say on Pay” proposals.While such proposals can take many forms, they generally providefor stockholder approval - typically non-binding approval - of thecompensation of senior executives and/or board members.


Directors of Delaware corporations are not required by Delawarelaw to be stockholders, unless so required in the certificate orbylaws of the corporation.As noted above, the Exchange Act requires disclosure of shareownership by each director, as well as the number of shares held bydirectors and executive officers as a group, in tabular form. Thisdisclosure is typically made in the proxy statement circulated by thecompany to stockholders prior to the annual meeting. Directors and executive officers of public companies are subject toSection 16 of the Exchange Act. Section 16 requires, among otherthings, that information regarding transactions effected by directorsin company shares be reported to the SEC, and posted to thecompany website, within two business days following thetransaction. In addition, Section 16 provides a strict liabilityprophylactic rule against insider trading by directors, seniorofficers, and 10% owners: any two “opposite way” trades incompany shares made within a rolling six-month period - apurchase and a sale, or a sale and a purchase - by a person subjectto Section 16, including any director of such company, can be“matched” for statutory purposes, and the director can be compelledto disgorge the profit from any such matched trades, whether or nothe or she made any actual profit. Lastly, Section 16 prohibitsdirectors and executive officers from engaging in short sales ofshares of the company of which he or she is a director or officer.


The process for meetings of the board of directors is typicallycontained in the certificate of incorporation or the bylaws. The

DGCL generally places few requirements or limitations on meetingof the board, beyond expressly providing that, unless otherwiseprovided in the certificate of incorporation or bylaws, (i) action bythe board may be taken without a meeting if all directors consent inwriting to such action, and (ii) meetings may be held telephonically.


Directors of Delaware corporations owe a fiduciary duty to thecorporation and its stockholders. Under Delaware case law, afiduciary duty has been held to consist of two components: a dutyof care, and a duty of loyalty. In the most basic terms, the duty ofcare requires directors to exercise the skill and care that areasonably prudent person in a like position would exercise undersimilar circumstances - to act in an informed manner, while the dutyof loyalty prohibits self-dealing and requires the director to act inthe best interest of the corporation. A corollary to director’s fiduciary duties, however, is the businessjudgment rule. Strictly speaking this is a standard of judicial reviewof director conduct rather than a standard of conduct. It is a legalpresumption that business decisions are made by disinterested andindependent directors on an informed basis and with a good faithbelief that the decision will serve the best interests of thecorporation. If directors are sued with respect to a businessdecision, a court will examine the decision only to the extentnecessary to determine whether the plaintiff has alleged and provenfacts that overcome the business judgment rule presumption. If thepresumption is not overcome, courts will not second guess directorsby reviewing the merits of the business decision.As discussed in more detail below, corporations usually mitigate thepersonal liability of directors by purchasing director and officerinsurance, by limiting the liability of directors to the corporation andits stockholders in the certificate of incorporation, and by agreeing toindemnify them for claims, although there are exceptions to thesebenefits in certain cases, including where the director acts in bad faithor breaches his or her duty of loyalty to the corporation.


The principal responsibility of the board of directors is to oversee,on behalf of the stockholders, the business and affairs of thecorporation. As a general matter, this responsibility consists ofidentifying, hiring, and retaining senior management andoverseeing long term corporate strategy. Sarbanes-Oxley andrecent changes to the NYSE and Nasdaq rules have imposedspecific, substantive duties on the board or directors or committeesof the board, including the responsibility to retain and monitor thecompany’s independent financial auditor. NYSE and Nasdaq rulesrequire the board of directors to have, in addition to an auditcommittee, a compensation committee and a corporate governancecommittee. All three committees must be composed entirely ofindependent directors, and in addition, all members of the auditcommittee must be financially literate and at least one member mustbe have accounting or related financial management expertise.


Annual Disclosure. The Exchange Act requires a public companyto disclose, either in its annual report to stockholders or in the proxy

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materials delivered to stockholders in advance of the annualmeeting, information about the directors and senior executiveofficers. The information that must be disclosed includes:

their names, ages, positions with the company, any familyrelationships with other directors or officers, and theirbusiness experience during the past five years;their annual compensation, including in the case of the chiefexecutive officer, chief financial officer, and the three mosthighly compensated executive officers other than the CEOand CFO, extensive disclosure, in tabular form and narrativeform, of all forms of compensation, as well as acompensation discussion and analysis section that explainsthe material elements of the company’s compensationpolicies and practices;the ownership of company shares by directors, each seniorexecutive officer, and all directors and executive officers, asa group; and information regarding transactions between the company anddirectors, officers, and members of their immediate family inexcess of a stated dollar amount.

The company must also disclose certain information regarding itscorporate governance practices, including (i) the total number ofmeetings held by the board of directors during the prior fiscal year, and(ii) the name of each director who attended fewer than 75% of suchmeeting and the meetings of any committees on which he or she wasa member. The company is also required to disclose, in its proxystatement or on its website, the company’s policy with respect to boardmembers’ attendance at annual meetings, and to state the number ofboard members who attended the prior year’s annual meeting.In addition, a public company must disclose whether or not it hasstanding audit, nominating and compensation committees of theboard of directors, or committees performing similar functions. Ifthe company does have such committees, it must identify eachcommittee member, the number of committee meetings held bysuch committee, and describe briefly the functions performed byeach such committee. As noted above, companies with securitiestraded on the NYSE or Nasdaq are required to have suchcommittees, and to prepare and disclose written charters for each,as well as certain other governance-related information. Interim/Ongoing Disclosure. The company is also required to makeongoing public disclosures with respect to the board of directorsand senior executives. These disclosures include:

changes to the composition of the board of directors or ofcertain senior executive officers;amendments to, or waivers granted under, the company’scode of ethics;amendments to the certificate of incorporation or bylaws; andany trades in company shares by directors, senior executiveofficers, or 10% owners, within two business days followingthe trade. Trade information must be posted on thecompany’s website.


Yes. Delaware law explicitly permits the indemnification ofdirectors, and others, by the corporation who are or are threatenedto be a party to a lawsuit or similar proceeding by reason of the factthat such person is or was a director, against expenses (includingattorney’s fees), judgments, fines and amounts paid in settlementactually and reasonably incurred in connection with the action.The indemnity is available if the person acted in good faith and in amanner he or she reasonably believed to be in or not opposed to thebest interest of the corporation, and with respect to any criminal

action, if he or she had no reasonable cause to believe his or herconduct was unlawful.Delaware law also expressly authorises the corporation to purchaseinsurance on behalf of a person who is or was a director, whether ornot the corporation would have the power to indemnify such person.



There is little to no law or regulation concerning corporate socialresponsibility. However, many corporations will, as a matter ofpractice, include statements of their positions regarding theirunderstanding of their social responsibility in their annual reports.In addition, certain socially conscious investor organisations, andsome labour unions, have made a practice of routinely submittingcorporate social responsibility-related proposals to publiccompanies, either directly or through the use of Rule 14a-8.


There is no specific statutory or other legally mandated role foremployees in corporate governance. For example, there is norequirement that an employee representative serve on the board ofdirectors. The role of employees in corporate governance varies fromcompany to company. Some companies may designate a particularofficer, such as the Company Secretary or General Counsel, or otheremployee or group of employees, to be responsible for corporategovernance compliance, but there is no obligation to do so. Some states other than Delaware have “other constituency” statutesthat permit, but do not require, boards of directors to consider theinterests of employees (and other non-stockholder constituencies)when considering whether to accept or reject a takeover proposal.

5 Transparency


Disclosure and transparency are the responsibility of seniormanagement and of the board of directors. Customarily, senior officersare responsible for preparing and filing the annual, quarterly andperiodic reports required to be made by the company with the SEC,under the general supervision of the board of directors.Pursuant to amendments to the Exchange Act adopted underSarbanes-Oxley, the Chief Executive Officer and the ChiefFinancial Officer are obligated to include in every periodic reportcontaining financial statements filed with the SEC a writtencertification stating that the report fully complies with the ExchangeAct and that all information contained in the report presents fairly,in all material respects, the financial condition and results ofoperations of the company.In addition, the Exchange Act obligates management, with theparticipation of the Chief Executive Officer and the Chief FinancialOfficer, to evaluate the effectiveness of the company’s disclosurecontrols and procedures, as of the end of each fiscal quarter. TheChief Executive Officer and Chief Financial Officer are required todisclose the conclusions of such evaluation in a separatecertification.



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In addition, Section 404 of Sarbanes-Oxley requires publiccompanies to make disclosure regarding the scope and adequacy oftheir internal controls over financial reporting, and assessing theireffectiveness.


As noted above, a number of corporate governance relateddisclosures are required under U.S. law, and in particular under theExchange Act and the provisions of the Exchange Act added bySarbanes-Oxley.


The auditors of a public company must issue a report attesting to theadequacy and effectiveness of the financial reporting controls andprocedures disclosed by the company under Section 404 ofSarbanes-Oxley. Also, in extreme circumstances, auditors mustdisclose certain information (such as significant accountingdisagreements) directly to the public.


As a matter of practice, many companies publish, or link to, theirannual and periodic SEC filings on their websites. Companies withsecurities traded on the NYSE or Nasdaq are required by the rulesof these exchanges to post the charters of the Nominating,Compensation, and Audit Committee to their websites, as well as,in the case of NYSE listed companies, their corporate governanceguidelines. In addition, public companies are required to post theirproxy materials to a public website.Reports of trades in company shares affected by persons subject toSection 16 of the Exchange Act, such as the directors and executiveofficers, must also be posted to the company website.

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David E. Rosewater

Schulte Roth & Zabel LLP 919 Third AvenueNew York, New York 10022USA

Tel: +1 212 756 2208Fax: +1 212 593 5955Email: [email protected]: www.srz.com

David Rosewater is a partner in the Business Transactions Group atSchulte Roth & Zabel LLP. His practice focuses on private equity,mergers & acquisitions, leveraged buyouts and corporategovernance. In the M&A area, he has represented numerouscorporate and private equity buyers and sellers, including inconnection with the acquisitions of auto finance firm GMAC LLC;Austrian bank Bawag P.S.K; the Mervyn’s department store chain;luxury dinnerware company Lenox Group, Inc.; Newell RubbermaidInc.’s cookware, glassware and picture-frame businesses; and thefactoring businesses of GE Capital Corp. and HSBC Business Credit(USA) Inc. David also has represented clients in connection with anumber of major campaigns by activist investors, including thoseinvolving CNET Networks, CSX Corp., The New York Times Co. andMcDonald’s. He received his J.D., cum laude, from New YorkUniversity School of Law, and his B.A., with distinction, from theUniversity of Michigan.

Marc Weingarten

Schulte Roth & Zabel LLP919 Third AvenueNew York, New York 10022USA

Tel: +1 212 756 2280Fax: +1 212 593 5955Email: [email protected]: www.srz.com

Marc Weingarten is Chairman of the Business Transactions Group atSchulte Roth & Zabel LLP. His practice focuses on corporategovernance, mergers & acquisitions, leveraged buyouts, securitieslaw and investment partnerships. Marc regularly counsels publicand private companies, and investors in such companies, oncorporate governance and transactional matters, including stock orcash acquisitions, tender offers and proxy contests. On the dealside, his transactional prowess earned Marc selection as a“Dealmaker of the Year” from The American Lawyer for hisrepresentation of the buyer in the acquisition of an 80% interest inChrysler from Daimler. He has also represented buyers ofcontrolling interests in GMAC and Aozora Bank, as well as otherfinancial entities, restaurant chains, media companies, retailers,pharmaceuticals and other companies. He has a B.A. from theUniversity of Pennsylvania’s Wharton School and a J.D. fromGeorgetown University Law Center. Marc serves on the Committeeon Mergers, Acquisitions and Corporate Control Contest of the NewYork City Bar Association, and is on the Board of the Institute forLaw and Economics at the Wharton School.

Founded in 1969, Schulte Roth & Zabel LLP, with offices in New York, London and Washington, D.C., has grown toover 450 attorneys whose primary focus is delivering sophisticated, leading-edge advice to clients, including Fortune500 companies, prominent financial institutions, and leading investment firms. We strive to build and maintain long-term relationships by emphasising client service. To ensure that the advice we provide is comprehensive, we take ateam approach to staffing that often crosses practice areas and jurisdictions.

We are one of the leading law firms in the area of business transactions, including mergers and acquisitions, leveragedbuyouts, special opportunity investments, activist matters, public offerings, high-yield debt issues and PIPEtransactions. Our clients include both financial and strategic investors.

The firm regularly advises public and private companies, and investors in such companies, on corporate governanceand transactional matters.

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