ICLGThe International Comparative Legal Guide to: Corporate Governance 2017 10th Edition A practical cross-border insight into corporate governance

Published by Global Legal Group, with contributions from:

Allens Kluge Advokatfirma AS ALRUD Law Firm Law Firm Charles Badou & Partners Ashurst Hong Kong Lenz & Staehelin Ashurst LLP Linklaters LLP Astrea Lobo & Ibeas Advogados BEITEN BURKHARDT McCann FitzGerald BGK Law Firm Montel&Manciet Advocats Blake, Cassels & Graydon LLP Munari Cavani Čechová & Partners Nielsen Nørager Law Firm LLP Cox Hallett Wilkinson Limited Nishimura & Asahi Cuatrecasas Trilegal Dorsey & Whitney LLP TSG Tomić Sinđelić Groza Edmond Pereira Law Corporation UGGC Law Firm Ferraiuoli LLC Waselius & Wist Georgiev, Todorov & Co. WBW Weremczuk Bobeł & Partners, Attorneys at Law Hadiputranto, Hadinoto & Partners (HHP Law Firm) Zhao Sheng Law Firm I. Frangos & Associates LLC The International Comparative Legal Guide to: Corporate Governance 2017

Country Question and Answer Chapters:

1 Andorra Montel&Manciet Advocats: Maïtena Manciet Fouchier & Liliana Ranaldi González 1

2 Australia Allens: Vijay Cugati & Kate Towey 5

Contributing Editors 3 Belgium Astrea: Steven De Schrijver & Thomas Daenens 13 Bruce Hanton & Vanessa Marrison, Ashurst LLP 4 Benin Law Firm Charles Badou & Partners: Charles Badou & Ogoudjé César Guégni 21 Sales Director Florjan Osmani 5 Bermuda Cox Hallett Wilkinson Limited: Natalie Neto 27 Account Director 6 Brazil Lobo & Ibeas Advogados: Paulo Eduardo Penna 33 Oliver Smith Sales Support Manager 7 Bulgaria Georgiev, Todorov & Co.: Alexander Katzarsky & Georgi Georgiev 41 Paul Mochalski Senior Editors 8 Canada Blake, Cassels & Graydon LLP: Frank P. Arnone & Madison Kragten 47 Suzie Levy, Rachel Williams 9 China Linklaters LLP / Zhao Sheng Law Firm: Fang Jian & Grace Yu 54 Chief Operating Officer Dror Levy 10 Cyprus I. Frangos & Associates LLC: Maria Raphael & Nikoleta Pogiatzi 61 Group Consulting Editor Alan Falach 11 Denmark Nielsen Nørager Law Firm LLP: Peter Lyck & Thomas Melchior Fischer 71 Publisher Rory Smith 12 Finland Waselius & Wist: Fredrik Lassenius 78

Published by 13 Germany BEITEN BURKHARDT: Moritz Kopp, LL.M. & Dr. Markus Ley 85 Global Legal Group Ltd. 59 Tanner Street 14 Hong Kong Ashurst Hong Kong: Joshua Cole 92 London SE1 3PL, UK Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 15 India Trilegal: Kosturi Ghosh & Wiseroy Damodaran 97 Email: [email protected] URL: www.glgroup.co.uk 16 Indonesia Hadiputranto, Hadinoto & Partners (HHP Law Firm): Mark Innis & Denny Ngadimin 104 GLG Cover Design F&F Studio Design 17 Ireland McCann FitzGerald: David Byers & Paul Heffernan 111 GLG Cover Image Source iStockphoto 18 Italy Munari Cavani: Raffaele Cavani & Paolo Preda 118 Printed by Ashford Colour Press Ltd 19 Japan Nishimura & Asahi: Nobuya Matsunami & Kaoru Tatsumi 125 June 2017 20 Morocco UGGC Law Firm: Ali Bougrine 132 Copyright © 2017 Global Legal Group Ltd. 21 Norway Kluge Advokatfirma AS: Atle Degré & Linn Hoel Ringvoll 138 All rights reserved No photocopying 22 Poland WBW Weremczuk Bobeł & Partners, Attorneys at Law: Łukasz Bobeł & ISBN 978-1-911367-56-7 Krzysztof Weremczuk 145 ISSN 1756-1035 23 Cuatrecasas: João Mattamouros Resende 152 Strategic Partners Portugal 24 Puerto Rico Ferraiuoli LLC: Fernando J. Rovira-Rullán & Yarot T. Lafontaine-Torres 158

25 Russia ALRUD Law Firm: Anton Dzhuplin & Timur Akhundov 164

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28 Slovakia Čechová & Partners: Katarína Čechová & Ivan Kolenič 190

29 Slovenia BGK Law Firm: Luka Gaberščik 196

30 Switzerland Lenz & Staehelin: Patrick Schleiffer & Andreas von Planta 201

31 United Kingdom Ashurst LLP: Bruce Hanton & Vanessa Marrison 208

32 USA Dorsey & Whitney LLP: Robert A. Rosenbaum & Cam C. Hoang 220

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WWW.ICLG.COM EDITORIAL

Welcome to the tenth edition of The International Comparative Legal Guide to: Corporate Governance. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of corporate governance. The guide is divided into country question and answer chapters. These provide a broad overview of common issues in corporate governance laws and regulations in 32 jurisdictions. All chapters are written by leading corporate governance lawyers and industry specialists, and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editors Bruce Hanton and Vanessa 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 at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

Andorra Maïtena Manciet Fouchier

Montel&Manciet Advocats Liliana Ranaldi González

1 Setting the Scene – Sources and 1.3 What are the current topical issues, developments, Overview trends and challenges in corporate governance?

The Principality of Andorra is in the process of modernising 1.1 What are the main corporate entities to be discussed? its corporate sector, which was recently opened up to foreign investment. With respect to the sectorial regulation of the The main corporate entities that will be discussed in this chapter corporate governance of financial institutions, there has been a are the societat anònima (SA) and the societat de responsabilitat significant legislative effort to harmonise Andorran policy with the limitada (SL), without taking into account the specificities requirements of neighbouring countries. However, Andorra is still a contemplated in the sectorial laws mentioned below. Please bear in conservative jurisdiction in terms of corporate governance. mind that in Andorra there is no stock exchange market.

2 Shareholders 1.2 What are the main legislative, regulatory and other corporate governance sources? 2.1 What rights and powers do shareholders have in the Both the societat anònima and the societat de responsabilitat operation and management of the corporate entity/ limitada are regulated by the Legislative Decree of February 26th, entities? 2014 of the consolidated text of Law 20/2007 of October 18th, 2007 (Decret legislatiu del 26 de febrer de 2014 de publicació del text The ownership of one or more shares confers the status of refós de la 20/2007, del 18 d’octubre, de societats anònimes i de shareholder to its holder, and all the rights and obligations responsabilitat limitada). inherent to the share and, in particular, the right to participate in It is mandatory for both types of companies to have articles of the distribution of corporate earnings and in the net assets resulting association containing the primary regulations for the company’s from the company’s liquidation, the right of first opportunity to operations and organisation. purchase, the pre-emptive right to subscribe to the issuance of new shares established at the articles of association, the right to vote at There are also sectorial laws which include regulations regarding the general meetings and the right to receive information. corporate governance, such as: ■ Llei 37/2014, de l’11 de desembre, de regulació dels jocs d’atzar. 2.2 What responsibilities, if any, do shareholders have as ■ Decret legislatiu del 12-02-2014 de publicació del text regards the corporate governance of their corporate refós de la Llei 8/2013, del 9 de maig, sobre els requisits entity/entities? organitzatius i les condicions de funcionament de les entitats operatives del sistema financer, la protecció de l’inversor, The ownership of one or more shares implies the submission of its l’abús de mercats i els acords de garantia financera. holder to the articles of association, and to all the decisions of the ■ Decret legislatiu del 12-02-2014 pel que s’aprova el text general meetings, without prejudice to the rights and actions granted refós de la Llei de regulació del règim disciplinari del sistema to them by the law. financer.

■ Llei 7/2013, del 9 de maig, sobre el règim jurídic de les 2.3 What shareholder meetings are commonly held and entitats operatives del sistema financer andorrà i altres what rights do shareholders have as regards them? disposicions que regulen l’exercici de les activitats financeres al Principat d’Andorra. The shareholders’ meetings are called General Meetings, which may ■ Llei 24/2008, del 30 d’octubre, sobre el règim jurídic de les be ordinary or extraordinary. entitats financeres -no bancàries- de crèdit especialitzat. An Ordinary General Meeting must be called once a year in first There is proposed legislation currently with the Andorran parliament the six (6) first months following the end of the financial year. An concerning insurance companies. This legislation contains a number of requirements on corporate governance.

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Ordinary General Meeting has the power to make decisions on the following matters: 3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of a. Approving the annual accounts. members of the management body? b. Adopting resolutions on the allocation of results. c. Censorship of the social management. The administrators or members of the board of directors can An Extraordinary General Meeting can be called during the year as be remunerated. The articles of association must establish the many times as it is necessary for the company’s interest and must remuneration system and the General Meeting is the body in always be called when requested in writing by shareholders who charge of applying the remuneration system for each fiscal year. represent at least ten (10) per cent of the share capital. The remuneration of the CEO must be established by the board of

Andorra directors without the involvement of the director affected by the decision. 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? 3.4 What are the limitations on, and what disclosure is As long as the company is not extinguished, the shareholders are required in relation to, interests in securities held by liable with respect to the company and its creditors up to the value members of the management body in the corporate entity/entities? of their contributions to the company’s share capital.

Even if there is no specific provision on this type of disclosure, we 2.5 Can shareholders be disenfranchised? understand that taking into account the duty of loyalty towards the company’s interest established by Andorran law, administrators A company may exclude a shareholder that breaches the obligations or members of the board of directors are obliged to disclose any of the partnership agreement or any clauses expressly established by interest that they might have in the company. the articles of association.

The exclusion of a shareholder requires the agreement of the 3.5 What is the process for meetings of members of the General Meeting and the reduction of the share capital to reimburse management body? the value of the shares. The board of directors is normally called to a meeting by the chairman 2.6 Can shareholders seek enforcement action against within the term established by the articles of association. Meetings members of the management body? of the board can be validly held, without a prior announcement, when all of the members of the board are present in person or by proxy. A shareholder can seek the enforcement of actions against members Resolutions shall be adopted by the majority of the directors present of the management body for acts or omissions which violate the in person or by proxy. However, a resolution of the Board of law or the articles of association, providing that the interests of the Directors regarding the delegation of its powers must be adopted by shareholder are directly harmed by such acts or omissions. two-thirds (2/3) of the members of the board. The social action for liability against members of the management Provided no director is opposed thereto, the board may also act body is exercised by the company, with the prior consent of the in writing and without a meeting. In this latter case, the directors General Meeting, which can be adopted even if not stated on the may cast their votes and make such comments as they wish to have agenda of the day. recorded in the minutes by e-mail or by any other distance means of communication, on the condition that the accreditation of the directors’ identity and the outcome of the vote are ensured. 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by All resolutions adopted by the board of directors shall be recorded in shareholders in the corporate entity/entities? minutes drafted by the secretary or the vice-secretary. The minutes of each session must be authorised by way of the signature of the There is no specific limitation on interests in securities held by chairman and the secretary at the latest at the beginning of the shareholders in a corporate entity/entities. following meeting. Board of directors’ resolutions shall be evidenced by means of a 3 Management Body and Management certificate issued by the secretary of the board or by thevice- secretary, as the case may be, with the approval of the chairman or the vice-chairman, as applicable. 3.1 Who manages the corporate entity/entities and how? 3.6 What are the principal general legal duties and The company shall be governed, managed and represented by a liabilities of members of the management body? governing body that can adopt one of the following structures: a single administrator; joint administrators; several administrators; or Administrators or members of the board of directors have to exercise a board of directors. their position with loyalty to the interests of the company and with the allegiance of a good representative. 3.2 How are members of the management body appointed The duty of diligence obliges members of the management body to and removed? apply, in the area of administration, the time, effort and knowledge that can be expected from a businessman that occupies a similar The administrators or the members of the board of directors are position, and, in particular, to be adequately informed about the appointed and removed by a resolution of the General Meeting. company’s evolution, to participate actively in its administration and to investigate any irregularities in the company’s management.

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The duty of allegiance obliges the administrator or the member of the board of directors to act in the honest manner expected of a 4.2 What, if any, is the role of other stakeholders in representative who manages external resources, and in particular, to corporate governance? refrain from: (i) competing with the company; (ii) taking advantage of the company’s business opportunities; and (iii) using the Besides the creditor’s right to be informed about any eventual company’s assets for personal purpose. capital reduction or about the liquidation of the company, there are no specific legal provisions regarding the role of stakeholders in corporate governance. 3.7 What are the main specific corporate governance responsibilities/functions of members of the management body and what are perceived to be the 4.3 What, if any, is the law, regulation and practice key, current challenges for the management body? concerning corporate social responsibility? Andorra

Administrators and members of the board of directors have wide There is no specific regulation on corporate social responsibility. powers to manage the company and to represent it, in and out of However, anyone applying for foreign investment authorisation court, including with respect to any transfer related to the company’s for the incorporation of an Andorran company must define in assets (with the exception of those matters exclusively within the the application the corporate social responsibility model that the purview of the General Meeting). company to be incorporated would apply. Furthermore, administrators or members of the board of directors have the following specific attributions: 5 Transparency and Reporting a. To establish the dates of the General Meetings, and their agendas. b. To call an Ordinary General Meeting in order for it to 5.1 Who is responsible for disclosure and transparency? meet within the six (6) months following the closing of the financial year. There are no specific legal provisions on this matter. c. To draft and present for the approval of the General Meeting the annual accounts (that comprise the balance sheet, the profit and loss statement, the annual report to the accounts, 5.2 What corporate governance related disclosures are the statement of changes in the equity, the statement of cash required? flow and the management report), the proposed allocation of profits or losses, and a proposal related to the budget for the There are no specific legal provisions on this matter. next year, within six months of the end of each financial year.

5.3 What is the role of audit and auditors in such 3.8 What public disclosures concerning management disclosures? body practices are required? In certain cases auditors must verify the annual accounts of a There are no specific legal provisions on this matter. company in order to ensure that the accounts are a fair reflection of the company’s equity, of its financial situation and of its operating results. Auditors must verify that the information provided in the 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? annual accounts is true and that it provides an accurate picture of the company. There are specific insurances that cover the eventual liability of the administrators or of the members of the board of directors. 5.4 What corporate governance information should be published on websites?

4 Other Stakeholders There are no specific legal provisions on this matter.

4.1 What, if any, is the role of employees in corporate governance?

There are no specific legal provisions regarding the role of employees in corporate governance. Notwithstanding the foregoing, employees’ representatives have the right to be informed about the general evolution of the company’s economic sector and matters regarding production, sales and recruitment.

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Maïtena Manciet Fouchier Liliana Ranaldi González Montel&Manciet Advocats Montel&Manciet Advocats Carrer Ciutat Consuegra, núm. 16 Carrer Ciutat Consuegra, núm. 16 Edifici L’Illa. Bloc A. 3r. 1a. Edifici L’Illa. Bloc A. 3r. 1a. AD500, Andorra la Vella AD500, Andorra la Vella Andorra Andorra

Tel: +376 809 809 Tel: +376 809 809 Fax: +376 863 698 Fax: +376 863 698 Email: [email protected] Email: [email protected] URL: www.mmadv.ad URL: www.mmadv.ad Andorra Maïtena Manciet began her professional career as a lawyer in 1986, Liliana Ranaldi González has been an associate of Montel&Manciet after working in the academic sector at the Université des Sciences Advocats since 2010. Her practice focuses on corporate and tax Sociales de Nice. Her practice focuses on corporate and public law matters. She graduated from the Universidad Católica Andrés Bello matters. She holds a Ph.D. in Private Law and a Master’s Degree (Caracas, Venezuela) and holds a Master’s Degree in the Banking in Law and Economy from the Université de Droit et de Sciences Sector and of Financial Agent (Madrid, Spain) and a Master’s Degree Economiques (Nice, France). She speaks fluent English, Catalan, in Business Legal Practice from the I.E. Business School (Madrid, French and Spanish. Spain). She is member of the Bar Associations of both Andorra and Madrid. She speaks fluent English, Catalan and Spanish.

Montel&Manciet Advocats was founded in 1992 and since the beginning it has been dedicated to integral and multidisciplinary legal counselling for both individuals and enterprises, with wide experience in outstanding domestic and cross-border transactions. Continuously adaptating to the market, Montel&Manciet Advocats has a strong commitment to its clients in the development of their activities in Andorra and abroad. Its highly qualified team has a diverse and complementary academic background and professional experience abroad, and is engaged in rendering an efficient and dynamic service to its clients.

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Australia Vijay Cugati

Allens Kate Towey

grounds for culpability. This approach is taken in the regulation of, 1 Setting the Scene – Sources and for example, competition and consumer protection, environmental Overview protection, and occupational health and safety. There are also some specific legislative and regulatory standards that apply to particular industry sectors – for example, financial institutions (banks 1.1 What are the main corporate entities to be discussed? and insurers) must comply with the Prudential Standards of the Australian Prudential Regulation Authority (APRA), and specific This chapter focuses on Australian public companies listed on the legislation and prudential guidance applies to superannuation Australian Securities Exchange (ASX). ASX is Australia’s principal providers. securities exchange with almost 2,200 listed companies, having a total market capitalisation of approximately AUD 1.5 trillion. All references in this chapter to ‘companies’ are to ASX listed Australian 1.3 What are the current topical issues, developments, companies. Corporate governance requirements also apply to other trends and challenges in corporate governance? entities in Australia; however, these are beyond the scope of this chapter. The information in this chapter is up to date as of April 2017. There have been several important corporate governance developments in Australian legislation, case law and practice over recent years. The most significant of these relate to: 1.2 What are the main legislative, regulatory and other corporate governance sources? 1. continuous disclosure: two prominent cases brought by ASIC – the James Hardie and Fortescue cases – emphasise directors’ responsibility to take steps to ensure that a company The most relevant sources are the Corporations Act 2001 (Cth) (the complies with its continuous disclosure obligations, and that Corporations Act), publications by the Australian Securities and announcements made by the company are accurate and not Investment Commission (ASIC), the listing rules of the ASX, and a misleading. This aligns with an increasing trend for inadequate company’s constitution and common law. disclosure practices to form the basis of shareholder class The principal legislative source of corporate governance actions against public companies. In 2013, ASX issued a requirements in Australia is the Corporations Act. The Corporations revised Guidance Note 8 on a listed company’s continuous disclosure obligations. The Guidance Note clarifies the Regulations 2001 (Cth) supplement the Corporations Act. meaning of ‘immediately’ for the purposes of Listing Rule ASIC administers the Corporations Act. ASIC publishes Regulatory 3.1 (disclosure of market-sensitive information) and narrows Guides, some of which deal with corporate governance matters. the parameters for applying the ‘reasonable person’ test under Regulatory Guides are advisory, setting out ASIC’s understanding Listing Rule 3.1A (disclosure carve-out). The Guidance Note and interpretation of relevant legislation. also provides greater direction on requested trading halts, confidential and incomplete control proposals, unanticipated Companies are bound by the official listing rules of the ASX, company earnings, and the potential loss of confidentiality commonly referred to as the Listing Rules. The ASX Corporate through media reports and market rumours; Governance Council’s Corporate Governance Principles and 2. executive remuneration: a series of reforms regarding the Recommendations are a set of guidance principles which apply to all level of executive remuneration and how this is disclosed to, companies on a ‘comply or explain’ basis – companies must either and influenced by, shareholders, has been introduced. The comply with these standards or explain in their annual report why they most significant of these is the ‘two strikes’ rule described have not done so. We refer to them as the Governance Principles. in question 2.1. Whilst the introduction of the reforms has Each company is bound by its constitution, which operates as a increased the engagement of companies with shareholders in contract between the company and its shareholders and with its respect of executive remuneration, there are also incidences directors and secretary, respectively. where it would appear that the ‘two strikes’ rule has been used by shareholders for purposes other than remuneration; and The common law (created by judicial precedent) also contains rules 3. measures to increase shareholder influence: several changes relating to corporate governance. introduced to the Corporations Act are aimed at increasing In addition to the above sources, various pieces of legislation include the ability of shareholders to influence the behaviour of liability provisions affecting companies or their directors in specific companies and their boards, including the requirement that areas that therefore influence governance systems, particularly directed proxies be voted (see question 2.7), and the increased where a failure to implement sufficient systems to prevent harm is ability for external candidates to nominate for board positions under the ‘no vacancy’ rule (see question 3.2).

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Corporate governance in Australia faces several challenges in 2017: 4. significant transactions: simple majority approval is 1. continuous disclosure requirements: directors face required if a company proposes to make a significant change significant challenges in reconciling their legal duties in to the nature or scale of its activities, or to dispose of its relation to the disclosure of material information with the main undertaking. A special resolution is required to allow complexities of (a) their personal appraisals of information, a person to acquire a ‘relevant interest’ (in simple terms, (b) the drafting of proposed disclosure announcements, and control) in over 20% of the voting power of the company (see (c) ascertaining an appropriate time for disclosure; question 2.7); and 2. shareholder activism: in addition to the comments at question 5. alteration of rights: alterations to the rights attaching to 2.6 on class actions, domestic institutional investors continue classes of shares must generally be approved by special to increase their focus and engagement on governance and resolution, normally by all shareholders and by each relevant corporate activity. Although Australia does not yet have a class, unless otherwise specified in a company’s constitution. Australia developed activist hedge fund industry like the US, there Shareholders also have a powerful advisory vote in relation to are a number of active players, with more expected. Such remuneration in the ‘two strikes’ rule. This rule reflects trends activists, along with institutional investors, have become to increase the influence of shareholders in specific areas; in this more vocal in their public engagement of boards, often using case, remuneration of executives. Each year, companies must the financial press to publicise their agendas and calls for report on their remuneration practices in the annual report, and this change; and ‘remuneration report’ is subject to an advisory vote by shareholders. 3. conduct risk: since the global financial crisis, Australian If the remuneration report receives an ‘against’ vote greater than regulators have increased their focus on corporate culture 25% of votes cast (known as a strike), the board must report and its links with management and employee conduct. In Australia, the Financial System Inquiry and the against concerns raised in the subsequent remuneration report. If a Commonwealth Government’s 2015 response identified a subsequent strike is received the following year, a ‘spill resolution’ number of specific measures to be addressed in 2016 and must be put to the meeting – and if this is approved by more than 2017, including introducing minimum professional, ethical 50% of shareholders, the board must call and hold a meeting within and education standards, and consultation on measures to 90 days to consider the re-election of all of the current directors, improve consumer protections and issuer accountability in other than the managing director. relation to financial products. APRA-regulated financial In addition to the ‘two strikes’ rule, directors of companies are services entities are subject to specific conduct risk management requirements under the relevant prudential required to submit themselves for re-election at least every three standards. years, which provides shareholders with an ongoing ability to alter the composition of poorly performing boards. In Australia, pension and superannuation funds and other 2 Shareholders institutional investors hold significant positions in many companies, particularly in those appearing in investment indexes. Australian 2.1 What rights and powers do shareholders have in the proxy advisers have a significant role encouraging and advising operation and management of the corporate entity/ on activism amongst institutional shareholders, and shareholders entities? generally.

Shareholders vote to appoint and approve appointments to the 2.2 What responsibilities, if any, do shareholders have as board; most company constitutions then delegate operation and regards the corporate governance of their corporate management of a company’s business to the board and its delegates, entity/entities? and only limited matters specified by the company’s constitution, the Corporations Act or the Listing Rules require shareholder There are no positive obligations or responsibilities placed on approval. Some approvals require a simple majority, others a shareholders in relation to corporate governance. Shareholders special resolution (approval by 75% of shareholders entitled to vote are empowered to participate and engage in corporate governance on the matter). Key approvals required from shareholders under the within a delegated authority model. Under this model, directors Corporations Act and the Listing Rules are: are responsible for managing companies and they are held 1. name and constitution: any change to the company’s name accountable for their decisions by shareholders, who are entitled to or constitution must be approved by a special resolution; appoint and remove the directors. Therefore, the contribution of 2. capital management: certain reductions of capital and share shareholders to good corporate governance is the exercising of the buy-backs require approval, either by simple majority or power of accountability of directors through the exercise of voting special resolution, depending on the circumstances. Simple entitlements. A pertinent example of shareholder oversight is the majority approval is required for companies to issue shares annual appraisal of executive remuneration under the ‘two strikes’ in excess of 15% of existing equity capital in any 12-month rule (see question 2.1). period. A company financially assisting another to acquire shares in itself also requires a special resolution, unless the assistance does not prejudice the interests of the company, its 2.3 What shareholder meetings are commonly held and shareholders, or its ability to pay its creditors; what rights do shareholders have as regards them? 3. related party transactions: simple majority approval is required for companies to give any financial benefit to Companies must hold an Annual General Meeting (AGM) at least related parties (including directors), with limited exceptions once each year, and within five months of the end of its financial including benefits given on arm’s-length terms, and year. The statutory annual financial report, auditor’s report and reasonable remuneration. Any issue of securities to related directors’ report must be presented to the AGM. The AGM must parties (even if reasonable remuneration) must be approved consider the advisory resolution on the remuneration report, and will by a simple majority of shareholders (either specifically or by commonly consider the re-election of directors (see question 2.1). an approved share plan); The company auditor must attend the AGM. Shareholders have a

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right to submit questions to the auditor in advance, and must be given an opportunity to ask questions of the auditor at the meeting. 2.6 Can shareholders seek enforcement action against There must also be an opportunity for shareholders to ask questions members of the management body? about, or make comments on, the management of the company and the remuneration report. Directors owe duties to the companies, and the company is generally the proper body to bring a claim against the directors if those duties A company may also call shareholder meetings to consider specific are breached. Shareholders are generally denied the right to bring business from time to time, such as the matters discussed in question a personal action where the shareholder’s loss is reflected in a 2.1. A shareholder meeting must be held if it is requisitioned by loss by the company for which the company could sue. However, shareholders individually or collectively holding at least 5% of the shareholders have statutory rights to bring derivative actions on votes in the company.

behalf of a company (including against directors), with leave of the Australia For all shareholder meetings, members have the right: to receive court. 28 days’ notice of the meeting, which must include specified There are two avenues for shareholders to obtain orders against information; to attend and vote at the meeting in person or by proxy directors by taking personal action under the Corporations Act: (subject to any voting restrictions that apply to specific matters); and to be heard at the meeting. If a meeting will consider the 1. if a shareholder’s interests are affected by a contravention of election of directors, shareholders must be given the opportunity to the Corporations Act, it will have statutory rights to seek an injunction or compensation orders; and nominate candidates. Auditors are entitled to attend and be heard at all shareholder meetings. There are rules mandating that directed 2. if a shareholder is aggrieved by the failure of a company’s directors to comply with the Listing Rules, it may seek a proxy votes be cast as directed, and requiring proxy votes to be court order to seek enforcement of the rule. disclosed to ASX. Shareholder class actions have become prevalent in the Australian corporate landscape. Although the number of class actions has been 2.4 Can shareholders be liable for acts or omissions of relatively few, they are increasing, and the nature of such actions the corporate entity/entities? has had a noticeable impact on corporate governance discourse and practice. In a recent development in this area, the NSW Supreme Australian law separates corporate liability from that of shareholders. Court in the HIH Insurance case ruled that shareholders can prove The liability of shareholders is limited to their equity investment in causation in a class action by establishing that the price of the shares a company. Although there are circumstances where the ‘corporate they bought was ‘inflated’ by a company’s misleading statements. veil’ may be pierced to impose liability on shareholders, these are Many class actions are brought against companies rather than their exceptional and very unlikely to arise for shareholders that do not directors; however, directors have often been targeted in resulting control a company. cross-claims.

2.5 Can shareholders be disenfranchised? 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by In certain circumstances, the rights of shareholders can be amended, shareholders in the corporate entity/entities? or shareholders can be forced to dispose of their shares, without their individual consent. The main instances are: There are two main rules: 1. takeovers: if a bidder has acquired more than 90% of a 1. a prohibition on acquiring ‘voting power’ which exceeds company through a takeover, the bidder can compulsorily 20%, subject to limited exceptions; and acquire the remaining shares; 2. a requirement to disclose substantial shareholdings. 2. schemes of arrangement: with approval of 75% of each These rules apply to listed companies, unlisted companies with class of shareholder, and majority approval by a number of more than 50 members and listed managed investment schemes. shareholders in each class, companies can implement a scheme of arrangement which, following court approval, becomes A person is not permitted to acquire a ‘relevant interest’ in shares if, binding on all shareholders. Schemes of arrangement can be as a result, their (or someone else’s) ‘voting power’ in a company used to effect a change of control of a company or to change would exceed 20%. ‘Relevant interest’ is a broad concept that shareholder rights; includes holding shares, having the power to vote or control voting 3. approved capital reductions: reductions of capital or share on shares, and having the power to dispose of or control disposal buy-backs that have requisite shareholder approval (see of shares. ‘Voting power’ is calculated as a proportion of the total question 2.1) may be used to reduce or cancel a shareholder’s voting capital of a company, and a person’s voting power includes all interest in a company; and voting shares that they, and their associates, have relevant interests 4. changes to shareholder rights: rights of classes of shares in. The application of this rule is very broad. The restriction is a may be varied or cancelled by special resolution of both prohibition, and acquisitions in excess of the threshold are a breach shareholders in that class, and shareholders as a whole, unless of law and may be subject to divestiture orders unless an exception the constitution specifies otherwise. Changes may also be applies. Permitted exceptions include acquisitions made during a made to the constitution by special resolution; however, changes that increase any requirement to contribute capital to takeover, acquisitions that have been approved by shareholders, the company will not bind existing shareholders. court-approved schemes of arrangement, and limited ‘creep’ acquisitions of no more than 3% in six months. In addition to voting thresholds and other procedural matters, there are statutory and common law grounds for a court to intervene to A person has a substantial holding in a company if the total votes protect minority shareholders from oppressive conduct. attached to shares held by themselves or their associates is 5% or more of the total number of votes attached to shares in the company. A person must inform a company and ASX if the person begins to have, or ceases to have, a substantial holding in a company, or has a substantial holding that increases or decreases by at least 1%.

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Termination payments for directors, and senior executives holding 3 Management Body and Management managerial or executive office, are capped at one year’s base salary, with higher payments requiring shareholder approval. The 3.1 Who manages the corporate entity/entities and how? Corporations Act also regulates how companies receive advice on remuneration matters – remuneration consultants must be engaged by the board or a remuneration committee and may only give A company is managed by a board of directors. The board of a advice to non-executive directors, and details of the advice and the public company must have at least three directors, though some fees paid to the remuneration consultants must be disclosed in the company constitutions will specify a higher minimum. At least remuneration report (see question 2.1). two directors must ordinarily reside in Australia. Boards may include both executive directors, who are also employees of the The Listing Rules restrict the total amount which companies Australia company, and non-executive directors. The Governance Principles may pay in directors’ fees to the amount that has been approved recommend that a majority of the board should be independent (non- by shareholders. This cap does not include salaries for executive directors. It is prohibited to pay executive directors any percentage executive directors that are free from relationships that may impede of operating revenue, and non-executive directors may only be paid independent judgment), and that the chair be an independent director. a fixed sum. It is common, and recommended by the Governance Principles, that The Governance Principles recommend that directors be formally boards delegate oversight of certain matters to formal committees. appointed and that certain terms be specified in their appointment. Companies that are included in the S & P All Ordinaries Index must The structure of remuneration for non-executive and executive have an audit committee. If the company is included in the S & P/ directors should be clearly distinguished. Non-executives should ASX 300 Index, its audit committee must only include non-executive receive fees – they should not participate in executive incentive plans, directors, a majority being independent, and it must also have a nor receive options, bonus payments, or termination benefits other remuneration committee comprising only non-executive directors. than superannuation. Executive remuneration packages (including Risk management and nomination committees are recommended by for executive directors) should comprise a mixture of fixed and the Governance Principles. Other common committees deal with performance-based remuneration. Equity-based remuneration may health and safety, the environment, and ethics and compliance. be appropriate for executives, within guidelines suggested to reduce Company constitutions commonly provide for the board to delegate ‘short-termism’. Termination payments (if any) should be confined the operation and management of the company to management, to defined circumstances agreed up front, within statutory limits. often through a managing director or chief executive officer. Directors are not excused from liability for any powers they delegate 3.4 What are the limitations on, and what disclosure is to committees or to management, subject to narrow exemptions – required in relation to, interests in securities held by see elsewhere in section 3. members of the management body in the corporate entity/entities?

3.2 How are members of the management body appointed Directors are neither required to own, nor prohibited from owning, and removed? shares in the companies that they serve under the Corporations Act. Some constitutions do provide that a director hold a minimum Shareholders appoint directors, and must ratify their appointment if number of shares or it may be a term of a board charter, though both they are initially appointed by the board. Such approval normally situations are quite rare. occurs at the company’s AGM, and must be approved by ordinary Under the Listing Rules, directors must disclose any holding they resolution. Many company constitutions allow the board to appoint have in a company, as well as any purchase or disposal of shares that a director to fill a vacancy, which must then be approved bythe they hold (either directly or through associates). shareholders at the following AGM. Even where a constitution does not expressly empower shareholders to appoint directors, The Listing Rules also require companies to have a trading policy shareholders have an ‘inherent power’ to do so. governing share trading which must be publicly available. At a minimum, this policy must include: Under a statutory ‘no vacancy’ rule, boards are restricted from limiting the number of positions available on the board, if the limit ■ the company’s blackout periods (during which key management personnel are likely to be in possession of non- is not in the constitution. Shareholder approval is required for public material information); such a declaration that there are no vacant board positions, and this approval must be refreshed annually. ■ the trading restrictions that apply to key management personnel; Directors may only be removed by a shareholders’ resolution – they ■ any trading which is not subject to the entity’s trading policy; cannot be removed by the board. This rule applies irrespective of and whether the constitution, an agreement between the director and the ■ any ‘exceptional circumstances’ under which key management company, or an agreement between any or all the shareholders and personnel may be permitted to trade during a blackout period, the director, provide differently. and procedures for obtaining written clearance to do so. Directors are also bound by general rules against insider trading, 3.3 What are the main legislative, regulatory and other which prohibit a person in possession of inside information from sources impacting on contracts and remuneration of dealing in – or tipping another person to deal in – securities to which members of the management body? that information relates.

The remuneration of directors and senior executives of companies is highly regulated in Australia. As discussed in question 2.1, financial 3.5 What is the process for meetings of members of the benefits to directors require shareholder approval if they arenot management body? ‘reasonable remuneration’, and all equity awards to directors must be approved by shareholders. The procedures for meetings of directors are generally set out in the company’s constitution, and in the board or committee

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charters that the company has adopted. There is no set minimum company, has primary responsibility for all of the company’s frequency or length required for meetings – the time devoted and corporate governance systems and practices. The Governance procedures adopted will vary from company to company, but Principles recommend that the board articulate its role, and delineate should be sufficient to allow the directors to discharge their duties that role from the functions which the board has delegated. The to the company. Boards generally meet at regular intervals, often board would usually be responsible for: monthly, with additional meetings called if required. Papers are ■ appointing and removing the chief executive and ratifying usually distributed in advance of meetings, and minutes of directors’ the appointment of senior executives, and monitoring the meetings must be kept. performance of senior executives; Directors are required to disclose any material personal interests ■ considering, directing and approving strategies proposed by which they hold in matters under consideration by the board, and must management and overseeing the implementation of strategy; absent themselves from the discussion and voting on such matters, ■ approving and overseeing budgets, major capital expenditure, Australia unless specifically approved by non-interested directors or ASIC. capital management, acquisitions and disposals; ■ reviewing and monitoring the company’s risk management framework and compliance systems; 3.6 What are the principal general legal duties and liabilities of members of the management body? ■ overseeing the company’s control and accountability systems; and Directors of companies incorporated in Australia are bound by ■ approving and overseeing financial and other reporting. common law fiduciary obligations to the company as a whole, as well Directors may not delegate functions imposed specifically on them as statutory duties under the Corporations Act. These obligations are under statute, such as making the directors’ declaration in the annual imposed on both executive and non-executive directors, as well as financial report. people who act in the position of a director, whether or not they were Key current challenges for the management body include continuous formally and properly appointed, and people whose instructions the disclosure requirements, executive remuneration, and increased directors of a company are accustomed to following. shareholder activism and conduct risk (see questions 1.3 and 2.6). Directors’ primary duties, existing under both common law and statute, are as follows: 3.8 What public disclosures concerning management ■ to take reasonable care in the performance of their office; body practices are required? ■ to discharge their duties in good faith and exercise their powers bona fide in the interests of the company; The Corporations Act requires companies to produce annual ■ to use their powers and position for a proper purpose, and to financial reports (including auditors’ reports) and directors’ reports. refrain from using information obtained in their position for The information about the board and its activities that must be an improper purpose; and included in the directors’ report is: ■ to avoid conflicts of interest and to disclose material personal ■ the name of each person who has been a director and the term interests in matters relating to the affairs of the company. of their board membership; The Corporations Act confers additional specific duties on directors, ■ for each director – details of their qualifications, experience, including: special responsibilities, interest in shares of the company, and ■ to prevent a company from incurring a debt when the other directorships held; company is insolvent; ■ meetings held by the board and its committees, and each ■ to call a meeting when requisitioned; director’s attendance at them; and ■ to pay dividends only in accordance with specified rules; ■ indemnities and insurance granted to officers or auditors; and contracts under which directors are entitled to receive any ■ to oversee the company’s control and accountability systems; benefit. ■ to maintain financial records and prepare financial reports; and See question 5.4 in relation to information recommended to be published on company websites. ■ to protect employee entitlements. Under statute, directors are permitted to delegate their powers, but may still be held liable for any power exercised by a delegate unless 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? the director believed on reasonable grounds that the delegate would act in conformity with the duties of directors, and that the delegate was reliable and competent. It is almost universal for companies to take out director indemnity insurance to cover directors against negligent acts, errors or The Corporations Act imposes civil penalties (including penalties of omissions. However, the Corporations Act prohibits a company up to AUD 200,000, disqualification orders and compensation orders) from insuring its officers against conduct arising out of a wilful for breaches of the duties relating to care and diligence, good faith, breach of their duties or a misuse of position or information. A use of position, use of information, maintenance of financial records, company also cannot indemnify directors against liabilities owed requirements for financial reports and prevention of insolvent to the company or related bodies corporate, liabilities for pecuniary training. Some violations of the Corporations Act, especially where penalties or compensation orders for breaches of duties, or liabilities dishonesty or recklessness is involved, attract criminal sanctions. owed to third parties and not arising out of conduct in good faith. A company must not indemnify or insure a director against legal 3.7 What are the main specific corporate governance costs incurred in defending proceedings in which a director is responsibilities/functions of members of the found to have a liability for which they could not be indemnified, management body and what are perceived to be the criminal proceedings in which the director is found guilty, or certain key, current challenges for the management body? proceedings brought by ASIC or a liquidator.

The board, as the organ charged with overall management of the

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The Governance Principles also require companies to maintain 4 Other Stakeholders and disclose a diversity policy, including measurable objectives to achieve gender diversity. 4.1 What, if any, is the role of employees in corporate governance? 5 Transparency and Reporting Employees that are not officers of a company do not generally have any formal corporate governance responsibilities. However, general 5.1 Who is responsible for disclosure and transparency? duties owed by employees require compliance with a company’s corporate governance policies and systems. The board is responsible for managing a company’s disclosure Australia Employees owe common law duties of loyalty, care and skill. They obligations, which include periodic reports (such as directors’ reports are required to obey all lawful orders of their employer, to act in and financial reports), and continuous disclosure requirements. the best interests of the employer, and not to engage in misconduct. This is consistent with the board’s legal responsibility to act There are also statutory duties which prohibit employees misusing with due care and diligence, specific statutory duties to approve their position or employment information to gain an advantage for certain reports, and its obligation to manage accountability and themselves (or another person) or to cause detriment to the company, transparency systems within the company. The Corporations Act and requiring the protection of certain whistle-blowers. All of these requires the chief executive and chief financial officer to endorse duties are consistent with a requirement that employees abide by the financial statements before they are adopted by the board; however, corporate governance systems established by companies. ultimately, the board must approve the financial statements before The common law does not generally require employees to disclose they are released. the misconduct of others. While employees are generally required Both the Corporations Act and the Listing Rules confer continuous to comply with governance requirements relevant to their own roles, disclosure obligations. A company must immediately notify the ASX they would not be required to monitor and report on others unless of material price-sensitive information, with limited carve-outs for this was formally required in their role. That said, the Corporations information that is confidential and which concerns an incomplete Act protects certain whistle-blower activities, and protects whistle- proposal or negotiation, is insufficiently definite, or is a trade secret blowers from persecution. These protections are designed to (among other limited exceptions). The Governance Principles encourage people within companies, or with special connections to recommend that companies put in place formal mechanisms to companies, to alert ASIC and other authorities to illegal behaviour. ensure that material information is brought to the attention of senior management and disclosed when required. These mechanisms should set out the roles and responsibilities of directors, officers and 4.2 What, if any, is the role of other stakeholders in corporate governance? employees as delegated by the board. There are certain routine disclosures that must be made to ASIC, As a general matter, no other stakeholders in a company have any such as notifications about changes in directors and share capital, formal corporate governance responsibilities. However, it is not which are primarily the responsibility of the company secretary. uncommon for persons with a substantial shareholding (say 5%+) in a company (particularly institutional investors such as fund 5.2 What corporate governance related disclosures are managers) to raise any corporate governance concerns directly with required? the company. Question 3.8 refers to compulsory annual financial reports and 4.3 What, if any, is the law, regulation and practice directors’ reports. These reports must be prepared and sent to concerning corporate social responsibility? members within four months of the end of each financial year, and disclosed to ASIC and ASX. Directors’ reports must contain the There is no overarching legislative requirement for companies or information referred to in question 3.8 and, among other things, their directors to consider or address corporate social responsibility must include: matters in Australia, although various specific legislative regimes fall ■ a review of the year’s operations and activities, likely within this general ambit (environmental regulation, occupational developments, information about dividends, and details of health and safety, and so on). share and option issuances; In 2006, two significant public reviews examined corporate social ■ unless it is published on the company’s website, a corporate responsibility law and practice in Australia, and both concluded governance report, disclosing the extent to which the company has complied with the Governance Recommendations, and that no specific legal rules were required to enable or mandate the reasons for any departures; standards of corporate social responsibility. The consensus view in Australia is that although directors owe their duties to the company, ■ the remuneration report, including each director’s remuneration, and the board’s policy for determining it is legitimate for directors to consider, manage and balance the the remuneration of directors and senior managers, and economic, social and environmental impact of the company’s the relationship between that policy and the company’s activities when exercising their authority. Directors are therefore performance; and entitled to consider these matters, but there is no statutory duty ■ information about non-audit services provided by the auditor, requiring them to do so. and the auditor’s independence. The Governance Principles require companies to ‘act ethically and The annual financial report consists of the company’s financial responsibly’. They recommend that companies state the ethical statements for the year, the notes to the financial statements, and standards that apply to personnel in a code of conduct, and publish the directors’ declaration about the statements and notes. It must it (or a summary). The Governance Principles also state that comply with Australian accounting standards and must give a true companies should have regard for the reasonable expectations of and fair view of the company’s financial position and performance. their stakeholders.

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Listed companies must also prepare a financial report and directors’ report for each half-year, covering a more limited ambit than the 5.4 What corporate governance information should be matters required in the full annual report, and provide the half-year published on websites? reports to ASIC and the ASX. The Governance Principles recommend that boards publish corporate governance and other information for shareholders on the 5.3 What is the role of audit and auditors in such company website, including: disclosures? ■ charters of the board and its committees; Auditors have a significant role in public companies in Australia. ■ the functions reserved for the board and those delegated to senior executives; Companies must appoint an auditor, and must have: ■ the company’s processes for evaluating the performance of Australia ■ their annual financial reports audited; and senior executives, the board, board committees and individual ■ their half-year financial reports reviewed, directors; by the auditor in accordance with the accounting standards. For an ■ a board skills matrix identifying, on a collective basis, the audit, the auditor must form a view as to whether the Corporations mix of skills that the board currently has or is looking to Act requirements have been complied with and, if not, must state achieve; why. Auditors have rights to access company books and to require ■ the company’s policies and practices regarding remuneration information and assistance from company officers. of directors (both executive and non-executive) and senior The Corporations Act imposes requirements for auditor executives; independence which prohibit certain relationships with auditors ■ all announcements made to ASX, notices of meeting, and and require auditor rotation (a gap of two years is required after historical announcements and financial information; and the auditor is involved in the audit for five successive years). ■ corporate governance policies, including the code of conduct, The auditor must make a declaration to the company that the policy on diversity, continuous disclosure compliance policy, independence requirements have not been breached each time an policy on communications with shareholders, and policy for audit is conducted. the management of business risks. Auditors have compulsory whistle-blowing obligations – they are required to report to ASIC any significant contravention of the Corporations Act, any undue influence or attempt to mislead the auditor, or interference with the proper conduct of the audit. Auditors must be available to shareholders at the AGM to take questions relevant to the conduct of the audit.

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Vijay Cugati Kate Towey Allens Allens Level 28, Deutsche Bank Place Level 28, Deutsche Bank Place 126 Phillip Street 126 Phillip Street Sydney NSW 2000 Sydney NSW 2000 Australia Australia

Tel: +61 2 9230 4940 Tel: +61 2 9230 5053 Fax: +61 2 9230 5000 Fax: +61 2 9230 5000 Email: [email protected] Email: [email protected] URL: www.allens.com.au URL: www.allens.com.au

Australia Vijay is a highly regarded M&A and corporate advisory specialist. His Kate is a leading M&A and equity capital markets specialist. She is the practice involves advising clients on public takeovers and schemes of Head of Allens’ Real Estate Sector and Co-head of Allens’ Head Office arrangement, private acquisitions and disposals, distressed M&A and & Governance practice. corporate restructurings, private equity, equity capital markets, listed Kate has been involved in a wide range of public and private M&A corporate governance and corporate compliance. transactions for clients across a diverse range of industries, including Vijay also advises on capital management initiatives, governance and the REIT sector, infrastructure, financial services, retail, media and ASX and Corporations Act queries; and regularly deals with regulators technology. Her practice also includes corporate reconstructions and including the Takeovers Panel, ASIC, FIRB and ASX. distressed M&A. He is consistently recognised as a market-leading advisor in leading In addition to her transactional practice, Kate regularly advises the publications, including most recently, Chambers Global 2017, Chambers firm’s clients on general corporate advisory and corporate governance. Asia-Pacific 2017, Best Lawyers 2018: Corporate Law and M&A and Kate is a member of the Australian Institute of Company Directors and Who’s Who Legal: Corporate 2017. is admitted in NSW. Vijay is a member of the Law Committee of the Australian Institute of Company Directors and is admitted in NSW and England & Wales.

Allens is a leading international law firm serving clients throughout Asia and Australia. We have client relationships with more than 75 of Australia’s top 100 companies and work with 55 of the world’s top 100 companies. Through our alliance with Linklaters, our global network spans 39 offices across 28 countries, which means we do challenging work for many of the world’s leading organisations across a wide range of sectors. We have built our reputation on the quality of our people, the strength of our client relationships and our innovative approach to complex work. Allens is proud to have been named Australian Law Firm of the Year for 2017 by leading international legal directory Chambers. We are also ranked by Chambers Asia Pacific 2017 as a Band One firm across 18 practice areas.

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Belgium Steven De Schrijver

Astrea Thomas Daenens

entry into force on 1 April 2011, most financial institutions 1 Setting the Scene – Sources and are supervised by the Belgian National Bank, whereas the Overview supervision of the financial markets is in the hands of the Financial Services and Markets Authority (the “FSMA”); ■ the Belgian Corporate Governance Code, which was first 1.1 What are the main corporate entities to be discussed? published by the Belgian Corporate Governance Committee in 2004 and subsequently replaced by a new and revised Corporate governance relates, in principle, to all types of corporate version, published in March 2009 (the “CG Code”). The entities. However, most corporate governance laws and regulations CG Code is applicable to listed companies and constitutes apply specifically to listed companies. Therefore, our discussion “soft law” as it is based on the principle of “comply or will be limited to the public limited liability company (“naamloze explain”. Listed companies must either comply with the vennootschap”/“société anonyme”), as this is the main type of legal CG Code’s regulations or explain the reasons why they entity whose shares are admitted to trading on the Belgian stock chose not to do so in the corporate governance chapter of their annual report. Pursuant to the Royal Decree of 6 exchange (Euronext Brussels). June 2010, the CG Code has been imposed by law as the reference code for Belgian listed companies. In addition 1.2 What are the main legislative, regulatory and other to the CG Code, the Corporate Governance Committee has corporate governance sources? several guidelines on remuneration reporting and internal control and risk management. On 18 December 2014, the Committee published new guidelines aimed at improving the The main legislative, regulatory and other corporate governance co-operation between the audit committee and the internal sources are the following: and external auditors of listed companies; and ■ the Belgian Companies Code (the “BCC”), which contains ■ each company has articles of association which contain rules the main set of rules relating to corporate governance of legal relating to the rights of the company’s shareholders, the entities (including, but not limited to, the appointment and organisation of shareholders’ and directors’ meetings, and the removal of directors and members of executive and board appointment, removal and powers of the directors. committees, directors’ liability, powers of the board and the general meeting of shareholders, etc.). The BCC entered into In addition to the sources mentioned above, there are several other force on 6 February 2001 and was amended several times Acts and Royal Decrees which contain provisions that are relevant in by corporate governance-related acts, including the Act of 2 the context of corporate governance of legal entities, including rules August 2002 (the “Corporate Governance Act”), the Act of 17 relating to the disclosure of major shareholdings or acquisitions, December 2008 regarding the creation of an audit committee market abuse and public takeover bids. in listed companies, the Act of 6 April 2010 enhancing corporate governance in listed companies (the “Corporate Governance and Executive Remuneration Act”), the Act 1.3 What are the current topical issues, developments, of 20 December 2010 on the exercise of certain rights of trends and challenges in corporate governance? shareholders in listed companies (the “Shareholders’ Rights Act”), the Act of 7 November 2011 on the remuneration in The last major topical issue is the envisaged introduction of a new shares of non-executive directors of listed companies and the BCC, which would include (i) a revision of the basic principles Act of 28 July 2011 on the representation of women on the of company law, (ii) a fundamental change of the conflict of laws boards of directors of autonomous state enterprises, listed framework with respect to company law, (iii) a limitation of the companies and the National Lottery; company forms to four basic forms (i.e., a partnership (“maatschap/ the Act of 2 August 2002 regarding the supervision of the ■ société simple”), a private limited liability company (“besloten financial sector and financial services (the “Act onthe vennootschap met beperkte aansprakelijkheid/société privée Supervision of the Financial Sector”); this Act contains provisions relating to insider trading and market manipulation, à responsabilité limitée”), a public limited liability company and imposes specific occasional and periodical disclosure (“naamloze vennootschap/société anonyme”) and a limited liability obligations; cooperative partnership (“coöperatieve vennootschap met beperkte ■ the Royal Decree of 3 March 2011 on the evolution of the aansprakelijkheid/société coopérative à responsabilité limitée”)) supervision architecture for the financial sector, which and allowing more flexibility, and (iv) the incorporation of the reformed the prudential supervision of the financial associations law into the BCC. Another priority is the simplification institutions and the financial markets. Since the Decree’s of the filing and publication system for companies and associations,

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as well as a relaxation of the applicable language legislation for called extraordinary shareholders’ meetings. As the articles of company documents. association are laid down in a notary deed, extraordinary meetings However, these proposals still have to be incorporated and finalised of shareholders must be held before a notary (as opposed to annual in a draft legal text, after which the parliament will further debate or special meetings). and possibly adopt the draft law. The draft legal text is expected to Decisions at shareholders’ meetings are usually taken by simple be finalised in the second half of 2017. majority of the votes cast (whereby a quorum of 50% of the voting rights is required). The articles of association may, however, provide for specific majority and quorum requirements in relation to certain 2 Shareholders decisions. In addition, amendments of the articles of association require a 75% majority of the votes cast (with the same quorum), Belgium except for changes to the corporate purpose or to the rights attached 2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ to shares or for the dissolution of the company, which require an entities? 80% majority. Shareholders’ meetings must always be convened by the company’s Pursuant to the BCC, the board of directors has the power to take board of directors or by the statutory auditor. Upon request of one all actions and measures in view of accomplishing the corporate or more of the shareholders representing at least 20% of the share purpose, with the exception of those actions that are reserved by capital, the board is required to convene a special or extraordinary law or in the articles of association to the shareholders’ meeting. As meeting with the agenda determined by said shareholders. such, the operational management of the company is the exclusive With respect to listed companies, the Shareholders’ Rights Act of power of the board. However, the shareholders still have important 20 December 2010 provides that shareholders representing at least powers, including the appointment and removal of directors and 3% of the share capital have the right to add items to the agenda or the statutory auditor, the approval of the annual accounts, the submit any proposals of resolution in relation to a point already on distribution of profits, the increase or decrease of the company’s the agenda. The Shareholders’ Rights Act has also introduced the share capital, restructuring operations (including mergers and possibility for minority shareholders to address questions in writing (partial) de-mergers) and amendments to the articles of association. to the board or the auditor, and to provide for mechanisms in the The shareholders’ meeting also has the power to decide on specific articles of association to allow remote participation in the meeting remuneration issues (such as the approval of the remuneration report and electronic voting in advance. of the board of directors and the approval of golden parachutes and certain types of variable remuneration). 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate The basic principle with respect to liability of shareholders for entity/entities? acts or omissions of the public limited liability company is that shareholders are only liable for the company’s debts up to the Corporate governance is mainly the responsibility of the board amount of the share capital contributed by each of them. There are, of directors (and in particular of the committees appointed within however, a number of exceptions to this principle. In exceptional the board, such as the audit committee and the remuneration circumstances, courts can decide to pierce the corporate veil and committee). Although the shareholders have decision powers with hold shareholders liable beyond their capital contribution. Also, if respect to certain remuneration issues (see question 2.1) and can a limited liability company has only one shareholder for more than exercise some influence by appointing the members of the board of one year, such shareholders lose the benefit of limited liability for directors, their responsibility in relation to corporate governance is the company’s debts until there is a second shareholder. Finally, quite limited. in the case of bankruptcy, shareholders – often in their capacity as founders of the company – may be held liable beyond their capital 2.3 What shareholder meetings are commonly held and contribution if certain conditions are met. It should be noted that what rights do shareholders have as regards them? exceptions to the principle of limited liability also apply in most cases to private limited liability companies (“besloten vennootschap There are three types of shareholders’ meetings: annual; special; met beperkte aansprakelijkheid”/“société privée à responsabilité and extraordinary. The annual meeting is held once a year on the limitée”). date mentioned in the company’s articles of association, and focuses on approving the annual accounts of the company, deciding on the 2.5 Can shareholders be disenfranchised? distribution of profits and granting discharge to the directors and the statutory auditor. Usually, the shareholders also take the opportunity If certain conditions are met, shareholders may be disenfranchised. to renew the mandate of, or replace, the statutory auditor, if such The most important example is the so-called squeeze-out procedure, is required. Other decisions, such as the appointment or dismissal whereby one or more shareholders, holding 95% or more of the of directors, may also be taken. The annual meeting must be held securities conferring voting rights of a listed company, can require within six months following the end of the last financial year. the remaining shareholders (holding 5% or less of the voting rights) Shareholders’ meetings that are not annual meetings and that do not to sell their securities to them at an equitable price. In the case decide upon the amendment of the company’s articles of association of a public takeover bid, an offeror who launched a (voluntary (but, for instance, on the dismissal or appointment of directors) are or mandatory) public takeover bid has the right to require that, called special shareholders’ meetings. following the close of the takeover bid, all remaining minority Finally, shareholders’ meetings that focus on amending the articles security holders sell their securities to him. This is a simplified of association (such as a change of the corporate purpose, capital squeeze-out procedure (structured as the re-opening of the preceding increase or decrease, amendment of any other provisions) are takeover bid) and is subject to a number of specific conditions.

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In the context of public takeover bids, the minority security holders Such notifications are required within four trading days from the of a public company can also force the offeror to acquire their date of the event triggering the notification obligation. securities (potentially) conferring voting rights at an equitable price The anti-money laundering legislation has also introduced a following the close of the takeover bid. This is the so-called reverse notification obligation for all persons or entities who acquire a squeeze-out procedure. participation of 25% or more in non-listed companies (Article Pursuant to Article 636 BCC, minority shareholders holding, alone 515bis BCC). or jointly, at least 30% of the voting rights attached to the total Finally, it should be noted that if a shareholder exceeds the threshold issued shares can request the court to order the other shareholders of 30% of the voting rights in a listed company, such shareholders to sell their shares to them, provided that they can demonstrate will be required by law to launch a public takeover bid. “justified reasons”. Article 642 BCC provides for the opposite procedure, whereby a shareholder can request the court to order Belgium the other shareholders (to whom the “justified reasons” apply) to 3 Management Body and Management acquire his shares.

3.1 Who manages the corporate entity/entities and how? 2.6 Can shareholders seek enforcement action against members of the management body? A public limited liability company is managed by the board of directors, which has the power to take all actions and measures in Yes, they can. Directors are liable to the company for any damages view of accomplishing the corporate purpose, with the exception of arising from: the powers that are reserved by law or in the articles of association ■ mismanagement; to the shareholders’ meeting (see also question 2.1). The board of ■ a breach of the provisions of the BCC or the company’s directors must consist of three members, unless the company only articles of association; has two shareholders; in which case, the number of directors may ■ tort; and be limited to two. Decisions are taken by a simple majority of the ■ criminal offences. votes cast, unless the articles of association provide for qualified majorities. The shareholders’ meeting, deciding by simple majority, can decide to sue directors on the basis of the breaches mentioned above, unless With regard to the composition of the board in listed companies, the it has already granted the directors in question a discharge following CG Code provides that at least half of the directors must be non- the approval of the annual accounts (subject to some exceptions, executive directors. Three of those non-executive directors should particularly in the event of damages arising from criminal offences be independent directors in the sense of Article 526ter of the BCC. or fraud). In addition thereto, the Act of 28 July 2011 on the representation Pursuant to Article 562 BCC, minority shareholders representing at of women on the boards of directors of autonomous state least 1% of the total outstanding votes, or owing shares representing enterprises, listed companies and the National Lottery imposes EUR 1,250,000 of the outstanding capital, can lodge a minority specific obligations upon listed companies regarding the gender claim against directors. Such a claim is only possible, however, if representation within the board of directors. The Act provides the minority shareholders in question voted against the discharge at that a minimum of one-third of the board’s members should be of the annual shareholders’ meeting, or if such discharge turns out to the opposite gender to the other members. This obligation shall be null and void. enter into effect at the beginning of the sixth financial year starting after 14 September 2011 (or the eighth financial year, if the listed company either has a free float of shares of less than 50% or falls 2.7 Are there any limitations on, and disclosures below certain thresholds relating to the number of employees, the required, in relation to interests in securities held by company’s turnover and/or its total balance sheet), i.e. the financial shareholders in the corporate entity/entities? year starting after 14 September 2017 (which will be, for most companies, the financial year starting on 1 January 2018). There are no limitations as to the number of securities that can be held by a shareholder of a public limited liability company, If the minimum number of directors is not achieved at the date of except that such a company must have at least two shareholders entry into effect, the general shareholders’ meeting will need to (or, to be more specific, if a limited liability company has only one appoint a board in compliance with the legal provisions. Until such shareholder, due to the acquisition of all shares by one person or is the case, all benefits granted to the directors, whether financial or entity, a second shareholder must enter the company within a year. If otherwise, will be suspended. Also, in the case of non-compliance not, the single shareholder will lose the benefit of limited liability). at the set date, the first member appointed by the general meeting must be of the gender that is not sufficiently represented. All other Regarding the disclosure of shareholdings, the Act of 2 May appointments will be considered as null. 2007 regarding the disclosure of major shareholdings in listed companies (the “Transparency Act”) provides that a shareholder Although the obligations described above will only enter into effect of a listed company must notify the company and the FSMA of its this year (and in practice, for most companies, as of 1 January voting rights held (either directly or indirectly) in such a company 2018), it should be noted that as from the first financial year starting if certain thresholds are met, particularly if its voting rights meet, after 14 September 2011 (for most listed companies, this was the exceed or fall below the threshold of 5% (or a multiple thereof) financial year starting on 1 January 2012), listed companies have of the total outstanding voting rights in the company. The articles been required to describe in their annual report all efforts that of association of the company may provide for lower thresholds were made in order to achieve the one-third representation of the (with a maximum of 3%) to trigger this notification obligation. In opposite gender on the board. It is worth noting that on average, addition, the law provides for specific notification requirements in approximately 25% of the board members of Belgian listed relation to events that give rise to a change in the breakdown of companies were women in 2016 (while this was only 6% in 2004). voting rights and agreements between shareholders to act in concert. Hence, given the fourfold increase, progress has in any case been made over the past years. However, Belgian listed companies will

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have to keep making efforts in order to reach the legal threshold The mandate of the interim director will run until the next annual of having one third (i.e., approximately 33%) of female board meeting, at which the shareholders must decide on the official members by the end of the year. appointment of the director. The articles of association usually provide that powers of daily Members of the management committee are appointed and removed management of the company can be granted to a managing by the board of directors. director (or CEO). The person in charge of daily management can be appointed among the directors, but sometimes the articles of 3.3 What are the main legislative, regulatory and other association provide that such a person need not be a member of the sources impacting on contracts and remuneration of board. members of the management body?

Belgium Article 524bis BCC provides that the board of directors can delegate some of its powers to an executive committee, consisting of persons The contracts and remuneration of members of the management who may or may not be members of the board. The delegation of body are mainly governed by the Corporate Governance and powers cannot relate to the definition of the general management Executive Remuneration Act of 6 April 2010. This Act contains the of the company or to specific powers that are by law reserved for following provisions: the board of directors (such as establishing the annual accounts, ■ Restriction of “golden parachutes”: any contractual preparing the management report or appointing a managing provisions relating to severance payment awarded to an director). executive director, a member of the management committee In addition, Article 522 BCC provides for the possibility for the or a person in charge of daily management of the company, which exceeds 12 months of salary (or 18 months, upon board of directors to set up advisory committees within the board. recommendation of the remuneration committee), requires The latter can freely determine the composition and tasks of such the prior approval of the annual shareholders’ meeting. In the committees. For listed companies, however, the creation of two absence of such approval, the provision is considered as null advisory committees is mandatory: and void. The same approval requirement applies to variable ■ Pursuant to Article 526bis BCC, most listed companies remuneration awarded to independent or non-executive are required to create an audit committee. Such an audit directors. In addition, the aforementioned provisions need committee must be entirely composed of non-executive to be communicated to the works council, which can make directors, of which at least one must: (i) qualify as an recommendations to the shareholders’ meeting as to their independent director in accordance with the criteria for approval (or not). independence set out in Article 526ter BCC; and (ii) have ■ Restrictions on variable remuneration: if a contract with the required expertise in the field of accounting and auditing. a member of the executive management contains provisions Without prejudice to the board’s overall responsibilities, the relating to variable remuneration, the criteria for awarding audit committee is entrusted with a number of monitoring and calculating such remuneration should be clearly defined tasks that are listed in Article 526bis BCC (monitoring the in the contract. In the case of non-compliance, the variable financial reporting, the effectiveness of internal control and remuneration will not be taken into account for the purpose risk management systems, the legal control of the annual of determining the severance payment. In addition, at least accounts, the independence of the statutory auditor, etc.). 25% of the variable remuneration awarded must be based ■ Pursuant to Article 526quater BCC, most listed companies are on performance criteria relating to a period of at least two required to set up a remuneration committee. This committee years and another 25% on performance criteria relating to a must be entirely composed of non-executive directors, of period of at least three years. The performance criteria must which at least one must qualify as an independent director be identified in advance and be objectively measurable. in accordance with the criteria for independence set out in ■ Restrictions regarding share-based remunerations: unless Article 526ter BCC. Without prejudice to the board’s overall the articles of association provide otherwise or the shareholders’ responsibilities, the remuneration committee is entrusted meeting approves an exception, shares cannot vest and stock with at least the tasks listed in Article 526quater BCC (e.g. options cannot be exercised by a director or any other member making proposals to the board as to the overall remuneration of the executive management within a period of three years policy, as well as the individual (both fixed and variable) following their award. remuneration of directors, certain members of management and persons in charge of daily management, preparing the remuneration report, etc.). 3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate 3.2 How are members of the management body appointed entity/entities? and removed? Directors are entitled to acquire, hold or sell shares, subject to a Directors are appointed by the general shareholders’ meeting, with number of restrictions and disclosure requirements: a simple majority (unless the articles of association provide for a ■ regulations regarding insider dealing and market qualified majority). The law provides for a maximum term in office manipulation; of six years, but such a term is renewable. The articles of association ■ the requirements for directors and members of executive may provide for a shorter term in office. In this respect, the CG management to notify the FSMA of any dealing in shares Code suggests a term of four years for directors of listed companies. of the company for their own account. Such disclosures are Directors can be dismissed at any time by a simple decision of the made public on the FSMA website on a daily basis after the shareholders’ meeting. Likewise, they can resign at any time before closing of the stock exchange; their term of office has expired, provided that such resignation does ■ specific disclosure obligations applying to directors of not unduly jeopardise the company’s interests. companies involved in a public takeover bid; and If the position of a director becomes vacant, following the dismissal ■ the BCC provides that no person owning more than 10% of or resignation, the remaining directors may provide for an interim the shares of a listed company can act as independent director replacement, unless the articles of association oppose thereto. in the sense of Article 526ter BCC.

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The BCC provides that the remuneration report should include ■ Duty of supervision: the board of directors should information on the number and the key features of the shares and review the executive management’s performance and the the stock options, as well as any other right to acquire shares that implementation of corporate strategy, approve internal were awarded, exercised or that lapsed to the company’s members controls and risk management procedures, supervise the of the executive management during the reported financial year. auditor’s performance and the internal audit function, and describe the key features of the company’s internal control Such information must be included on an individual basis. and risk management systems, in the corporate governance statement of the management report. 3.5 What is the process for meetings of members of the As far as the directors’ liability is concerned, please see question management body? 2.6. Belgium The board of directors is convened in accordance with the rules set out in the articles of association. Usually, this is done by sending a 3.7 What are the main specific corporate governance responsibilities/functions of members of the convening notice (either by letter or email) to the directors a couple management body and what are perceived to be the of days or weeks in advance. The board must be convened whenever key, current challenges for the management body? the interest of the company requires. Although Belgian company law does not impose a minimum number of meetings per year, the The CG Code imposes a number of specific corporate governance CG Code provides that sufficient meetings must be held to allow the duties upon the board of directors. These include: directors to exercise their duties effectively. In addition, the Code ■ pursuing the long-term success of the company by providing provides that the number of meetings held in the preceding financial entrepreneurial leadership and enabling risks to be assessed year should be disclosed in the corporate governance chapter of the and managed; annual report. ■ reviewing executive management performance and the Board meetings can be held at any location (as indicated in the realisation of the company’s strategy; convening notice), unless the articles of association provide ■ monitoring and reviewing the effectiveness of the board’s otherwise. Participation in board meetings by telephone or video committees; conference is only possible if the articles of association explicitly ■ taking all necessary measures to ensure the integrity and provide for such possibility. timely disclosure of the company’s financial statements; Unanimous written resolutions can only be adopted if (i) the urgency ■ disclosing other material financial and non-financial of the matter(s) to be decided on requires it, and (ii) the articles of information to the shareholders and potential shareholders; association provide for such a possibility. ■ supervising the performance of the statutory auditor and supervising the internal audit function, taking into account 3.6 What are the principal general legal duties and the review made by the audit committee; and liabilities of members of the management body? ■ fostering – through appropriate measures – an effective dialogue with the shareholders and potential shareholders A director in a company limited by shares is an agent based on a mutual understanding of objectives and concerns. (“lasthebber”/“Mandataire”) of the company. One of the key challenges for the boards of directors of many listed The general legal duties of directors can be summarised as follows: companies lies in sound risk assessment and management. This requires that the members of the board have a thorough knowledge ■ Duty of care: directors are expected to manage the company of the business but also sufficient risk expertise. Risk management with the care and skill a reasonably prudent professional would exercise running the same type of business, under the should also be made part of the corporate culture of the company, same circumstances. and not just treated as a box-ticking exercise. ■ Duty to act in the company’s interests: directors must act in the best interests of the company as a whole and not only 3.8 What public disclosures concerning management for its shareholders. They must make and implement their body practices are required? decisions in the “corporate interest” of the company. ■ Duty of confidentiality: directors must keep confidential all The mandatory public disclosures on corporate governance are to information which they obtain in the performance of their be made in (i) the corporate governance charter of the company, and duties. They cannot use such information for purposes other (ii) the corporate governance statement, as part of the annual report. than the exercise of their official duties. Specific information must also be made public on the company’s ■ Duty of integrity and commitment: all directors (both website (see question 5.4). executive and non-executive) must demonstrate independence of judgment in their decisions. They should ensure that Pursuant to the CG Code, the corporate governance charter should they have detailed, accurate information and study this include at least: information carefully in order to acquire and maintain a clear ■ a description of the governance structure of the company, understanding of the key issues relevant to the company’s with the terms of reference of the board; business. Directors should seek clarification whenever they ■ the policy established by the board for transactions and other deem it necessary and should arrange their personal and contractual relationships between the company, including business affairs so as to avoid direct and indirect conflicts of its related companies, and its board members and executive interest with the company. managers, to the extent not covered by the legal provisions on ■ Duty to regularly attend board meetings: this is mandatory. conflicts of interest; The board should meet sufficiently frequently in order to ■ the measures taken by the company in order to comply with effectively perform its duties. the Belgian rules on market abuse; ■ Duty to be, and stay, informed: directors must obtain the ■ the terms of reference of each committee; information necessary to allow them to make decisions and share with other board members all appropriate information. ■ the terms of reference of the executive management;

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■ the identity of its major shareholders, with a description of ■ disclosure of the remuneration report prepared by their voting rights and special control rights, and, if they the remuneration committee and possibility to make act in concert, a description of the key elements of existing recommendations on the adoption of certain golden parachute shareholders’ agreements; and variable remuneration provisions; ■ any other direct and indirect relationships between the ■ deciding the criteria to be used in selecting employees to be company and major shareholders; and made redundant or re-employed for economic or technical ■ a statement that the company adopts the CG Code as its reasons; and reference code. ■ the right to veto the appointment of the company’s statutory Pursuant to the BCC, the corporate governance statement in the auditor. annual report must include, inter alia, a reference to the applicable Belgium corporate governance code, an overview of the provisions of such a 4.2 What, if any, is the role of other stakeholders in code that are not complied with and the justification for such non- corporate governance? compliance, a description of the most important features of the internal control and risk management systems relating to financial Under Belgian law, and pursuant to the CG Code, other stakeholders reporting, the composition and functioning of the management do not have a specific role in relation to corporate governance. bodies and their committees and a description of all efforts that were However, given the increased regulations with respect to corporate made in order to achieve the one-third representation of the opposite social responsibility, and the emphasis on transparency, integrity, gender in the board. dialogue, and thus responsibility, more attention is given to the right of information of stakeholders. 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? 4.3 What, if any, is the law, regulation and practice concerning corporate social responsibility? Such indemnities or insurance are permitted in relation to directors or other members of executive management, provided that the Pursuant to Directive 2014/95/EU of the European Parliament and indemnification or insurance does not relate to the liability of the of the Council of 22 October 2014 amending Directive 2013/34/EU director towards the company itself (as such would be considered as regards disclosure of non-financial and diversity information by a total exoneration of liability, which is not permitted by law) or to certain large undertakings and groups, listed, as well as non-listed liability resulting from the director’s intentional misconduct. companies with more than 500 employees, will need to include a corporate social responsibility (“CSR”) section in their annual report. The aforementioned Directive had to be transposed into 4 Other Stakeholders national law in Belgium by 6 December 2016, and the pre draft law was approved by the Belgian Council of Ministry on 23 December 4.1 What, if any, is the role of employees in corporate 2016 and is currently held with the Council of State for advice. As governance? a result, the final text of the draft law is not yet available, whilst the provisions of the Directive in principle apply for financial years Under Belgian law, employees do not have a specific role in relation starting on or after 1 January 2017. to corporate governance. There is no obligation to appoint any The CSR statement in the annual report should in any case include employees or employees representatives as members of the board information relating to (i) environmental matters (i.e., the current of directors or management (with the exception of certain pension and foreseeable impact of the undertaking’s operations on the funds). environment), (ii) social and employee matters (i.e., actions taken Employees of larger companies do, however, have an impact with respect to gender equality, working conditions, respect for trade on the operation and management of the company through their union rights, health and safety at work, etc.), and (iii) respect for representation in the works council. The works council must be human rights, anti-corruption and bribery matters (i.e., information informed and/or consulted about certain decisions which the board on the prevention of human rights abuses and on measures in place of directors wishes to take. The main areas in which the works to combat corruption and bribery). council is involved are: ■ creation and modification of a company’s work regulations; 5 Transparency and Reporting ■ examination of corporate, financial, commercial, personnel information and other data which the company is legally obliged to disclose to the works council at regular intervals of 5.1 Who is responsible for disclosure and transparency? three months or more, depending on the type of information involved; Transparency is mainly achieved through publication of information ■ prior consultation before implementation of any decision in a company’s annual accounts and on its website (see questions to carry out mass hiring, lay-offs, reorganisation or plant below). This is essentially the responsibility of the board of closure; directors. ■ prior consultation before implementation of a decision As far as disclosures are concerned, the responsibility lies with concerning organisation of work (working hours, part-time the person who is legally required to disclose certain information work, organisational changes, etc.), training, the introduction of structural changes to the undertaking (merger, takeover (e.g. disclosure by directors or persons in charge of executive bid, etc.); management of dealings in the company’s shares for their own account or disclosure by shareholders when they meet certain ■ prior information on the appointment or re-appointment of independent directors; thresholds of ownership).

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board is subsequently required to convene in order to discuss any 5.2 What corporate governance related disclosures are measures that should be taken in order to preserve the company’s required? continuity within a reasonable term. The auditors must be notified of the deliberations that have taken place and the measures that have In addition to the mandatory disclosures discussed under questions been adopted within a month from their initial notification to the 2.5, 3.4 and 3.8, the Royal Decree of 14 November 2007 on the board. In the absence of such a notification, or if the auditors are obligations of issuers of financial instruments admitted to trading of the opinion that the proposed measures will not be sufficient to on a regulated market provides that listed companies are required to redress the situation within a reasonable term, the auditors may (but publish annual accounts, half-yearly and quarterly financial reports are not obliged) to communicate their findings to the president of (or, in the absence of the latter, interim management reports on the commercial court. the major events and transactions and their possible impact on the Belgium financial situation of the company). 5.4 What corporate governance information should be Listed companies are also required to immediately communicate published on websites? any inside information that directly or indirectly concerns them, unless a specific exemption applies; in which case, the disclosure of Listed companies must publish certain financial information on their the information may be delayed. website, including the annual accounts, the half-yearly and quarterly In the context of public takeover bids, target companies are required financial reports and the interim management reports. by law to inform the FSMA and the bidder of any decision to issue In addition, Article 533bis BCC provides that specific information securities carrying voting rights or giving access to such voting should be made available on the company’s website in the period rights, or of any decision which may result in the failure of the between the issuance of the convening notice for a general takeover bid. shareholders’ meeting and the date of such a meeting. This information includes: (i) the convening notice, which should contain 5.3 What is the role of audit and auditors in such information on the date, place and agenda of the meeting and the disclosures? exercise of voting rights; (ii) the number of shares and voting rights (as the case may be, per category of shares); (iii) the documents If certain thresholds are met, public limited liability companies submitted to the shareholders; (iv) for each point on the agenda, a are required by law to appoint a statutory auditor. Such auditors draft proposal of decision or comments from the board of directors; are in charge of monitoring the financial situation and the annual and (v) the forms to be used for voting by proxy or by letter. accounts of the company. Each year, auditors must issue a report on Finally, the CG Code requires that listed companies make certain the annual accounts (prior to their approval), in which they confirm information permanently available on their website, in particular: the conformity of the annual accounts with the provisions of the ■ the company’s articles of association and the corporate BCC and the company’s articles of association and indicate whether governance charter; the accounts give a true and fair view of the company’s financial ■ all relevant information and documentation regarding the situation. shareholders’ right to participate and vote at the general In addition, statutory auditors are required to issue special reports shareholders’ meetings; in relation to specific transactions, such as contributions in-kind, ■ a timetable on periodic information and shareholders’ mergers or the distribution of interim dividends. meetings; and Finally, Article 138 BCC provides that when auditors discover ■ the results of the votes and the minutes of the shareholders’ important facts that could jeopardise the continuity of the company, meetings, as soon as possible after the meetings. they should notify the board of directors thereof in writing. The

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Steven De Schrijver Thomas Daenens Astrea Astrea Louizalaan 235 Louizalaan 235 1050 Brussels 1050 Brussels Belgium Belgium

Tel: +32 2 215 97 58 Tel: +32 2 215 97 58 Email: [email protected] Email: [email protected] URL: www.astrealaw.be URL: www.astrealaw.be Belgium Steven De Schrijver is a partner in the Brussels office of Astrea. Thomas Daenens is a senior associate in the Brussels office of He has 20 years of experience advising Belgian and multinational Astrea. He advises international and national companies on corporate companies on mergers and acquisitions, joint ventures, corporate matters. He frequently handles corporate and M&A transactions and restructurings, acquisition financing, private equity and venture capital, has special expertise in corporate governance, restructuring and HR- debt structuring and secured loans. He has been involved in several related issues. In addition, he specialises in Belgian and international national and cross-border transactions, mostly in technology-oriented data protection and privacy law. sectors. Thomas obtained a law degree from the University of Leuven Steven is also recognised as one of the leading commercial IT lawyers (2000) and a Master’s degree in International Relations and Conflict in Belgium, specialising in new technologies (such as data protection, Management from the same university (2001). Prior to joining Astrea, e-commerce, software licensing, website development and hosting, Thomas worked in the Brussels offices of Hunton & Williams and Bird technology transfer, digital signature, IT-outsourcing, cloud computing, & Bird, and as in-house counsel at Bpost. cybersecurity, artificial intelligence, drones, robots, driverless cars, augmented and virtual reality, etc.). Steven holds a law degree from the University of Antwerp (magna cum laude, 1992) and an LL.M. degree from the University of Virginia School of Law (1993). He received the ILO Client Choice Award 2012 in the General Corporate Category for Belgium. Prior to joining Astrea, Steven worked for 15 years at Van Bael & Bellis, where he became a partner in 2002. He was also a partner at law firm Lorenz, where he headed the Corporate/M&A and IT and New Media departments between 2009 and 2012.

Astrea is one of the leading independent full-service law firms in Belgium, with offices in both Brussels and Antwerp, the two largest economic and financial centres in the country. It currently has 12 partners and 40 fee-earners in total, and an impressive international and domestic client base. The lawyers at Astrea have a very business-oriented, pragmatic and flexible no-nonsense approach, and are known for offering good value. Astrea’s experience includes all types of cross-border private equity and venture capital transactions, private M&A and capital market transactions. Astrea often cooperates in this respect with independent law firms in other jurisdictions. Astrea’s transactional team can benefit from state-of-the-art assistance in other areas of law, including competition law, real estate and environmental law, employment and pensions law, intellectual property, IT and privacy law and regulatory law.

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Benin Charles Badou

Law Firm Charles Badou & Partners Ogoudjé César Guégni

the introduction of the SAS, the OHADA zone now has a corporate 1 Setting the Scene – Sources and form more suited to investment operations than the ones existing in Overview other countries. Such corporate form is characterised by a strong economic dynamism. 1.1 What are the main corporate entities to be discussed? An SAS may be incorporated without a minimum share capital and may have corporate entity shareholders and also natural person The main companies involved in the law of the Organization for the shareholders. Its governance structure is very flexible and can be Harmonization of Business Law in Africa (OHADA) are the Société adapted to the needs of shareholders. Whereas a Société Anonyme Anonyme or SA (Public Limited Liability Company) and the Société à (SA, Public Limited Liability Company) must be headed by a Board Responsabilité Limitée or SARL (Private Limited Liability Company). of Directors with more than three (3) shareholders, the company law applicable in OHADA member countries provides that, subject to mandatory rules (representation of a Company by a Chairman, the 1.2 What are the main legislative, regulatory and other sole compulsory body with the broadest powers to act on behalf of corporate governance sources? the company and to engage it vis-à-vis third parties, the competence of the shareholders’ general meeting, which is imperative for certain In the law of the Republic of Benin, the legal system of companies in corporate decisions such as the decisions relating to annual accounts general, and their corporate governance in particular, are governed and profits, capital or transformation operations), the Articles of by the Revised Uniform Act of OHADA relating to the law of Incorporation of SAS provide for the organisation, management and th commercial companies and economic interest groupings, dated 30 operation of Companies including the appointment of Managing- January 2014. Directors, Deputy Managing-Directors, Executive Committee and the Supervisory Board, etc. 1.3 What are the current topical issues, developments, This freedom will help to set up governance arrangements adapted trends and challenges in corporate governance? to the different profiles of investors within the framework of private equity transactions, but also within the framework of joint ventures In OHADA law, the merit of transparency remains topical in terms involving a local partner (which may be, for instance, a national of corporate governance. In terms of challenges, the effectiveness business) and a foreign partner. of governance rules remains one of the main challenges facing the The Uniform Act (Article 2-1) now provides explicitly for the governance of commercial companies. In the same vein, in the possibility to conclude “extra-statutory agreements” with a view to current context of globalisation of trade where businesses pursue organising freely the management of a business. The main clauses multiple goals and interests, it is more than necessary to clarify the of these agreements will cover the organisation of decision-making rules of governance of commercial corporations that have to take between the various shareholders (establishment of supervisory on the challenges of the market economy. Added to this are the bodies, qualified majorities, veto, prior authorisation, confidential sustainability challenges. information clauses) and also capital operations (restriction on It is worth noting that when the normal operation of a company is transfers of securities, integration of clauses of inalienability, rendered impossible, either due to the management or administrative approval clauses, pre-emption, anti-watering, etc.), and exit of bodies, or the partners, the Revised Uniform Act of January 2014 shareholders (joint exit clauses, first offer clauses, etc.). now offers the possibility for the management or administrative bodies, or one or more partners to refer the matter to the competent court of law ruling under an emergency interim proceeding. Such 2 Shareholders court may decide to appoint a provisional administrator for the purpose of temporarily managing the business of the company. 2.1 What rights and powers do shareholders have in the With the revision of the Uniform Act in January 2014, OHADA operation and management of the corporate entity/ Business Law has created the Simplified Joint Stock Company entities? (SAS) (Articles 853-1 to 853-23). The SAS provides shareholders and business managers with much more flexibility than the Société Under OHADA law: Anonyme, (SA) (Public Limited Liability Company), the main ■ The shareholders are entitled to a right to information; vehicle used for foreign investments in Africa up until then. With which provides them the opportunity, twice (two times) per

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financial year, to ask questions to the Chairman of the Board of the court. If the ordinary general meeting has not been of Directors, the Chief Executive Officer or the General convened within this time-limit, the public prosecutor or any Administrator, as the case may be, on anything that may shareholder may refer the matter to the competent court of compromise the pursuance of the business of a company. law for an emergency interim ruling in order to enjoin the ■ The shareholders are entitled to obtain dividends. executives to convene such a meeting or appoint a proxy to do so. The directors who enjoy the status of shareholders In public limited liability companies (Société Anonyme), the ■ may take part in the vote of the ordinary general meeting shareholders are liable for corporate debts only to the extent and their shares are taken into account for the calculation of of their contributions and the rights of shareholders are the quorum and the majority. The ordinary general meeting represented by shares. can only validly deliberate, based on first convening, if the

Benin ■ The shareholders are entitled to take legal action against shareholders present or represented own at least one quarter a corporate executive for the faults he committed in the of the shares enjoying the right to vote. performance of his duties. ■ The Extraordinary General Meeting. This is the only ■ In order to strengthen their right to information, the meeting empowered to amend the Articles of Incorporation shareholders in general and the minority shareholders in and all associated provisions. Any shareholder may particular may have recourse to management expertise. participate in extraordinary general meetings, without any ■ In the public limited liability company (Société Anonyme), limitation of vote. one or more shareholders representing 0.5 to 5% of the share ■ The Special General Meeting. This brings together the capital, may request the inclusion on the agenda of a general holders of shares of a specific category. The decision of a meeting of shareholders a draft resolution the text and general meeting to amend the rights relating to a category of motives of which must be communicated to the management shares is final only after the approval by the special general body of the company at least ten days before the date of the meeting of shareholders of that class. The special general general meeting. It is therefore an established permanent meeting deliberates validly only if the shareholders present right to information concerning management. or represented possess at least half of the shares at the first ■ Any shareholder may also at any time take cognizance and convening, and one quarter of the shares at the second receive copies of corporate documents on the last three (3) convening. financial years, as well as the minutes and the attendance records of held meetings, if the Articles of Incorporation so provide. In case of refusal to communicate the requested 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? documents to the shareholder, the latter may refer the matter to the judge of interim measures, who may order the company, if necessary under penalty, to disclose such documents. Under OHADA law, the founders, as well as the first members of ■ Senior shareholders have the right to subscribe in order of the management or administration bodies, are jointly and severally preference to the newly issued cash shares. liable for the damage caused either by the absence of a mandatory ■ At the end of the financial year, it is imperative that business mention in the Articles of Incorporation or by the omission or managers produce the accounts and balance sheets of the improper fulfillment of a formality prescribed for the incorporation company and send them to the shareholders at least 15 days of the company. In public limited liability companies (Société before the date of the general meeting. Anonyme), the shareholders are liable for corporate debts only to the extent of their contributions and the rights of shareholders are represented by shares. When the value adopted is different from the 2.2 What responsibilities, if any, do shareholders have as one proposed by the contribution commissioner, the shareholders regards the corporate governance of their corporate entity/entities? are jointly and severally liable for five (5) years, vis-à-vis third parties, for the value attributed to the contributions in kind. Under OHADA law, the shareholders are responsible, inter alia, for: ■ Taking action regarding the internal powers of executives. 2.5 Can shareholders be disenfranchised? ■ Controlling the management of the company. ■ In order to avoid the paralysis of corporate action, the Strictly speaking, under OHADA Business Law, the principle is that OHADA legislator has conferred on the shareholders the the partners cannot be deprived of their right to vote. However, there right to replace the defaulting corporate bodies by carrying are some hypotheses relating to the removal of the right to vote. Three out corporate actions in their place. (3) situations are recurrent. Firstly, the shareholders in public limited liability companies may create non-voting priority shares (see Article 775 of the Uniform Act). Secondly, even if these are exceptional 2.3 What shareholder meetings are commonly held and assumptions, the partner must be deprived of his right to vote when what rights do shareholders have as regards them? he risks being in a situation of conflict of interest with the company. This is justified by the fact that the partner cannot be both judge and Under OHADA law, the shareholders participate in: party. These hypotheses exist in the Uniform Act (see Articles 354 ■ The constitutive general assembly. This meeting is chaired (2) and 440 (5) of the Uniform Act). Thirdly, when the shareholder by the shareholder who has the largest number of shares fails to fulfill his obligations, the law may, as a sanction, deprive him or, failing this, the most senior shareholder. Any general of his right to vote for all general meetings, ordinary or extraordinary. meeting convened contrary to the rules may be invalidated in accordance with the provisions of Articles 242 et seq. of the Uniform Act. However, an action for a declaration 2.6 Can shareholders seek enforcement action against of invalidity is not admissible if all the shareholders were members of the management body? present or represented. ■ The Ordinary General Meeting. It is held at least once OHADA corporate law grants shareholders the power to take legal a year, within six (6) months of the end of the financial action against a corporate executive for any misconduct committed year, subject to the extension of this time-limit by ruling by him or her in the performance of his or her duties.

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an ideal tool for the operation of small and medium-sized 2.7 Are there any limitations on, and disclosures enterprises. Article 323 of the Uniform Act provides that the required, in relation to interests in securities held by management of a SARL (private limited liability company) shareholders in the corporate entity/entities? is entrusted to one or more private individuals, partners or not, appointed by the partners in the Articles of Incorporation The general principle is that there is no limitation in the holding of or in a subsequent instrument, by a majority of the partners securities or shares. Foreigners, Beninese, natural or legal persons accounting for over half of the share capital. can obtain the number of shares available. However, for certain companies, such as the ones operating in the 3.2 How are members of the management body appointed and removed?

audiovisual sector, the public authorities and the public interest Benin organisations cannot participate directly or indirectly in the share capital or in the management bodies of private televisions, unless 1) In an SA (Public Limited Liability Company) with a Board it concerns the participation of a provider or a public broadcasting of Directors, the term of office of directors is determined organisation, provided that its participation does not exceed twenty- freely by the Articles of Incorporation but cannot exceed six (6) years in the case of appointment during the corporate life four per cent (24%) of the capital of the private television. (See and two (2) years in case of appointment by the Articles of Article 241 of Bill No. 2015-07 of 20th March 2015 on the Code of Incorporation or by the constitutive general assembly. The Information and Communication in Republic of Benin.) mandate is renewable. Except in the event of death or termination of office, the 3 Management Body and Management duties of directors end at the end of the ordinary general meeting that approved the accounts for the financial year and held in the year during which their term expires. The directors 3.1 Who manages the corporate entity/entities and how? may be removed at any time by the ordinary general meeting. The termination of the duties of a director is published in the Trade and Personal Property Register. 1) Public Limited Liability Company [Société Anonyme (SA)]. Under Article 414 of the Uniform Act, the method In an SA with a General Manager, the first General Manager of administration of each public limited liability company is is appointed by the Articles of Incorporation. During the determined unequivocally by the Articles of Incorporation, life of the company, the General Manager is appointed by which choose between: the ordinary general meeting. He/she does not have to be a shareholder. ■ The public limited liability company (SA) with a Board of Directors. The Board of Directors is the body responsible The term of office of the General Manager is fixed bythe for the administration of the company. It is vested with Articles of Incorporation, without the possibility of exceeding the broadest powers to act on behalf of the company and six (6) years in case of appointment during the corporate life leads relations with third parties including decisions that and two (2) years in case of appointment by the Articles of do not fall within the scope of the company’s aim. The Incorporation. This mandate is renewable. public limited liability company has a Board of Directors In the event of temporary incapacity of the General Manager, which is headed by either a Chief Executive Officer or his duties are to be provisionally exercised by the Deputy a Chairman of the Board of Directors and a Managing General Manager, where one has been appointed. In the Director (MD). absence of such an appointment, the duties of the General ■ The public limited liability company (SA) with a General Manager are fulfilled provisionally by any person whom Manager. This company is headed by a General the ordinary general meeting of shareholders deems fit to Manager who is responsible for the administration and appoint. In the event of death or resignation of the general management of the company. The OHADA legislator manager, his duties shall be exercised by the deputy general has therefore separated the duties of director and general manager until a new general manager is appointed by the next manager, but this separation is not clear-cut. The General ordinary general meeting. Manager is vested with a general power of administration The general manager may be removed at any time by the and management of the company, therefore the power to general meeting. If the removal is decided without due cause, perform all acts necessary or useful for the achievement it may give rise to damages. of the aim of the company. He represents the company in 2) A SARL (private limited liability company) is managed its the General Manager is vested with the most extensive by one or more natural persons, partners or not. They are powers to act in all circumstances on behalf of the appointed by the partners in the Articles of Incorporation or company, unlike the Board of Directors which only passes in a subsequent act. In the second case, unless a clause in decisions. A general manager convenes and chairs general the Articles of Incorporation requires a higher majority, the meetings but is not involved in the powers expressly decision is taken by a majority of the partners representing reserved for the general meetings by the Uniform Act or more than half of the capital. In the absence of statutory by the Articles of Incorporation. provisions, the manager(s) is/are appointed for four (4) years. 2) Private Limited Liability Company [Société À They are eligible for re-election. Responsabilité Limitée (SARL)]. SARL (Private Limited The dismissal of the manager, whether statutory or not, must Liability Company) is the company in which one or more be decided by the partners representing more than half of the partners (a single partner SARL is also possible) are only liable shares and based on due cause. The partners are convened at for the corporate debts to the extent of their contributions to least fifteen (15) days before the date of the General Meeting, the share capital. The most widespread and most common notably through means of communication of information legal structure of commercial companies in the OHADA including a letter delivered by hand, a registered letter or space, this company entails a simplified management an e-mail. Collective decisions are taken at the General structure, hence its attractiveness, it does not include the Meeting, with an absolute majority of the share capital in first duality of management body specific to the SA (public limited consultation and a relative majority in second consultation. liability company) with the Board of Directors . On the other The extraordinary decisions must be adopted by a majority hand, it cannot issue securities, hence it cannot call up capital of three quarters of the share capital. The managers are from the financial market, the privilege of SA. It is therefore

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liable, either individually or jointly, as the case may be, to The agenda of the general meeting is decided by the convener of the the company or third parties, for infringements of laws or meeting. However, when the general meeting is convened by an ad regulations applicable to limited liability companies, or hoc proxy, the agenda shall be determined by the competent court violations of the Articles of Incorporation, or misconducts which appointed him. committed under their management. The general meeting is chaired by the Chief Executive Officer, the Chairman of the Board of Directors or the General Manager or, in 3.3 What are the main legislative, regulatory and other the event of they are prevented and subject to contrary statutory sources impacting on contracts and remuneration of clause, by the shareholder having or representing the largest number members of the management body? of shares or, in the case of a tie, by the most senior member.

Benin In a SARL (private limited liability company), managers convene Issues pertaining to the contracts and remuneration of members meetings and inform the partners. One or more shareholders of management bodies are governed exclusively by the OHADA accounting for half of the company shares or holding, if they represent Uniform Act on the Law of Commercial Companies and Economic at least one-quarter of the partners, one-quarter of the shares, may Interest Groupings dated 30th January 2014. However, the national request the holding of a general meeting. Furthermore, any partner laws of OHADA Member States may be referenced with regard to may submit a request to the court of law for the appointment of an the conditions for the formation and drafting of contracts. ad hoc proxy to be in charge of convening the general meeting and setting its agenda. Finally, general meetings may also be convened by 3.4 What are the limitations on, and what disclosure is the auditor, if there is one, after the latter has unsuccessfully requested required in relation to, interests in securities held by the manager to convene the general meeting by letter delivered by members of the management body in the corporate hand with proof of receipt or by registered letter with a notice of entity/entities? acknowledgment of receipt. When the auditor receives the notice of meeting, he shall fix the agenda and may, on decisive grounds, choose Under OHADA law, only corporate bodies are empowered to make a venue of meeting other than the one prescribed by the Articles of decisions about the timing and content of disclosure of information. Incorporation. He presents the reasons requiring the convening of the It should also be noted that if a serious event occurs, the shareholders meeting in a report which is read at the general meeting. are not required to remain silent. In fact, shareholders are obliged The general meeting of shareholders is presided over by the manager to inform the executive managers outside of the legal mechanism. or by one of the managers. If none of the managers is a partner, it That said, as associates for the smooth running of the company and is chaired by the partner present and accepting, who has the largest holders of information whose disclosure could harm the community number of shares, and in the event of a tie, by the most senior. to which they belong, the shareholders must exercise discretion in order to avoid any risk that may affect the assets of the company Still with respect to a SARL (private limited liability company), the and arouse fear among the subscribers. This enhanced weapon annual ordinary general meeting is held within six (6) months of information and control is a real deterrent in the hands of of the close of the financial year. The managers may request an shareholders. It also has considerable practical utility. extension of this time-limit to the competent court ruling. If the shareholders’ meeting has not been convened within this period, the public prosecutor or any partner may refer the matter to the 3.5 What is the process for meetings of members of the competent court ruling emergency interim ruling proceedings, in management body? order to force the managers, if necessary, to convene this general meeting or appoint an ad hoc proxy to do so. In an SA (public limited liability company), the general meeting of shareholders is convened by the Board of Directors or the General Manager, as the case may be. Failing that, it may be convened by 3.6 What are the principal general legal duties and liabilities of members of the management body? the auditor, by a representative appointed by the competent court of law, ruling in emergency interim proceedings, or by the receiver. In the performance of their duties, corporate executives must act in Subject to the provisions of the Uniform Act, the Articles of strict compliance with the legal or regulatory provisions applicable to Incorporation of the company lay down the rules for convening the Company and its Articles of Incorporation. Moreover, they must the general meetings of shareholders. The convening of general of course demonstrate competence, diligence and loyalty in order to meetings is carried out via a notice of meeting inserted in a newspaper ensure the smooth running of corporate business and preserve the accredited to receive legal announcements. If all the shares are necessary balance between the various interests that clash within and registered, this insertion may be replaced by a notice of meeting sent around the company. The obligation of loyalty is therefore essential at the expense of the company via a letter delivered by hand against for the managers, who must refrain from any behaviour likely to a receipt or by registered letter with a notice of acknowledgment of harm corporate interests or the interests of partners. receipt, by facsimile or by e-mail. The convening notices sent by fax and e-mail are only valid if the partner has given his prior written consent and communicated his fax number or his e-mail address, as 3.7 What are the main specific corporate governance the case may be. He may at any time expressly request the company responsibilities/functions of members of the management body and what are perceived to be the by registered mail with a notice of acknowledgment of receipt that key, current challenges for the management body? the aforementioned means of communication be replaced in future by a postal mail. The convening notice must indicate the date, the Articles 330 and 740 of the Uniform Act establish a common venue of the meeting and the agenda. The notice of meeting must liability regime for the managers of SARLs and SAs (public and be communicated to the shareholders at least fifteen (15) days private limited liability companies). As such, the managers are liable before the date of the general meeting for the first convening and, if individually or jointly to the company or third parties for breaches necessary, at least six (6) days for the subsequent convening. When of the laws or the regulations applicable to companies, or violations a general meeting is convened by an ad hoc proxy, the judge may of the provisions of the Articles of Incorporation or misconduct in set a different time limit.

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the performance of their duties. A careful reading of these provisions search for the effectiveness of any economic activity depends on demonstrates that the only acts likely to trigger the responsibility of the control of the right to information. In fact, in the digital age, executives are those classed in a global sense as serious “misconduct”. if the control of information is at the heart of the governance of Examples include violation of laws and regulations, violation of the commercial companies, it is viewed as a prerequisite but not Articles of Incorporation and mismanagement. sufficient to acquire full control over information. Ideally, other Moreover, in the general partnership (SNC), all the partners are stakeholders should be associated, as information control can help traders and liable indefinitely and jointly for corporate debts. to improve corporate productivity and competitiveness. Likewise, in the limited partnership (SCS), one or more partners are indefinitely, jointly and severally liable for the corporate debts, 4.3 What, if any, is the law, regulation and practice referred to as “general partners”, with one or more partners liable for concerning corporate social responsibility? Benin corporate debts within the limit of their contributions, referred to as “limited partners” and whose capital is divided into shares. Corporate social responsibility is provided for under the Bill No. 98- th Regarding the main challenges, the effectiveness of governance 004 of 27 January 1998 on the Labor Code in Republic of Benin, rules remains one of the main challenges facing the governance of the General Collective Labor Agreement applicable to companies commercial companies. In the current context of the globalisation belonging to the private and para-public sectors in Republic of st of trade, where companies pursue multiple goals and interests, it is Benin and the Bill No. 98-19 of 21 March 2003 on the Social more than necessary to establish rules of clarity for the governance Security Code in Republic of Benin. of commercial companies that must face the challenges of the Strictly speaking, under the law of Republic of Benin, the employer market economy. Added to this are the sustainability challenges. (head of the company) has a duty to declare his existence and his workers to the National Social Security Fund (CNSS). The company must join the CNSS to enable the workers to enjoy the benefits of 3.8 What public disclosures concerning management this membership. He is required to declare all workers to the Social body practices are required? Security Fund, right from the first day of his employment. However, the workers who are placed under more favourable conditions In OHADA’s law of commercial companies, the decision of continue to benefit in their personal capacity. (See Articles 279, the timing and content of disclosure of information is left to the paragraph 2, of the Labor Code and 59 of the Collective Labor discretion of the relevant corporate bodies. Agreement.) Consequently, the head of a company must automatically withhold 3.9 Are indemnities, or insurance, permitted in relation to workers’ contributions from wages and pay them to CNSS under the members of the management body and others? conditions laid down by the regulations in force or by the Articles of Incorporation of the aforesaid Fund (see Article 216, paragraph Members of the management body or other persons may carry 2, of the Labor Code). Actually the employer pays the CNSS the various insurance policies. contributions on the dates and consistently with the terms and conditions laid down by an order of the Minister responsible for 4 Other Stakeholders social security (see Article 26 of the Social Security Code).

4.1 What, if any, is the role of employees in corporate 5 Transparency and Reporting governance? 5.1 Who is responsible for disclosure and transparency? The OHADA legislator has not yet considered the possibility for employees to be directly represented in the decision-making bodies. In OHADA law, the decision on the timing and content of the Workers’ representation in the running of companies is addressed in disclosure of information is left solely at the discretion of the almost all OHADA member countries, but not in the same way: there relevant corporate bodies. are elected representatives such as staff representatives. However, employees are no strangers in the pursuance of the business of the The auditor is responsible for transparency. In an SA (public company. Indeed, employees who contribute daily to the existence limited liability company), the shareholders, whether minority of the company are sometimes the first to notice complications or majority, can also control transparency within the company as they are at the forefront of operations. This provides them the through management expertise. This is intended to extend the opportunity to observe the aforesaid complications first hand, for control of auditors, who cannot be subjected to any interference. example the cashier and other employees of an accounts department. The shareholders therefore have recourse to an expert who may Salaried staff may thus possess a certain amount of information be a counsel, an accountant or even a chartered accountant. No which may appear necessary for prevention. professional secrecy can be opposed to him. Moreover, he has absolute independence in the fulfillment of his duties. This In the same vein, many voices have been raised, especially in independence is the most obvious sign that will confirm the certainty literature, to advocate for an extension to the framework of the of his report. Unquestionably, transparency is ensured at this level. bodies responsible for triggering alerts, notably those of staff and trade union delegates. 5.2 What corporate governance related disclosures are required? 4.2 What, if any, is the role of other stakeholders in corporate governance? The Uniform Act does not specifically address information to be provided related to corporate governance. Reading between the The Uniform Act did not carry significant weight for other lines, it transpires that the information in question must have at least stakeholders in corporate governance. However, presently, the

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a close link with the management of the company. Actually, one from the president of the competent court of law of the company’s of the surest means of protecting the interests of shareholders and registered office. This procedure is one of the most significant allowing them to exercise effective control over the management innovations in OHADA law of commercial companies. Indeed, of executives is to provide them with as much information as management expertise meets a classic concern expressed explicitly possible on the management of corporate affairs, provided that in the Uniform Act, i.e. inform partners about the management of such information is accurate. The right to information is one of the the company at a given time, the aim being to strengthen their right political rights of the shareholder. He may exercise it periodically or to monitor the management each accounting year and to reinforce permanently. The control of shareholders is carried out by means of their intervention in the social life of the company. the questions which are asked to the business managers.

Benin 5.4 What corporate governance information should be 5.3 What is the role of audit and auditors in such published on websites? disclosures? The Uniform Act does not address this issue. However, the The audit, as well as the decision on the timing and content of organisational chart of the governing body of the company should disclosure of information, is left at the discretion of the relevant be publicised. corporate bodies. However, the shareholders (especially minority shareholders) may take the initiative to request management expertise

Charles Badou Ogoudjé César Guégni Law Firm Charles Badou & Partners Law Firm Charles Badou & Partners Ilot, 1108 Parcelle Ilot, 1108 Parcelle Wologuèdè, 01 BP 144 Wologuèdè, 01 BP 144 Cotonou Cotonou Benin Benin

Tel: +229 95 96 00 18 Tel: +229 96 67 87 35 Email: [email protected] Email: [email protected] URL: www.cabinetbadou.com [email protected] URL: www.cabinetbadou.com

Charles Badou is a Doctor in Private Law. He is also a lawyer Ogoudjé César Guégni holds a Master’s degree in Private Law and a registered with the Bar of Benin. He holds a postgraduate degree in Master’s (II Research) in Law and Judicial Institutions. He is currently Business and Tax Law, a postgraduate diploma in Advanced Studies preparing a doctoral thesis in law. He is also a collaborator lawyer at on Democratic and Human Rights and a law degree in Business Law Law Firm Charles Badou & Partners. from Jean Moulin Lyon 3 University (France).

About the firm: Law Firm Charles Badou & Partners Founded: 2005 Office Location: Cotonou-Benin Website: www.cabinetbadou.com Contacts: Phone: +229 21 32 69 33 Fax: +229 21 32 69 32 Email: [email protected]/[email protected] Practice Areas & Industries: The firm is organised into three divisions: ■■ Business Law: Commercial Companies Law, Banks, Finances, International Trade, Property Law, General Commercial Law, OHADA Law. ■■ Maritime Law and Intellectual, Industrial and Artistic Law. ■■ Hydrocarbons Law and Electricity Law. Other Areas: Criminal Law, New Information Technology, Administrative Litigation. Working language: French-English. Staff: Two (2) Attorneys-at-law and six (6) Lawyers.

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Bermuda

Cox Hallett Wilkinson Limited Natalie Neto

All Bermuda companies are subject to the provisions of the 1 Setting the Scene – Sources and Companies Act, 1981 (as amended) (the “Companies Act”). The Overview Companies Act, together with applicable common law rules, is the primary source of corporate governance regulation of Bermuda companies. 1.1 What are the main corporate entities to be discussed? For companies which are listed on the Bermuda Stock Exchange The main corporate entities in Bermuda are private companies (the “BSX”) corporate governance is also promulgated through the limited by shares. There are two types of private companies limited BSX Listing Regulations (the “Listing Regulations”). There are ten by shares: sections to the Listing Regulations. Section I – Listing Regulations is generic and applicable to all issuers and the remaining nine ■ exempted companies (“exempted companies”): which are companies that are owned by non-Bermudians and which sections are applicable to specific types of products or securities. carry on business outside Bermuda from a principal place of The Listing Regulations are available on the BSX website at www. business in Bermuda; and bsx.com. ■ local companies (“local companies”): which are companies Constitutional Documents that: (i) are controlled by Bermudians, where at least 60% In addition, corporate governance is regulated by the constitutional of the total voting rights in the company are exercisable by documents of a company. Such documents include the memorandum Bermudians and the percentage of directors and of beneficial of association (the “memorandum”) and bye-laws (“bye-laws”). ownership in the company’s shares is not less than 60% (known as the “60/40 Rule”); or (ii) have a licence from The memorandum will state whether the objects of a company are the Minister of Finance of Bermuda to carry on business restricted (for example in the case of a special purpose vehicle) or notwithstanding that the criteria in (i) is not met. unrestricted. A Bermuda company has the capacity, rights, powers and privileges of a natural person, subject to any specific provisions The 60/40 Rule does not apply to companies whose shares are in the memorandum. The bye-laws govern the relationship between listed on a designated stock exchange (or the subsidiary of such a the company and its shareholders and detail the rights and duties of company) nor to companies within certain prescribed industries, each. The bye-laws will contain provisions relating to the convening including insurance, telecommunications, energy, hotel operations, and conducting of meetings of the board and shareholders (among banking or international transportation services (by ship or aircraft). other things). Exempted companies may conduct business from within Bermuda Corporate governance matters may also be dealt with in a with entities outside Bermuda or with other exempted undertakings shareholders’ or investment agreement relating to the relevant in Bermuda. Exempted companies are prohibited from carrying on company, whose provisions may override those set out in the bye- business in Bermuda except in certain circumstances, which include laws, subject always to the Companies Act. dealing in securities and acting as manager or agent for, or consultant or advisor to, affiliated exempted companies or permit companies to Regulatory Bodies the exempted company, or to an exempted partnership in which the The Bermuda Monetary Authority (the “BMA”) regulates exempted company is a partner, or carrying on reinsurance business Bermuda’s financial services sector. The BMA develops risk-based or, in the case of mutual funds, selling or distributing their shares financial regulations that it applies to the supervision of Bermuda’s in Bermuda. banks, trust companies, investment businesses, investment funds, fund administrators, money service businesses, corporate service 1.2 What are the main legislative, regulatory and other providers and insurance companies. The responsibilities of the corporate governance sources? BMA also include issuing Bermuda’s national currency (the Bermuda Dollar, which is pegged to the United States Dollar), Legislation and Common Law managing exchange control transactions, assisting other authorities with the detection and prevention of financial crime and advising the The legal system in Bermuda is based on statute and common law. Bermuda Government on banking and other financial and monetary Decisions of the English courts are highly persuasive in Bermuda. matters. Further information concerning the BMA can be found on The Bermuda court system is comprised of the Magistrate’s Court, its website www.bma.bm. the Supreme Court (the “Supreme Court”) and a Court of Appeal, with certain cases being subject to a final right of appeal to the Privy The BSX is today the world’s preeminent fully electronic securities Council of the United Kingdom. market offering a full range of listing and trading opportunities

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for international and domestic issuers of equity, debt, depositary Banking: receipts, insurance-linked securities and derivative warrants. ■ The Corporate Governance Policy for Banks and Deposit The BSX is supervised and regulated by the BMA and, as noted Companies Act 1999 (Issued January 2012): this Code applies above, promotes corporate governance standards through the to deposit taking companies licensed under the Banks and Listing Regulations. As a full member of the World Federation of Deposit Companies Act 1999 and sets out 13 principles and Exchanges, the BSX has been acknowledged as meeting the highest related guidance which reinforce key elements of corporate regulatory and operational standards. The BSX is not bound by the governance applicable to such companies. European Union Listings Directive or the United States Securities Exchange Commission regulations and has a light but effective 1.3 What are the current topical issues, developments, regulatory environment. trends and challenges in corporate governance?

Bermuda Corporate Governance Codes Bermuda has not adopted a formal overarching corporate governance Bermuda companies, like many others, are facing more difficult code but there are several industry-specific corporate governance challenges with respect to corporate governance issues and codes (“Industry Codes”) issued by the BMA in its capacity as the particularly how to achieve more effective board oversight than ever regulator for such industries: before. Current hot topics include: ■ increasing the number of independent directors on boards (in Insurance: line with the recommendations made in the Industry Codes); ■ The Insurance Code of Conduct (Revised July 2015): which ■ board diversity; establishes duties, requirements and minimum standards to be complied with by every (re)insurer that is registered under ■ risk management and oversight; and section 4 of the Insurance Act 1978 (as amended), including ■ succession planning and avoiding entrenchment at board the procedures and sound principles to be observed by such level. persons. Failure to comply with the provisions set out in the Shareholder involvement/engagement is of increasing importance, Code will be a factor taken into account by the BMA when as well as dealing with the impact of technology and cyber-security determining whether a (re)insurer is meeting its obligation to carry out its business in a sound and prudent manner. and putting in place effective policies and procedures to manage any This Code requires every registered (re)insurer to establish associated risk. and maintain a sound corporate governance framework, which provides for appropriate oversight of the (re)insurer’s business and adequately recognises and protects the interests 2 Shareholders of policyholders. The framework should have regard for international best practice on effective corporate governance. Corporate governance includes principles on corporate 2.1 What rights and powers do shareholders have in the discipline, accountability, responsibility, compliance and operation and management of the corporate entity/ oversight. entities? ■ The Insurance Manager Code of Conduct 2016 (Issued August 2016): requires insurance managers to implement Under common law principles, shareholders of Bermuda companies a documented corporate governance framework which are entitled to have the affairs of the company conducted in includes policies and processes, and controls which the BMA accordance with general law, and in particular with the company’s considers appropriate given the nature, scale, complexity memorandum and bye-laws. A Bermuda court will generally refuse and risk profile of the insurance manager. The Code also to interfere with the management of a company at the insistence of includes requirements and recommendations with respect to a minority of its shareholders who are dissatisfied with the conduct the composition of the board of an insurance manager and of the company’s affairs by the majority or by the board of directors management of conflicts of interests. Insurance managers (who are normally elected by the majority). The fundamental are expected to comply with both the letter and spirit of this proposition of law (under the rule in Foss v Harbottle (1843) 67 ER Code. 189) is that a minority shareholder cannot sue for a wrong done to Trusts, Investment Business and Fund Administrators: the company or bring proceedings to rectify an internal irregularity ■ The Corporate Governance Policy for Trusts (Regulation in circumstances where the majority can lawfully ratify the same. of Business Act 2011), Investment Business Act 2003 and Generally, the exceptions to this would include: Investment Funds Act 2006 (Issued January 2014) (together ■ where the act complained of is ultra vires or illegal and not the “Regulatory Acts”) (the “Regulatory Acts Policy”): capable of ratification by the majority; applies to entities that are licensed under the Regulatory Acts and sets out nine principles and related guidance ■ where the act complained constitutes a fraud on a minority which reinforce key elements of corporate governance. where the wrongdoers control the company; All licensed entities are required, as a statutory minimum ■ where the act complained constitutes an infringement of licensing criterion, to implement corporate governance individual rights of shareholders, such as the right to vote; policies and procedures. The BMA takes into consideration and compliance with the Regulatory Acts Policy when assessing ■ where the company has not complied with provisions whether a licensee meets the criterion. The Regulatory requiring the act be approved by a special or extraordinary Acts Policy consists of principles and underlying guidance. majority of the shareholders. The principles are the core of the policy and the BMA expects licensed entities to comply with them. In assessing Rights of all shareholders: compliance, the BMA will adopt a proportional approach that ■ Personal actions: Any shareholder may complain in their reflects the size, complexity, structure and risk profile of the own name and on their own behalf of a wrong done to them relevant entity’s business and recognises that approaches to as shareholders by other shareholders or by the company, corporate governance among different institutions may vary including, under the exceptions to the rule for ultra vires acts, notwithstanding the application of the general principle of breaches of the company’s memorandum or bye-laws or an proportionality. infringement of their personal rights.

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■ Derivative actions: A derivative action (where the shareholder ■ electing the directors and determining their remuneration; sues in the company’s name rather than its own) may be ■ considering the financial statements and auditor’s report brought where the act complained of is ultra vires the (unless the laying of such financial statements and/or company. A derivative action may also be brought against the appointment of an auditor has been waived by the directors directors and promoters who have been guilty of a breach of and shareholders); and their fiduciary duties. ■ reappointing the auditors (unless the appointment has been ■ Acts which are prejudicial to the interests of a shareholder: waived). Pursuant to section 111(1) of the Companies Act, any shareholder may make an application to the Supreme Court The directors may also convene general meetings other than AGMs. for a petition for an order if the affairs of the company are Such meetings are called special general meetings (“SGM”). being or have been conducted in a manner which is oppressive Generally, there must be at least 5 days’ prior notice of general or unfairly prejudicial to the shareholders, and seek either a meetings. Such notice should specify the place, date and time and Bermuda winding-up order or an alternative remedy if a winding-up the general nature of the business to be transacted. All shareholders order would be unfairly prejudicial to them. entitled to attend and vote at a general meeting are entitled to receive Matters requiring shareholder approval under the Companies Act notice. The bye-laws of the company will typically specify the relevant Any holder of shares representing 10% or more of the company’s majorities for approval by the shareholders on specific matters. The issued share capital is entitled to requisition the convening of Companies Act provides that certain matters require authority by a an SGM pursuant to section 74(1) of the Companies Act. If the company in the general meeting (as well as, in some cases, express directors do not convene an SGM within 21 days from the date of authority in the bye-laws). If a higher majority is not specified in the deposit of the requisition, the requisitionists, or any of them the bye-laws, this would mean a simple majority of votes cast at the representing more than 50% of the total voting rights of all of them, meeting. Such matters include: may themselves convene a meeting (within three months of the date ■ converting preference shares into redeemable preference of the requisition). shares; Section 77A of the Companies Act permits written resolutions of ■ increasing or reducing the company’s share capital; shareholders in lieu of holding a physical shareholders’ meeting, ■ altering a company’s share capital; unless the bye-laws otherwise provide. Notice of the resolutions must be given to all shareholders. Written resolutions are passed ■ electing the directors of the company; when signed by those shareholders who would be entitled to pass ■ continuances and discontinuances; a resolution at a general meeting of the company or by all of the ■ loans to directors; shareholders. ■ waiving the convening of annual general meetings or the presentation of accounts to shareholders and/or the appointment or removal of an auditor; and 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? ■ winding-up the company on a voluntary solvent basis. Subject to any contrary provision in the company’s bye-laws, The liability of a shareholder in a Bermuda company limited by shareholders holding at least 75% of the company’s issued share shares is limited to the unpaid amounts (if any) in respect of their capital have certain rights under the Companies Act including: shares. This is the corollary to the principle of separate corporate ■ to provide written consent to alter or abrogate all or any personality established in Salomon v A Salomon & Co Ltd [1897] special rights attaching to shares or classes of shares (where AC 22. the memorandum or bye-laws do not preclude such variation); As a consequence, a company is responsible for its own actions. ■ to agree to any compromise or arrangement at a meeting of A company’s liability is also its own and does not pass through to shareholders (shareholders in this case must represent 75% in its shareholders. The circumstances in which the court will ignore value of those present and voting at the meeting); and the principle of a company’s separate liability and will hold the ■ to approve an amalgamation or merger. shareholders accountable for the company’s actions (known as ‘piercing the corporate veil’) are therefore very exceptional. Such 2.2 What responsibilities, if any, do shareholders have as cases would generally involve the legal personality of the company regards the corporate governance of their corporate being used for the purpose of wrongdoing where no other remedy entity/entities? is available. Under section 246 of the Companies Act, if during the course of From a Bermuda perspective, shareholders are rarely responsible the winding up of a company it appears that any business of the for the corporate governance of Bermuda entities. There are no company has been carried on with the intention to defraud creditors institutional investor or shareholder groups that have particular of the company or creditors of any other person or for any fraudulent significance in corporate governance. purpose, any person who was knowingly a party to the carrying on of the business in such manner may be held personally liable 2.3 What shareholder meetings are commonly held and without any limitation of liability, for all or any of the debts or other what rights do shareholders have as regards them? liabilities of the company. Further, the officers of a company may be held liable to imprisonment for offences committed under section All meetings of shareholders are known as general meetings. 243 of the Companies Act during the course of a winding up of An annual general meeting (“AGM”) must be held once in each the company and for this purpose ‘officer’ means ‘any person in calendar year, unless the company has elected to dispense with the accordance with whose directions or instructions the directors of holding of the relevant AGM. The following are typically dealt with a company have been accustomed to act’ (which may include the at an AGM: shareholders in certain circumstances). ■ establishing the minimum and/or maximum number of directors;

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method of appointment is typically set out in the bye-laws, although 2.5 Can shareholders be disenfranchised? other documents such as a shareholders’ or investment agreement may contain provisions relating to the appointment and removal Yes, the bye-laws or the shareholders’ agreement may include of directors. Absent any specific provisions in either the bye-laws provisions in which shareholders may lose their voting rights or such agreements, the first board of directors is elected by the including, for example, where employee shareholders cease shareholders at the first statutory general meeting of the company employment with the company or where it is necessary in order to and thereafter by the shareholders typically at each AGM unless preserve maximum/minimum ownership/voting thresholds. the company has dispensed with the requirement to hold them. Directors are usually appointed to serve until the next AGM or if earlier until their successor is appointed or elected. However, the 2.6 Can shareholders seek enforcement action against Bermuda members of the management body? bye-laws may provide for longer terms of service and for retirement by rotation. Please refer to the response to question 2.1 above. The bye-laws usually expressly specify the circumstances in which a director must vacate office (for example, if he becomes bankrupt or of unsound mind). Subject to contrary provisions in the bye-laws, 2.7 Are there any limitations on, and disclosures the shareholders may also remove a director at an SGM convened required, in relation to interests in securities held by shareholders in the corporate entity/entities? for the purpose and appoint another person in his place. At least 14 days’ notice of the SGM must be given to the relevant director(s), who would be entitled to attend and be heard at the SGM. All issues and transfers of shares in Bermuda companies require the prior consent of the BMA, unless a general or specific permission The shareholders may also authorise the remaining directors to fill has been granted in respect of such issues or transfers. The BMA has any vacancies arising on the board. issued a public notice containing the current general permissions available which include where shares of a company are listed on 3.3 What are the main legislative, regulatory and other a recognised stock exchange. It is also possible for a company to sources impacting on contracts and remuneration of obtain specific ‘blanket’ permission to the issue or transfer of shares, members of the management body? for example, pursuant to an employee share incentive scheme. Notification to the BMA is required by a shareholder or a prospective The bye-laws often provide that the amount of the directors’ fees shareholder of new or increased control in a (re)insurance company shall be determined by the company in the general meeting. Subject that is registered under the Insurance Act 1978, where the new or to any restrictions in the bye-laws, the board is typically empowered increased control is at a level of 10%, 20%, 33% and 50%. The to determine the remuneration of the directors and there is generally new or increased control can be obtained through either a transfer or no obligation to disclose the remuneration of each director. new issue of shares and can take place at the direct, intermediate or However, a prospectus issued by a company applying for listing on ultimate level of shareholding. In the case of private companies, no the BSX must contain details of the aggregate remuneration and person may become a new or increased shareholder unless the BMA benefits in kind given to directors in the last financial year. has confirmed there is no objection (or failed to confirm within the Some of the Industry Codes make recommendations with respect to required 45-day period). the remuneration of the board and management. For BSX listed companies, the directors or executive officers must Directors do not have to be employees of the company. There is no deliver written notice and details to the BSX if they become aware of any right to inspect directors’ service contracts. shareholders who (i) acquire a beneficial interest, control or direction of 5% or more of the company’s securities (or convertible securities) or any change in the identity of such holder, or (ii) has a beneficial interest 3.4 What are the limitations on, and what disclosure is in or exercises control or direction over 5% or more of the company’s required in relation to, interests in securities held by securities (or convertible securities) and the shareholder acquires an members of the management body in the corporate additional 3% or more of the company’s securities. entity/entities?

There is no requirement for a director to hold shares in a Bermuda 3 Management Body and Management company. For listed companies, an internal code of dealing is required which 3.1 Who manages the corporate entity/entities and how? must, as a minimum, prohibit them from dealing in a company’s shares for a period from when they become aware of the interim and full year’s results of the company until those results are announced. Management of a company is typically the responsibility of its board of directors. Subject to the bye-laws, the directors may exercise all of the powers of the company except those powers that are required 3.5 What is the process for meetings of members of the by the Companies Act to be exercised by the shareholders of the management body? company. The directors may delegate day-to-day management to committees and to executive officers. The method for convening and conducting board meetings will Directors can be either individuals or corporate entities and sole usually be set out in the bye-laws, which typically give the board directors are permitted. considerable discretion to regulate their own affairs. The bye- laws will typically provide that the length of notice for calling a board meeting must be reasonable in the circumstances. Matters 3.2 How are members of the management body appointed are usually decided by simple majority vote but the bye-laws may and removed? prescribe higher majorities or the consent of independent directors, for example. The chairman may also have a casting vote. The board of directors is appointed by the shareholders and the

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A quorum must be in attendance throughout the meeting. The bye- creditors or for any fraudulent purpose. Bermuda courts are laws will also usually contain provisions requiring declaration of guided by the standard borrowed from the UK’s ‘wrongful material interests which may prevent a director from being able to trading’ provisions. vote and count in the quorum (particularly for listed companies). ■ Section 36C of the Conveyancing Act 1983 (Transactions at The Companies Act provides that a director who discloses his an Undervalue): a creditor may seek to set aside a disposition material interest either in writing or at the first available opportunity of the company’s property at an undervalue. may vote and be counted in the quorum, subject to the bye-laws. Civil and Criminal Liability: Unless the bye-laws provide otherwise, board meetings may be held A director can be criminally liable under the general laws of theft telephonically or by video conference. The bye-laws usually permit and fraud. If a company commits an offence under the Proceeds written resolutions of the directors in lieu of meetings and such of Crime Act, 1997, and it is shown to have been committed with written resolutions typically require unanimous consent, although the consent and connivance of an officer of the company or can be Bermuda some companies provide for written resolutions to be valid once attributable to any neglect on his part, the officer and the company signed by a specified majority of the directors. are liable under that Act. Further, the Bribery Act 2016, which received Royal Assent in 2016 3.6 What are the principal general legal duties and and is expected to come into force in 2017, provides for indictable liabilities of members of the management body? offences of bribing and being bribed, including bribery of foreign public officials. Common Law Duties: At common law, a director owes a fiduciary duty and a duty of 3.7 What are the main specific corporate governance skill and care to the company. Bermuda law follows the English responsibilities/functions of members of the common law principle that such duties are owed to the company management body and what are perceived to be the and not individual shareholders. Where a company is solvent, a key, current challenges for the management body? director’s duty to act in the best interests of the company includes having regard to the interests of shareholders. But when a company Please see our answer to question 1.3. is insolvent, the board must also have regard to creditors’ interests. The fiduciary duty has four aspects: 3.8 What public disclosures concerning management ■ a duty to act in good faith; body practices are required? ■ a duty to exercise powers for a proper purpose; There are no prescribed disclosures. ■ a duty to avoid conflicts of interests with the company; and ■ a duty not to take a personal profit from opportunities resulting from his directorship. 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? The duty of skill and care: ■ requires a degree of skill (although the test is subjective); A company may, either by contract or pursuant to its bye-laws, ■ requires diligent attention to the business; and indemnify its officers against or exempt them from any liability in ■ entitles a directors to rely on others (co-directors or company respect of any loss arising or liability for which the officer may be officers) but not to the extent of absolving a director from his guilty in relation to the company other than in respect of fraud or responsibility by delegation to others. dishonesty. A company may purchase and maintain insurance for Statutory Obligations: the benefit of its officers. In addition, the following statutory provisions, many of which arise in the context of an insolvent company, are applicable to directors 4 Other Stakeholders and give rise to obligations and potential liability: ■ Section 97 of the Companies Act (Duty of Care): requires a director in the exercise of his powers and the discharge 4.1 What, if any, is the role of employees in corporate of his duties, to act honestly and in good faith with a view governance? to the best interest of the company and to exercise the care, diligence and skill that a reasonably prudent person would Employees do not generally have a significant role in corporate exercise in comparable circumstances. A director will be governance. presumed not to act in good faith if he fails to disclose an interest in a material contract or person party thereto. ■ Section 237 of the Companies Act (Fraudulent Preference): 4.2 What, if any, is the role of other stakeholders in applies to transfers or dispositions (including mortgages, corporate governance? conveyances and delivery of goods) made within six months of the winding up of a company, that are carried out with the There are no institutional investors or other shareholder groups that dominant intention of preferring one creditor over another at have particular significance in corporate governance. a time when the company was unable to satisfy all creditors’ claims in full. ■ Section 246 of the Companies Act (Fraudulent Trading): 4.3 What, if any, is the law, regulation and practice enables a court (on the application of a liquidator or any concerning corporate social responsibility? creditor or shareholder of the company) to make an order imposing personal liability on directors for any or all of the Bermuda companies are not currently legally required to, and company’s debts if he is knowingly a party to fraudulent currently do not generally report on, social, environment and ethical trading, which occurs when a company carries on business issues. with intent to defraud creditors, or any other person’s

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5 Transparency and Reporting Natalie Neto Cox Hallett Wilkinson Limited Cumberland House, 9th Floor 5.1 Who is responsible for disclosure and transparency? 1 Victoria Street, Hamilton HM 11 Bermuda The board of directors would be responsible for disclosure and Tel: +1 441 294 1512 transparency. Email: [email protected] URL: www.chw.com

5.2 What corporate governance related disclosures are required? Bermuda Natalie Neto, Head of Corporate There are no prescribed disclosures. Natalie has over 18 years’ experience advising on a range of corporate and regulatory matters including corporate governance issues; IPOs; banking and private equity transactions; mergers and acquisitions 5.3 What is the role of audit and auditors in such (with particular expertise in regulated entities); joint venture and special purpose vehicles; and offshore corporate, partnership and disclosures? limited liability company structures (with particular expertise in relation to complex global restructuring projects involving Bermuda entities). This is not applicable. Natalie is a certified director of the Institute of Directors andis Executive Committee Member and Chairman of the Regulatory Sub- Committee of the Institute of Directors – Bermuda Branch. 5.4 What corporate governance information should be published on websites?

For larger and/or listed companies, we would recommend that copies of all constitutional documents, board committee charters and any corporate governance policies or procedures (or a summary of them) are published on the website.

Cox Hallett Wilkinson Limited is one of Bermuda’s leading commercial law firms. The firm serves a diverse clientele and provides a full range of legal and other professional services. Through its affiliated companies, it provides corporate administration and licensed trustee and administration services. The firm and its attorneys are recommended in a number of global law firm guides. CHW is consistently recognised as one ofthetopthree commercial law firms in Bermuda by Chambers Global, IFLR1000 and The Legal 500.

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Brazil

Lobo & Ibeas Advogados Paulo Eduardo Penna

by government-controlled or -owned companies. Except where 1 Setting the Scene – Sources and expressly indicated otherwise, in this chapter we do not cover the Overview corporate governance rules applicable to government-controlled or owned companies. 1.1 What are the main corporate entities to be discussed? A corporation’s organisational documents All corporations in Brazil are governed by bylaws (estatuto social), In Brazil, there are two main types of corporate entities: limited which, in addition to defining the corporation’s name, its purpose, liability companies (sociedades limitadas); and corporations the location of its head office, the value of its capital stock and the (sociedades anônimas). Limited liability companies have a number of issued shares, among other elements, may also establish simpler structure and are generally used in small and medium-sized rules on shareholder meetings, board composition and authority, ventures, family businesses and as subsidiaries. Corporations which officers’ authority, organisation of other committees of the board, have a more complex structure are subject to a more encompassing shareholders’ rights and many other aspects of corporate governance, regulation and are geared towards medium and large-sized ventures. to the extent that such matters are not regulated or imposed by the As a general rule, corporations are the only entities that can be listed Corporation Law. In the case of a conflict, the Corporation Law will and have securities admitted for public trading. generally prevail over the bylaws. The bylaws can be amended by Although corporate governance is relevant to all types of the shareholder meeting. companies, the answers below cover corporations, focusing on Listed corporations are also required to issue a policy for disclosure listed corporations. and use of information. Such a policy will establish standards of disclosure of acts and facts involving the entity and procedures to maintain confidentiality of sensitive information not yet disclosed to 1.2 What are the main legislative, regulatory and other corporate governance sources? the public. Listed corporations are also encouraged to issue a policy for trading of securities by related parties, setting forth standards to be upheld by the corporation, its controlling shareholders, directors, The main sources of corporate governance requirements are officers and members of the audit committee and other committees corporate legislation, the corporation’s organisational documents, of the board when trading securities issued by the corporation. securities legislation and stock exchange rules. Shareholder advocacy groups are also increasingly influential through the Corporations, especially listed ones, may also adopt additional issuance of guidelines and best practices rules. governing documents, such as codes of ethical business conduct, dividends policies and charters of the board of directors and other Corporate legislation committees. According to Federal Law 13,303/2016, government- The primary source for corporate regulation and corporate controlled corporations have to adopt a code of business conduct. governance is Federal Law 6,404/1976 (“Corporation Law”), which Securities legislation governs all corporations in Brazil, whether listed or not. In Brazil, only the Federal Congress has the authority to issue laws with regard Listed corporations are subject to Federal Law 6,385/1976, which to corporate matters and the securities market. regulates the securities market and the Comissão de Valores Mobiliários (the Brazilian securities and exchange commission, The Corporation Law regulates all matters concerning the referred to as the “CVM”). They must adhere to the various rules, incorporation, organisation, existence and winding up of corporations, regulations and guidance opinions issued by the CVM, among including the issuance of shares and other securities, shareholder which is: meetings, shareholders’ rights, operation and management of the corporation, directors’ and officers’ duties and profit distribution. ■ Ordinance 358/2002, which addresses the disclosure requirements and use of relevant information of the In Brazil, important listed corporations are government- corporation. controlled. In view of an increase in conflicts between minority ■ Ordinance 361/2002, which regulates tender offers of shareholders and the controlling shareholder (the government) of Brazilian listed corporations, including delisting offers, such corporations due to accusations of corruption and the use of hostile offers and sale of control offers. such corporations as vehicles to implement governmental policies ■ Ordinance 400/2003, which regulates the public offer for the that undermine shareholder value, at the end of 2016 the Brazilian distribution of securities, including the disclosure and control Congress approved a law (Federal Law 13,303/2016) establishing of inside information before the offer period. rules and corporate governance standards that must be observed

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■ Ordinance 480/2009, which contains the requirements for a corporation to obtain registration with the CVM and thus 2 Shareholders be listed. It also establishes annual, quarterly and periodic financial reporting and other continuing obligations, and 2.1 What rights and powers do shareholders have in the imposes additional obligations on directors, officers and operation and management of the corporate entity/ controlling shareholders. entities? ■ Ordinance 481/2009, which regulates proxy solicitations and information that must be disclosed to shareholders on matters The operation and management of corporations is entrusted to to be voted in shareholder meetings. the members of the management bodies (directors and officers). Stock exchange rules Brazil Shareholders will shape the corporation’s operation and management Corporations listed on the São Paulo Stock Exchange must comply by electing, removing or refusing to re-elect management body with its listing rules and regulations. There are four listing segments members. Shareholders may also choose to install an audit in the São Paulo Stock Exchange’s main market: the traditional committee, which will be responsible for overseeing the actions segment; Level 1; Level 2; and Novo Mercado. The latter three taken by the members of the management bodies and the fulfilment segments were created in 2000. They subject corporations to of their duties. Audit committee members will also be elected by additional corporate governance practices in comparison to those the shareholders. set forth by law; the Novo Mercado having the highest standards and Additionally, under the Corporation Law, the following matters Level 2 having the second highest standards. The great majority of require shareholders’ approval: amendments to the bylaws (such recent IPOs have been made on Novo Mercado. The following as share capital increases and decreases, changes to the rights practices, among others, must be followed by corporations of share classes, modification of the composition of the board, listed on the Novo Mercado segment: capital composed of a sole corporate name change); the laying and receiving of accounts from class of voting shares; tag-along to all shareholders in the sale the management bodies; approval of financial statements; issuance of the corporation’s control; additional disclosures of financial of debentures; suspension of shareholders’ rights; evaluation of information; and at least 20% of independent board members must assets to be conveyed by a shareholder in exchange for shares of the be involved. corporation; issuance of participation notes (partes beneficiárias); The São Paulo Stock Exchange also manages an over-the-counter transformation of the corporation into another type of entity; market – the Bovespa Mais – similar to the London Stock Exchange corporate reorganisation (merger, spin-off or amalgamation); AIM, focusing on smaller companies and with more flexible listing dissolution, winding up and appointment of the liquidator; and filing rules. for bankruptcy or court-ordered restructuring. The authority of the Other sources shareholder meeting, though, is not limited to those matters. The shareholder meeting is the supreme authority within the corporation Advocacy groups such as IBGC (the Brazilian Corporate Governance and has the power to decide on any corporate matter, including those Association), and also the CVM, have issued best practice guidelines delegated by law or the bylaws to management bodies. and manuals. Although not mandatory, such guidelines and manuals have had a growing influence on corporate governance practices of The bylaws can also establish that specific transactions, such as Brazilian corporations. the sale of relevant assets or the execution of contracts with values exceeding certain thresholds, require shareholders’ approval. This type of provision is more common in smaller unlisted corporations, 1.3 What are the current topical issues, developments, notably those that do not have a board of directors. trends and challenges in corporate governance?

Due to ‘Operation Car Wash’, the enactment in 2013 of an anti- 2.2 What responsibilities, if any, do shareholders have as corruption law (Federal Law 12,846/2013) and other factors, regards the corporate governance of their corporate entity/entities? compliance has become a very important issue for Brazilian corporations. Brazilian corporations are taking active measures to adopt compliance programmes and institute compliance committees. Corporate governance responsibilities are generally owed to the shareholders by those in command of the corporation. In Brazil, in Important advocacy groups in the Brazilian capital market, including spite of the emergence of some listed corporations with dispersed ABRASCA (the Brazilian Listed Corporations Associations), share ownership, most of them continue to have a concentrated AMEC (the Brazilian Capital Market Investors Association) and capital structure, in which the controlling shareholder exercises a IBGC jointly approved in the end of 2016 a corporate governance vast influence over the corporations’ activities. The Corporation Law code applicable to Brazilian companies, particularly listed provides that the controlling shareholder must use its controlling corporations. The code adopts a ‘comply or explain’ approach, authority to cause the corporation to fulfil its corporate purpose under which companies will have to undertake to comply with the and social function. It also sets forth the controlling shareholders’ principles set out in the code and report on their implementation, or fiduciary duties towards other shareholders, the corporation’s else provide an explanation in cases of non-compliance. The CVM employees and the communities affected by the business activities. is considering making the code mandatory for all listed corporations. The controlling shareholder will be liable for damages caused by the If the code is made mandatory, this will have an impact on some of abusive use of its controlling authority. the answers set out in this chapter. The Corporation Law further provides that all shareholders must Finally, the São Paulo Stock Exchange is currently proposing to exercise their voting rights in the corporation’s best interest. A change some of the rules applicable to corporations listed on the shareholder’s vote will be considered abusive when exercised to Novo Mercado and the Nível 2 listing segments. The purpose is to cause damage to the corporation or other shareholders or to obtain update and enhance the corporate governance rules applicable to undue advantages. A shareholder will be liable for damages caused such corporations. by its abusive vote, even if it is not the winning vote.

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In addition, and as discussed in question 2.7 below, certain corporation. Courts may apply the “piercing of the corporate veil” shareholders have disclosure obligations with regard to securities theory and hold a shareholder liable where the corporation is used owned by them. for purposes other than those for which it was organised, where the corporation’s assets are commingled with the shareholder’s personal assets, where the corporation is employed to carry out a fraud or in 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them? other specific and exceptional cases (generally in smaller, unlisted companies). A shareholder that belongs to the same economic group of the corporation may also be held accountable for labour credits of Annual shareholder meetings are required by law and must be held the corporation’s employees. Moreover, the controlling shareholder within four months after the corporation’s fiscal year-end. Annual

may be held liable for damages caused by the abusive use of the Brazil meetings will resolve upon the following matters: the laying and controlling power (for instance, where the controlling shareholder receiving of accounts from the management bodies; approval of causes the corporation to benefit another company to the detriment financial statements; profit allocation and dividend distribution; and of the minority shareholders or the corporate assets). appointment of directors (or officers) and audit committee members. Special shareholder meetings can be called at any time to resolve upon any corporate matter, including amendments to the bylaws, 2.5 Can shareholders be disenfranchised? corporate reorganisations (mergers, spin-offs and amalgamations) and removal of members of management bodies. As mentioned in The shareholder meeting can suspend a shareholder’s voting, question 2.1, shareholder meetings have the power to decide on any dividend and other rights for breach of an obligation set forth in corporate matter, including those under the board’s authority. law or the bylaws (e.g. default in the payment of subscribed shares). Shareholder meetings are generally convened by the board of Shareholders may be squeezed out of a listed corporation if, as a directors or, if the entity is unlisted and does not have a board, by result of a tender offer launched to delist the entity, the purchaser the officers. The call notice must contain an agenda of the meeting. acquires a stake corresponding to at least 95% of the outstanding Generally, only matters listed in the agenda may be voted. If the shares. In this case, the purchaser can, in a shareholder meeting, members of the management bodies fail to call a shareholder approve the compulsory acquisition of the outstanding 5% shares, meeting required by law or the bylaws (for instance, the annual for the same purchase price (which must be a fair price) adopted in meeting), any shareholder may convene the meeting. In certain the tender offer. situations, meetings may also be called by the audit committee. The shareholder meeting of listed or unlisted corporations may also In addition, shareholders representing at least 5% of the approve the redemption of outstanding shares through the use of corporation’s capital stock may require the management bodies profits and reserves. to call a shareholder meeting and indicate the specific resolutions Note that up to half of a corporation’s shares can be non-voting to be voted upon. If the management bodies fail to do so, these shares or have restricted voting rights (in the past, such a threshold shareholders may call the meeting themselves. comprised two-thirds of the corporation’s shares). It used to be very Shareholders holding at least 5% of the voting shares or 5% of the common for listed corporations to issue non-voting shares up to such non-voting shares may also compel the management bodies to call a threshold. Currently, many listed corporations in Brazil still have a shareholder meeting for the installation of the audit committee. In significant percentages of non-voting shares. However, corporations listed corporations, these percentages will be reduced to up to 2% that have launched IPOs in the last decade have generally opted to of the voting shares or 1% of the non-voting shares, depending on issue only voting shares, especially since most recent listings have the value of the capital stock (the higher the value, the lower the been made on Novo Mercado, which is accessible only to companies required percentages). Again, if the management fails to comply, that have a sole class of voting shares. the meeting may be called directly by these shareholders. Shareholders have the right to attend the meetings, speak, request 2.6 Can shareholders seek enforcement action against clarifications from the management bodies and, if they have voting members of the management body? shares, vote. Voting rights may be exercised by a proxy provided to another Yes. Shareholders can seek enforcement against directors and shareholder, a member of a management body or lawyer, and, officers through a derivative or direct claim. in listed corporations, also by a financial institution. In listed It is generally incumbent upon the corporation, previously authorised corporations, both management and shareholders may make proxy by the shareholder meeting, to bring an enforcement action against solicitations. Shareholders representing at least 0.5% of the capital members of management bodies for losses caused by them to the stock may require the inclusion of candidates for the position of corporations. If the shareholder meeting decides to pursue such director or audit committee member in the management body’s action but the corporation fails to do so, any shareholder may bring proxy solicitation. a derivative claim against members of management bodies on the corporation’s behalf. However, even if the shareholder meeting decides not to pursue such action, shareholders jointly holding 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? 5% of the corporation’s shares may initiate a derivative claim. Any proceeds of a successful derivative claim are awarded to the corporation, which must reimburse the shareholders that initiated Generally, no. The basic premise under Brazilian law is that the the action for litigation expenses. shareholders are only responsible for the payment of the shares subscribed by them. The corporation is an autonomous legal entity, A shareholder may bring a direct claim against directors or officers distinct from the shareholders. The corporation’s liabilities shall be when directly affected by their action or negligence (i.e. when the paid with the corporation’s own assets. damage is not a result of the loss of value of the investment made in the corporation). There are, however, some restricted circumstances in which a shareholder may be held liable for an act or omission of the

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The board of directors will be composed of at least three members. 2.7 Are there any limitations on, and disclosures If the corporation is listed on the Novo Mercado segment, the board required, in relation to interests in securities held by must have a minimum of five members and at least 20% of the board shareholders in the corporate entity/entities? members must be independent. Directors can reside in Brazil or abroad. There is generally no limitation on the number of shares a Corporations must have at least two officers. All of them must shareholder can own. In some specific industry sectors (such as reside in Brazil. broadcasting and newspaper media), there are laws prohibiting the acquisition by foreign shareholders of shares above a certain A corporation will typically have at least a Chief Executive Officer threshold. Although not common, unlisted corporations may issue a and a Chief Financial Officer, larger corporations tending to have Brazil special class of shares that can only be held by Brazilians. more officers. Bylaws can also limit the number of votes per shareholder. In Composition of the two management bodies can be partially corporations listed on the Novo Mercado or Level 2 segments, the overlapping: up to ⅓ of the directors may concomitantly be officers. number of votes of a shareholder or group of shareholders cannot be However, under the Novo Mercado rules, the CEO cannot act as limited to a percentage lower than 5% of the capital stock. Plural chairperson of the board of directors. votes cannot be attributed to any class of shares. Corporations may also have an internal audit committee (conselho The controlling shareholder, the shareholder (or group of fiscal), even though strictly speaking it is not a management body. shareholders) that has elected a member of the board of directors The committee’s main purpose is to oversee the activities of the and any shareholder (or group representing the same interest) corporation, providing a written opinion on its financial statements. holding 5% of the corporation’s shares must inform the CVM and The audit committee is usually not a permanent body and will be the stock exchange of the purpose of her/his equity interest, all of established to operate for a specific fiscal year upon the request of the securities of the corporation directly or indirectly owned by shareholders. It will be composed of three to five members. All her or him and existing shareholders’ agreements. This disclosure of them must reside in Brazil and have a university degree or at must be repeated each time there is a 5% increase or decrease in the least three years of professional experience. Employees, officers shareholder’s participation in the corporation. and directors, as well as their relatives, cannot be audit committee members. The controlling shareholders and the corporation itself are prohibited from trading with securities of the corporation before According to Federal Law 13,303/2016, government-controlled the disclosure of any material fact or pending merger, acquisition or corporations must have an internal control committee (comitê de other corporate restructuring transactions. Controlling shareholders auditoria estatutário). This committee will be report to the board and the corporation must also refrain from purchasing or selling of directors and be responsible, among other duties, for issuing securities during a 15-day period before the publication of financial opinions on the contracting of independent auditors and overseeing reports. This prohibition does not apply in corporations that adopt their activities, overseeing and monitoring the corporations’ a fixed calendar for the issuance of those reports. If the controlling internal control mechanisms, and evaluating and monitoring the shareholder acquires more than ⅓ of the corporation’s outstanding corporations’ risk exposure. shares not belonging to the controlling group by any means other than a tender offer, she or he is obligated to launch a tender offer to 3.2 How are members of the management body appointed acquire all of the shares held by the minority shareholders. and removed?

3 Management Body and Management The board of directors is elected by the shareholders, usually at the annual shareholder meeting and by majority vote. Board members are, in principle, elected all at the same time. They can be removed 3.1 Who manages the corporate entity/entities and how? at any time by the shareholders, by a resolution of the shareholder meeting, with or without cause. Corporations are managed by executive managing officers The Corporation Law provides two main mechanisms to facilitate (diretores) and, when established by the bylaws, also by a board the election of directors by minority shareholders: separate voting; of directors (conselho de administração). Listed corporations and cumulative voting. Holders of at least 15% of the voting shares and government-controlled corporations (sociedades de economia or non-voting shares (or restricted voting shares) amounting to 10% mista) must have a board of directors. of the capital stock may require separate voting, which takes place The board of directors will supervise, direct and oversee the in a sort of parallel meeting within the shareholder meeting. This business and activities of the corporation. The board will establish parallel meeting is entitled to appoint and remove one director (and the corporation’s general policies and business strategies, appoint one alternate director) by a majority vote in which only minority and remove officers (more details in question 3.2 below), oversee shareholders can participate. Moreover, holders of at least 10% of and evaluate the officers’ performance, call shareholder meetings the voting shares may require the adoption of cumulative voting and approve certain material or sensitive transactions such as the for the appointment of board members (with the exception of the sale of fixed assets and material loans. The bylaws may assign director elected through the separate vote, if any). In this case, each additional tasks and authority to the board. shareholder has as many votes as the number of shares respectively held, multiplied by the number of vacant positions on the board (for Officers will be responsible for the day-to-day management and instance, if there are five vacant positions, the holder of 10 voting representation of the corporation. The bylaws can assign different shares will have 50 votes). The votes can be freely distributed activities and authorities to each officer. They will usually perform among all candidates of the board, allowing minority shareholders their tasks individually. However, the bylaws can provide that to concentrate all of their votes on few candidates (or even a single specific decisions and actions will be submitted to a board of officers candidate) and ensure their election. Under the Novo Mercado (diretoria), which will decide by vote. rules, directors appointed by minority shareholders under either of these two mechanisms will be considered independent directors.

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The adoption of both separate and cumulative voting mechanisms well of members of other committees. However, a court order has may prevent the controlling shareholder holding the majority of so far exempted corporations from disclosing the maximum and shares from appointing the majority of members of the board. If minimum compensation payable within each management body on this occurs, such controlling shareholder will be entitled to appoint a the grounds of individual privacy and lack of authority of the CVM sufficient number of additional directors to reach this majority, even to regulate this issue. if this means adding more members to the board.

In government-controlled corporations, minority shareholders are 3.4 What are the limitations on, and what disclosure is entitled to appoint one director even if they are unable to reach required in relation to, interests in securities held by the shareholding thresholds for the separate and multiple voting members of the management body in the corporate mechanisms. entity/entities? Brazil Officers are generally appointed by majority resolutions taken by the board of directors. Subject to the bylaws’ provisions, the board As a general principle derived from the duty of loyalty, management of directors is also entitled to establish the specific role and authority body members of listed corporations are not allowed to seek of each officer. If the corporation does not have a board of directors, personal advantages based on privileged information. This includes officers will be appointed by the shareholder meeting. any form of trading with shares or securities of the corporation based on confidential data. The maximum term in office for both directors and officers is three years (or two years for directors of corporations listed on Novo All management body members are required, upon request of a Mercado). There are no limitations on the number of times an group of shareholders holding more than 5% of the total number of individual can be re-elected. shares, to disclose to the annual shareholder meeting details on any equity interest she or he may have in the corporation and affiliated As previously mentioned, members of the audit committee are companies, including stock options. Members of the management elected by the shareholder meeting. Holders of non-voting shares, bodies are also required to inform the corporation about any equity on the one side, and minority shareholders with at least 10% of voting interest held by themselves or their spouses in the entity itself and shares, on the other side, are each entitled to appoint one member by affiliated listed companies. The corporation must subsequently means of separate votes. If both such groups have exercised their transmit such information to the stock exchange and the CVM. right to elect audit committee members, the controlling shareholder will be entitled to appoint a total of three members, securing the The CVM regulations set forth certain restrictions on the trading majority of seats. of shares. Similarly to the prohibition applicable to controlling shareholders, officers, directors and audit committee members are not allowed to trade with securities of the corporation before the 3.3 What are the main legislative, regulatory and other disclosure of any material fact or pending merger, acquisition or sources impacting on contracts and remuneration of other corporate restructuring transactions. Unless the corporation members of the management body? has adopted a fixed calendar for the disclosure of its interim financial statements and periodic information, officers, directors and audit While the Corporation Law sets forth the general methods for committee members must also refrain from purchasing or selling approval of management compensation and the main limits and securities during a 15-day period before the publication of the restrictions on bonuses and stock options, the CVM regulations relevant reports. As mentioned in question 1.2, listed corporations focus on disclosure of information on remuneration – even though may establish a policy for trading of securities by related parties. the scope of its rules has been limited by court decisions. Additionally, officers and directors of corporations listed on Novo Under the Corporation Law, the annual shareholder meeting must Mercado are not allowed to sell their shares within six months from approve the compensation payable to officers and directors. The the initial public offering. meeting usually approves only the general maximum threshold of remuneration, without specifying the amounts payable to each management body or member. In this case, the board of directors 3.5 What is the process for meetings of members of the will decide the individual remuneration of each management body management body? member. Officers will only meet in a formally structured manner, organising Management profit-sharing schemes can be adopted by corporations themselves as a board, if and to the extent that their activities are whose bylaws establish a minimum mandatory profit distribution subject to collective resolutions. Otherwise, officers will carry out corresponding to at least 25% of accrued net profits. Total profits their duties individually, reporting back to the board of directors. shared with members of management bodies cannot exceed the lesser As a result, the process for meetings of board of officers may vary of 10% of accrued profits or the aggregate annual compensation significantly from corporation to corporation. of the management bodies approved by the shareholder meeting. Members of management bodies will only be entitled to profit- There is also great flexibility with respect to the process for board sharing in fiscal years in which mandatory minimum dividends have of directors’ meetings. However, in contrast to officers, directors been distributed to shareholders. must always take resolutions collectively, by means of majority votes, and it is mandatory to establish in the bylaws the rules for the A corporation can also grant stock options to directors and officers appointment of its chairperson and calling of its meetings. Bylaws within the limits of its authorised capital. can establish that the chairperson of the board will be appointed by The shareholder meeting will also establish the remuneration of the the directors themselves or by the shareholder meeting. audit committee members. The compensation paid to each member The chairperson of a directors’ or officers’ meeting has a relevant role cannot be lower than 10% of the average annual remuneration paid in Brazilian corporations. This significance, to a great extent, results to officers. from the effectiveness of shareholders’ agreements under Brazilian The CVM regulations provide for mandatory disclosure on law: agreements duly filed with the corporation are expressly binding compensation policies. Listed corporations are required to disclose on management. The chairperson of a meeting will be required to several details on the remuneration of directors and officers, as disregard any votes cast in breach of a shareholders’ agreement. She

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or he may also allow a party (or its representatives) damaged by the measures that could exclude or mitigate their personal liability in absence or abstention of other members of the board to vote on their relation to corporate wrongdoing, such as requests for additional behalf, if the approval or rejection of a given resolution is backed by information from officers, abstaining from voting due to conflicts of the shareholders’ agreement. interest and casting dissenting votes. Boards can have decision-making criteria based on qualified The audit committee has an important role in overseeing the majorities or unanimous approval. The criteria must be indicated in activities of officers and directors and assessing the compliance by the bylaws and apply to specific matters. them of applicable duties under the law and bylaws. The committee Several corporations have adopted rules for holding board meetings is required to review the corporation’s financial statements and express its opinion on them. It will also give an opinion on proposals through telephone or video conference.

Brazil to be submitted by officers or directors to the shareholder meeting on certain corporate restructuring transactions and investments. 3.6 What are the principal general legal duties and The audit committee must also inform officers and directors of any liabilities of members of the management body? detected fraud or error in the activities of the corporation. If officers and directors do not react properly and in a timely fashion, the audit Under the Corporation Law, the main general duties of members of committee is required to inform the fraud or error to the shareholder management bodies are: meeting. The committee will also call the annual shareholder ■ to act with diligence and care; meeting if the management bodies fail to do so for more than a ■ to act within their powers, observing the purposes of the month or, in cases of urgency, call special shareholder meetings. entity; An important current challenge for members of all management ■ to be loyal towards the corporation; bodies in Brazil is the adjustment of corporate practice and culture to the Brazilian Federal Anti-Corruption Law of late 2013. This law ■ to avoid conflicts of interest; and set forth, among other provisions, the strict liability of corporations ■ to inform. for corrupt acts carried out on their behalf, or to their benefit, and The duty of diligence and care requires officers and directors is prompting many corporations to adopt or review anti-corruption to exercise the same diligence, care and skills that a sound compliance policies. businessperson would exercise in dealing with her or his own personal assets in comparable circumstances. 3.8 What public disclosures concerning management To fulfil the duty to act within their powers and purposes ofthe body practices are required? corporation, officers and directors must consider the interests of the corporation and of shareholders as a whole in their actions and The minutes of meetings held by management bodies must be decisions, without privileging the shareholders responsible for their registered with the Commercial Registry if they are expected to appointment, and while observing the corporation’s social function. affect third parties. This will be the case when the meeting approves, The duty of loyalty translates mainly into the obligation to preserve for example, the creation of a branch office or the issuance of new confidentiality and not to use privileged or sensitive information shares under the authorised capital. Listed corporations must also relating to the corporation for personal benefit or the benefit of third upload copies of such minutes to the online systems of the São parties. Paulo Stock Exchange and the CVM, where they will be available With respect to the duty to avoid conflicts of interest, members of for public viewing. management bodies may not take part in transactions or resolutions Listed corporations are required to adopt a disclosure policy in which they have a personal conflicting interest. They must also with guidelines on public announcements of material facts and inform the other officers or directors about the nature and relevance confidentiality of undisclosed sensitive information. The CVM of their personal interest. must be informed about such a policy and any changes thereto. The duty to inform requires officers and directors of listed Listed corporations must also annually provide to the CVM an corporations to disclose details about equity interests held in the electronic document known as a “Reference Form”, containing corporation and affiliates, and remuneration and fringe benefits to various public disclosures on the corporation, its business and which they are entitled. They must also disclose material acts or the members of the management bodies. The Reference Form events related to the entity. will be available for public viewing. It should contain, among other information, comments of the management bodies on the 3.7 What are the main specific corporate governance corporation’s financial situation and results, the accounting policies responsibilities/functions of members of the and changes to accounting practices, internal controls and the management body and what are perceived to be the corporation’s business plan. The Reference Form should also detail key, current challenges for the management body? the mechanisms for evaluating the performance of the management body members and present information on each of them, including Officers will carry out the actions required in the ordinary course of her or his professional experience and relationship with the business and represent the corporation before third parties, signing controlling shareholder. documents on its behalf. In listed corporations, they are responsible for disclosing material facts and publishing financial reports. 3.9 Are indemnities, or insurance, permitted in relation to The main responsibility of the board of directors is to supervise, members of the management body and others? direct and oversee the business and activities of the corporation. While overseeing the officers’ performance, they should assess if Yes, indemnities and professional liability insurance are generally the applicable corporate governance practices are being observed by permitted in relation to members of the management bodies, but the corporation. The board will approve the corporation’s disclosure not for losses arising from wilful misconduct, tort or fraud. D&O policy and policy for trading of securities. Further functions of the coverage has been growing steadily in Brazil. Listed corporations board of directors are mentioned in other questions in this chapter. need to include the provisions of D&O insurance of management A key challenge for directors is properly documenting individual body members in the Reference Form.

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4 Others Stakeholders 5 Transparency and Reporting

4.1 What, if any, is the role of employees in corporate 5.1 Who is responsible for disclosure and transparency? governance? All members of management bodies are responsible for disclosure of In general, employees have a very limited role in the corporate information regarding events falling under their scopes of activity or governance of Brazilian corporations. Even though the Corporation authority or their respective personal relations with the corporation Law permits that a position in the board of directors be allocated to and affiliated entities. a representative of the employees, this allocation is not mandatory In addition, listed corporations are required to appoint an investor Brazil and is not exercised by the vast majority of corporations. relations officer (diretor de relações com investidores), who will be Federal government-owned or -controlled companies with more than responsible for liaising with shareholders and market authorities 200 employees are required to have at least one representative of the and disclosing material facts. The investor relations officer can be employees on the board of directors. Such a representative – who is not entrusted concomitantly with other functions or activities within authorised to take part in discussions on labour matters, due to potential the corporation. Her or his appointment does not exclude personal conflicts of interest – will be appointed by a majority vote in a direct liability of other officers and directors for any failure to comply with election held among all employees. The election must be organised by disclosure requirements. the corporation jointly with the relevant union representatives.

5.2 What corporate governance related disclosures are 4.2 What, if any, is the role of other stakeholders in required? corporate governance? Unlisted corporations are essentially required to publish their yearly Other stakeholders also have a limited role in the corporate governance management reports and financial statements, notices and minutes of Brazilian corporations. The Corporation Law grants to creditors of shareholder meetings, and minutes of management meetings certain rights, which may impact the corporation’s governance. affecting third parties. They are also required to respond to specific According to this law, creditors may oppose the reduction of the information requests from shareholders, either made in writing or corporation’s capital stock and may judicially request the annulment during annual meetings. of mergers that negatively affect her/his credit. Mergers and spin-offs Listed corporations, on the other hand, are required to disclose all of the corporation will also require the prior approval of debenture of the information above plus significant additional data, which holders, unless they are authorised to redeem their debentures within are typically divided into periodic standardised information and a six-month period. If the corporation has debentures convertible into event-based disclosures. The main applicable periodic reports are: shares, the following actions will also require the prior approval of the yearly financial statements (including statements in the standard debenture holders: (i) change of the corporation’s corporate purpose; form required by the CVM); quarterly financial statements; and the and (ii) creation of preferred shares or the modification of the rights Reference Form mentioned in question 3.8. The Reference Form of existing preferred shares that may negatively impact the shares into will include, among other information, a report on the business which the debentures may be converted. In addition to the rights set activities, a description of the risks that could affect the corporation, forth by law, it is not unusual for certain creditors, especially in more a summary of existing lawsuits and a description of the economic significant financings, to require the inclusion of covenants inthe group to which the corporation belongs. Corporations listed on financing agreements establishing that certain actions to be taken by Novo Mercado must also publish copies of their yearly and quarterly the corporation (for instance, sale of relevant assets) will require the financial statements translated into English. The most important creditor’s prior approval. Finally, although the Corporation Law does form of non-periodic information is the disclosure of material facts, not grant any specific approval or similar right to other stakeholders, which refer to any event that could have a significant impact on the it sets forth as a general principle that the controlling shareholder has market value of the securities issued by the corporation. duties and responsibilities towards the employees of the corporation and the community in which the corporation operates, and must respect the rights and interests of such stakeholders. 5.3 What is the role of audit and auditors in such disclosures?

4.3 What, if any, is the law, regulation and practice Listed corporations, as well as other entities with aggregate assets concerning corporate social responsibility? exceeding R$240 million or annual turnover exceeding R$300 million, must have their yearly financial statements audited Brazil has extensive and complex legislation on issues such as by independent external auditors (including both individual environmental protection, labour safety, consumer rights and gender professionals or auditing firms) duly registered with the CVM. equality, which must be observed by corporations. As mentioned in question 4.2, the Corporation Law also sets forth the principle that External auditors will assess the compliance of the corporation’s the controlling shareholder must exercise the controlling powers financial statements with applicable accounting standards and within the corporation taking into account the interests not only of indicate the effects and impact of any possible discrepancies. minority shareholders, but also of employees and the community. They will provide detailed reports to internal auditors, officers and directors, highlighting alleged deficiencies in accounting practices. Although not mandatory, some corporations issue social responsibility reports, describing their social responsibility practices Note that the CVM regulations impose mandatory rotation of and actions throughout the year. Certain advocacy groups, such as external auditors after each period of five years. To limit possible Institute Ethos and IBRACON, have enacted non-binding rules conflicts of interest, there are also restrictions on the provision of and standards for Brazilian corporations to prepare and publish consultancy services by auditing firms to the audited corporation. corporate social responsibility reports.

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5.4 What corporate governance information should be Paulo Eduardo Penna published on websites? Lobo & Ibeas Advogados Av. Rio Branco, 125, 21st floor Listed corporations are required to upload the following information Rio de Janeiro, RJ – 20040-006 Brazil to the CVM’s website, among other things: notices of shareholder and debenture holder meetings; requirements to attend those meetings Tel: +55 21 2517 6300 and vote; summaries of decisions taken in those meetings; minutes of Email: [email protected] URL: www.loboeibeas.com.br shareholder meetings and of certain board of directors’ and auditors committee’s meetings; opinions, reports and assessments on the Brazil financial status of the corporation, its value and specific corporate Paulo’s practice focuses on general corporate matters, mergers and transactions (e.g. mergers and spin-offs); shareholders’ agreements; acquisitions, joint ventures and private equity deals. He regularly communications on material facts; disclosure policy; reinstated counsels multinational groups and funds investing in Brazil. Paulo has bylaws; any materials used in roadshows and presentations; rating extensive experience in representing both international and domestic agencies’ reports and assessments; instruments of securitisation clients of different industry sectors in major cross-border transactions. He has been a partner of Lobo & Ibeas Advogados since 2000. and debenture issuance deeds; and debt restructuring plans and bankruptcy requests including related court decisions. In addition, Paulo is recommended by The Legal 500 in Corporate and M&A, as well as by Latin Lawyer in Real Estate and Mining. He is a member listed corporations authorised to trade shares (rather than just other of the Regulatory Committee of the Brazilian Private Equity and securities) must publish all such information on their own website. Venture Capital Association and of the Business Law Committee of Unlisted corporations are not required to maintain a website or the Rio de Janeiro Bar Association. Paulo is a lecturer at the Pontifícia Universidade Católica do Rio de Janeiro and has written a number provide information on the CVM’s website. of legal publications, including a book on mandatory tender offers. He holds a Master’s degree in Commercial Law from the Pontifícia Universidade Católica de São Paulo and a postgraduate degree in Finance from Ibmec Business School.

Lobo & Ibeas Advogados is one of Brazil’s leading law firms, with offices in São Paulo and Rio de Janeiro. Lobo & Ibeas Advogados is a full-service law firm and has lawyers specialised in all main areas of business law. Lobo & Ibeas Advogados offers its clients a sophisticated and integrated legal assistance through a permanent group of highly qualified professionals. The firm is particularly known for its teamwork, which ensures a unique standard of services and allows clients to have access to the skills and experience of all lawyers of the firm. Lobo & Ibeas Advogados also has a significant international presence, working in cooperation with some of the world’s top-tier international law firms.

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Bulgaria Alexander Katzarsky

Georgiev, Todorov & Co. Georgi Georgiev

if they do not, the company or its corporate board must explain and 1 Setting the Scene – Sources and disclose the reasons for non-compliance. Following the principles Overview of the Code is one of the requirements for admission to trading on the official market of securities. The requirement is set asa criterion for the level of the corporate governance and culture of 1.1 What are the main corporate entities to be discussed? the companies that are admitted to trading on the highest tiers of the Bulgarian Stock Exchange-Sofia. The main corporate entities discussed in this overview are Private Joint-Stock Companies and Public (Stock-Exchange Listed) Joint- Moreover, unlisted companies are also advised to comply with the Stock Companies. Code. II. Non-regulatory Sources:

1.2 What are the main legislative, regulatory and other 1. By-laws of the company (Statute) corporate governance sources? These contain provisions regarding the scope of business activity of the company, the amount of capital, the types of shares and specific The sources of corporate governance in Bulgaria can be classified rights for each particular class of shares, if any, the system of into two categories: corporate governance, etc. It is published in the Company Register. I. Regulatory Sources: 2. Rules and Procedures/Charter of the Board of the company 1. The Commercial Act This act is not compulsory but if adopted, it regulates the special The Commercial Act applies to any Bulgarian company, whether requirements regarding convention of the Management Board, privately held or listed on the stock exchange. This act regulates Board of Directors and the Supervisory Board, such as invitations, all general issues regarding the company, e.g., the relations absences, restriction of the power of the board for particular shareholders vis-à-vis the company, the company vis-à-vis the board transactions above a certain value, etc. and the shareholders vis-à-vis the board. It also governs the power of the General Meeting and the boards, and the management system 1.3 What are the current topical issues, developments, specifics – one- or two-tier systems of governance, procedures trends and challenges in corporate governance? regarding the convention of the annual and extraordinary General Meeting, etc. The implementation of EU Law has now been successfully completed In particular the following chapters apply: and there are no pressing tasks for the development of legislation. ■ Chapter 10 containing general rules applicable to all types In practice, private Joint-Stock companies are attempting to apply of company, among them the most important related to some the National Code for Corporate Governance. aspects of the incorporation of a company. It should be pointed out that as a result of the financial crisis and ■ Chapter 14, titled “Stock Company”, contains detailed the increase in the number of insolvency proceedings, the duties of regulations regarding Private Join-Stock Companies, the board members to file an application in a timely manner have partially applicable for Public Joint-Stock Companies too, been analysed by the Supreme Court of Cassation (SCC). In its unless there are mandatory provisions in the Public Offering recent judgment concerning procedure for the interpretation of the of the Securities Act. law in cases where there is a contradiction with case law of the SCC 2. The Public Offering of Securities Act (which is mandatory for all courts) the SCC analysed the criminal This Act provides specific rules for incorporation, management and liability imposed on the board members who didn’t abide by the corporate governance of the Public Joint-Stock Company. Criminal Code, i.e. s.227 “b”, which stipulates that the individuals 3. The National Code for Corporate Governance who manage and represent the company have to file an application to the court for the opening of insolvency proceedings within 30 The Code is, by its nature, a standard for good practice. It provides days of the day of the insolvency (cash-flow insolvency). The companies with a framework for corporate management and control. breach of this duty, which is also governed in the Commercial Act, The Code applies to Bulgarian public joint-stock companies constitutes a crime under the Criminal Code and is punishable by according to the “comply or explain” principle. This principle is imprisonment of up to three years or with a fine of EUR 2,500. espoused by all corporate governance codes adopted by EU Member There have been disputes as to whether board members can be held States. It means that companies should comply with the Code, and liable if a resolution of the general meeting of shareholders or the

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sole proprietor of the shares had not been passed. In a judgment of the board for damage caused to the company by them for the interpretation of the Law №5, dated 22 December 2014, (“action pro socio” or “derivative suit”) – art. 240a of the the Penalty Division of the SCC held that there is no need for such Commercial Act; art. 118, par. 2, item 1 of the Public Offering resolution of the general meeting and the board member/manager of Securities Act; and of the company is obliged to file the application for the opening ■ the right of a shareholder/group of shareholders who own of insolvency proceedings, notwithstanding whether the general at least 10% of the capital of the company (5% for a Public meeting of the shareholders has passed a resolution in this regard. Joint-Stock Company) to ask the board or the court to appoint an auditor for revision of the Annual Financial Report of the company (art. 251a of the Commercial Act and art. 118, par. 2 Shareholders 2, point 1 of the Public Offering of Securities Act). Bulgaria 2.2 What responsibilities, if any, do shareholders have as 2.1 What rights and powers do shareholders have in the regards the corporate governance of their corporate operation and management of the corporate entity/ entity/entities? entities?

There are no responsibilities of the shareholders to participate in The main characteristic of the Joint-Stock Company is the limited corporate governance. See question 2.4 below. power of the General Meeting concerning the management of the company. As well as this principle, there are such categories of decision and actions which are of vital importance to the company 2.3 What shareholder meetings are commonly held and and could be taken by the management only after special resolution what rights do shareholders have as regards them? of the General Meeting, usually with a majority of more than 50% (art. 221 of the Commercial Act). This constitutes specific There are two types of General Meetings – annual General Meeting shareholder rights, which are classified as non-pecuniary rights. and special (extraordinary) General Meeting. The annual General The non-pecuniary rights consist of several groups of rights, divided Meeting must be held during the first six months of the calendar by the legal doctrine as follows: year at the headquarters of the company, according to art. 222 of the Management rights Commercial Act and art. 115 of the Public Offering of Securities Act (unless otherwise agreed for Private Joint-Stock Companies but Each shareholder has the following rights: on the territory of Republic of Bulgaria, pursuant to art. 222 of the ■ to participate in the General Meeting, to express his opinion Commercial Act). and to demand answers to his questions by the members of The special (extraordinary) General Meeting takes place when the board; special circumstances occur (e.g. art. 222, par. 3 of the Commercial ■ to vote at the General Meeting. The principle is that each Act) or when it is convened by authorised persons at their own share has one vote, unless otherwise agreed in the Statute. In discretion (art. 223 of the Commercial Act). particular, this right is restricted in cases where a conflict of interest arises (art. 229 of the Commercial Act); and The rights of the shareholders are described in question 2.1 above. ■ to vote and to be elected as a member of the board. Control rights 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? They concern mainly the right of information about the status and the activity of the company. This category consists of, but is not limited to, the shareholders’ rights described below: Generally, shareholders cannot be liable for acts or omissions of the company. The “Piercing the Corporate Veil” doctrine has not been ■ to be provided with access to or to receive at least 30 days adopted by Bulgarian legislation. before the date of the General Meeting the materials subject to discussions, according to the agenda (art. 224 of the However, as regards a Public Joint-Stock Company, in art. 118a of Commercial Act); the Public Offering of the Securities Act liability is provided for ■ to receive a copy of the minutes of the General Meeting (art. damage caused to the company by a person or company who controls 232, par. 5 of the Commercial Act); and the Public Joint-Stock Company, or any other entity, which by its ■ to ask questions at a General Meeting of shareholders (not influence on the Public Company caused an act or omission affecting necessarily related to the agenda) to the board members the members of the board, if this decision/act/omission is not in the regarding the economic and financial situation of the company interest of the company. In this case, the person or entity is jointly and its commercial activity. The members are obliged to liable with the member of the board who took the action or failed to answer correctly and exhaustively unless the questions are do so. Consequently, we could state that there is an explicit obligation deemed to concern issues related to inside information (art. of shareholders to refrain from interfering in the management of the 115, par. 11 of the Public Offering of Securities Act). company directly or indirectly by influencing the management to act Minority Shareholders’ Rights in a manner contrary to the interest of the company. These rights belong to a shareholder/group of shareholders who has owned at least 5% of the capital of the company since a date not later 2.5 Can shareholders be disenfranchised? than three months before the date of the General Meeting: ■ the right to convene a General Meeting (art. 223, par. 2 of the In principle, this is not possible. A shareholder is not entitled to vote Commercial Act); in one case provided in the Public Offering of Securities Act. ■ the right to add questions to the agenda of the General Transactions with interested or related parties at a value greater than Meeting (art. 223a of the Commercial Act); 2% of the company’s assets are subject to preliminary authorisation ■ the right of a shareholder/group of shareholders who own by the General Meeting pursuant to art. 114, par. 1, letter “b” of the at least 10% of the capital of the company (5% for a Public Public Offering of Securities Act, the respective shareholder being Joint-Stock Company) to bring an action against member/s disenfranchised.

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2.6 Can shareholders seek enforcement action against 3.2 How are members of the management body appointed members of the management body? and removed?

Yes, the “derivative suit” is provided for such purpose, both for A meeting is held in order to appoint and approve members of the shareholders in Private and in Public Joint-Stock companies. This management body. Participants elect a chairman, a vice-chairman issue is governed by the provisions of art. 240a of the Commercial and one or more executive members. Act (for Private Joint-Stock Companies) and art. 118, par. 2, point 1 The members of the Management Board (three to nine members) are of the Law for Public Offering of Securities (for Public Joint-Stock appointed and removed by the Supervisory Board whose members Companies). (three to seven) are appointed and removed by the General Meeting. The main peculiarity of this suit is that by bringing the action, The legal relations between the members of the Management Board Bulgaria shareholders act not on their own behalf, but on behalf of the company and the company are governed by management contract and signed and the aim of the claim is all damages to be paid to the company. by the chairman of the Supervisory Board on behalf of the company. The rights and obligations of the members of the Supervisory Board are settled in contract. 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by shareholders in the corporate entity/entities? 3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of Regarding shareholders in Private Joint-Stock Companies there is an members of the management body? obligation for shareholders with registered shares to be registered in the company book (art. 179 of the Commercial Act). No limitations The Obligations and Contracts Act is the main source of provisions concerning the acquisition of shares are established. regarding the contracts executed between the company and the With regards to Public Joint-Stock Companies provisions of the members of the board. Public Offering of Securities Act apply (art. 145) and anticipate There are also certain relevant rules in the Commercial Act and the disclosure in the following circumstances: Public Offering of Securities Act. ■ Acquisition or disposal of shares by shareholders when the total amount of these shares represents 5% of the voting 3.4 What are the limitations on, and what disclosure is rights at the General Meeting, either more than 5%, or an required in relation to, interests in securities held by amount divisible by five. In this hypothesis the shareholder members of the management body in the corporate is obliged to inform both the company and the Financial entity/entities? Supervision Commission. ■ Transactions with interested or related parties at a value less Disclosures: than 2% of the company’s assets are subject to preliminary authorisation by the board of the company, according to art. The members of the boards of both the Private and the Public Joint- 114, par. 2 of the Public Offering of Securities Act. Stock Companies are required to declare before their appointment the ■ Transactions with interested or related parties at a value more ownership of more than 25% of the capital of other companies. When than 2% of the company’s assets are subject to preliminary shares above this limit are acquired during the tenure of the member, authorisation by the General Meeting pursuant to art. 114, an immediate written notification to the company is required. par.1, letter “b” of the Public Offering of Securities Act, the The members of the boards of the Public Joint-Stock Company are respective shareholder being disenfranchised. obliged in addition to the described above to declare in front of the company and the Financial Supervision Commission circumstances 3 Management Body and Management described in art. 114b of the Public Offering of Securities Act such as current or forthcoming transactions in which they could be interested parties (art. 114b, point 3). Other obligations of the 3.1 Who manages the corporate entity/entities and how? members are required in the subordinate legislation acted by the Financial Supervision Commission. There are two systems of corporate management and the Limitations: incorporators of the company could choose one of the following in With regards to Public Joint-Stock Companies, the limitations the statutes: described in question 2.5 apply when the members of the boards ■ One-tier system (Board of Directors) are shareholders. The general rule, set forth in art. 238, par. 4 of the Where the company is represented and managed entirely by Commercial Act are applicable for Private and Public Joint-Stock the Board of Directors. Companies, provides that the members of the board are obliged ■ Two-tier system (Management Board and Supervisory to notify the chairman of the board in written form not later than Board) the beginning of the board meeting regarding the fact that they or Where the company is represented and managed by the a third party related to them is interested in the resolution subject Management Board but the actions and resolutions of the to discussion in the agenda. Such members do not participate in the Management Board are controlled by the Supervisory Board. decision-making process in question. At least one-third of the members of the Board of Directors/ The members of the board are also obliged to notify in written Management Board of Public joint-stock company should be form the boards when they or a third party related to them form independent members (art. 116a, par. 2 of the Law for Public a contract a the company and its subject-matter is beyond the Offering of Securities provides a definition of the term “independent scope of the ordinary business activity of the company (art. 240b member”). In addition, a director should be appointed for of the Commercial Act). These contracts are formed following a communication with the investors. resolution of the Board of Directors or the Management Board. This transaction is binding and valid even if a special resolution was not

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taken, but the board member who knew or ought to have known is business, thus the elaboration of case law on the business judgment liable for damage caused to the company. rule is necessary for the Bulgarian legal order. Apart from the typical situations such as conflict of interests and related-party transactions, the running of the day-to-day business requires the taking of risks 3.5 What is the process for meetings of members of the management body? and launching of new products and services, the failure of which could trigger the liability of the managers. It is vital the case law and doctrine setting out the applicable criteria takes into consideration The process for board meetings is governed by The Commercial both the interest of the company and of the managers. Act (art. 238 and 239) and by the Statute of the company and its Rules and Procedures. The requirement for quorum in the provision of art. 238 provides that at least half of the board members should 3.8 What public disclosures concerning management Bulgaria attend or should be represented by another member of the board. body practices are required? The resolutions are taken with “ordinary majority” (more than half of the members), unless otherwise agreed in the company’s statute. An Annual Report on the Activity of the Management Board/Board A decision in absentia may be taken unanimously in writing. of Directors and Annual Financial Report should be drafted by 31st March each year. The Annual Financial Report is disclosed to the auditors of the Company (art. 245 of the Commercial Act); such 3.6 What are the principal general legal duties and liabilities of members of the management body? auditors are appointed by the General Meeting. Once it is examined by the auditors, it should be accepted by the General Meeting and published in the Company Register. The members of the Management Board and the Supervisory Board are obliged to conduct any and all business activities of the The annual report on the activity of the board should provide company. They have to apply due diligence of a proper and diligent information regarding remuneration of the board members, the manager in this capacity as board members. The board members amount of securities from the company owned by them, their shares are jointly and severally liable for damage caused to the company. in other companies in cases where they own more than 25% of Furthermore, specific duties of the members of the boards are set the capital, etc. The annual report should also be accepted by the forth in art. 116b of the Public Offering of Securities Act and in the General Meeting and published in the Company Register. Commercial Act including: ■ to notify the board regarding particular circumstances (art. 3.9 Are indemnities, or insurance, permitted in relation to 237, par. 3 CA); members of the management body and others? ■ to restrain from exercising competition activity, unless otherwise agreed in the Statute (art. 237, par .4 CA); The members of the boards are obliged to secure guarantee for their ■ non-disclosure of inside information regarding the company governance in an amount determined by the General Meeting but (art. 237, par. 5 CA; art. 116b, par. 1, item 2, letter “c”); and not less than three times the amount of their monthly remuneration ■ to be loyal to the company (art. 116b, par. 1, item 2 of the (art. 240 of the Commercial Act; art. 116c of the Public Offering of Public Offering of Securities Act). Securities Act).

3.7 What are the main specific corporate governance 4 Other Stakeholders responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body? 4.1 What, if any, is the role of employees in corporate governance? The corporate governance responsibilities of the members of the board are divided into three categories: Pursuant to art. 220, par. 3 of the Commercial Act, if the number ■ Organisation matters of employees of the company is higher than 50, then one employee Organisation matters include preparation of the annual and can attend the General Meeting as their agent. He/she has the right the special (extraordinary) General Meeting, incorporation to access information (as in art. 224), but does not have the right to of all committees and bodies of the company, appointment vote (he has a “consultative vote”). and dismissal of employees, business transactions, The system of “co-determination” elaborated in German Corporate accountability, etc. Law is not implemented in the Bulgarian legislation. ■ Management issues Management issues concern all activities related to planning and enforcement of the company’s strategy and course of 4.2 What, if any, is the role of other stakeholders in business. corporate governance? ■ Control issues There is no explicit regulation of the authorities and the status of Control issues concern mechanisms for internal control which other stakeholders as participants in the corporate governance are provided in order to supervise the company’s activity and process. its compliance with the strategy of the company. The Board of Directors and the Management Board are entitled to act on behalf of the company and these actions must be taken 4.3 What, if any, is the law, regulation and practice collectively by all of the board members or by executive members, concerning corporate social responsibility? according to the rules of the company’s statute. Corporate social responsibility is not governed by the Bulgarian Currently the key challenges for the management body are mainly legislation. It is developed by the companies as an element of their related to the application of the due care in the ordinary course of PR and marketing strategies.

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regarding the Annual Financial Report (AFR) is required in order 5 Transparency and Reporting for the AFR to be presented to the General Meeting and approved by the shareholders. The board members are liable for omissions or 5.1 Who is responsible for disclosure and transparency? discrepancies regarding the AFR.

The board members are responsible for disclosure and obliged to 5.4 What corporate governance information should be declare relevant circumstances, acts and important issues related published on websites? to the Company’s activity. They should announce the respective fact in the Company Register and notify the Financial Supervision Pursuant to art. 13 of the Commercial Act the website of the company Commission as well as the regulated market (where its shares should contain information regarding the name of the company, its Bulgaria and other securities are listed) if it concerns a Public Joint-Stock headquarters and registered office, the unified identification number Company. and bank account of the Private Joint-Stock Company. In the Commercial Act there are no particular obligations for disclosure 5.2 What corporate governance related disclosures are of corporate governance information. However, in the Company required? Register all information about the company described above is published and updated. The names of all board members and agents of the Company should The Public Joint-Stock Companies should publish on their websites be published in the Company Register, their specimen, declaration information regarding forthcoming General Meetings, their agenda for compliance, the deadline of their tenure if any, and limitations and supporting materials, and also the Minutes of a General Meeting of the agency powers. within three days after the date when it was held (art. 117 of the Law for Public Offering of Securities).

5.3 What is the role of audit and auditors in such Art. 115b, par. 4 of the Public Offering of Securities Act allows the disclosures? Statute of a Public Joint-Stock Company to provide the necessary technical facilities for distant voting including via e-mail and/or via The auditors’ report on the Annual Financial Report examines a website. whether the provisions of the Accountancy Act and the Statute of the Company are implemented. The statement of the auditors

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Alexander Katzarsky Georgi Georgiev Georgiev, Todorov & Co. Georgiev, Todorov & Co. 27 Parchevich str. 27 Parchevich str. Sofia Sofia Bulgaria Bulgaria

Tel: +359 2 937 65 40 Tel: +359 2 937 65 49 Email: [email protected] Email: [email protected] URL: www.georg-tod.com URL: www.georg-tod.com Bulgaria Alexander Katzarsky graduated from Sofia University Faculty of Law Georgi Georgiev graduated from Sofia University Faculty of Law in in 1990 and became a barrister at the Sofia Bar in 1996. In 1997 he 2010. In 2011/2012 he obtained a master’s degree in International studied European company and commercial law at the University of Business Law from one of the world’s leading universities – King’s Limerick, Ireland and the following year he studied the third and sixth College London. EEC Company Law Directives in TMC Asser Institute in The Hague, He took part in courses on Contract Law and English Legal Methods The Netherlands. During the period 2001-2002 he conducted research at the University of Cambridge, English Company Law and Corporate on the transformation of commercial companies at the Max Plank Governance at the London School of Economics and Political Science, Institute for Comparative and International Private Law – Hamburg, as well as training programmes in arbitration and ADR at the Court Germany. of Arbitration with the Bulgarian Chamber of Commerce and Industry. The Bulgarian government appointed him an arbitrator and conciliator In 2012, Georgi was appointed as a country researcher for Bulgaria pursuant to the Washington Convention on the settlement of and a member of the research team in a project of the London international disputes between states and nationals of other states. School of Economics and Political Science, funded by the European In the period 1992-1995 he was an expert for the Council of Ministers Commission, to carry out a survey on legislation and case-law of and a vice-chairman of one of the biggest Bulgarian companies – BTC the Member States regarding corporate governance. From 2013 to AD. He is also an arbitrator and has practised in the court of Arbitration 2016 he was a part-time assistant professor at the Law School of the with the Bulgarian Chamber of Commerce and Industry since 1994. University of National and World Economy in Sofia and since 2016 has been a full-time assistant professor in Commercial law and Civil law at the School of Law of Sofia University.

Georgiev, Todorov & Co. was founded in 1991 as one of the first Bulgarian law firms. Currently we are one of the largest business law firms in the country consisting of seven partners and 52 lawyers who have always been proud to render excellent legal service. The firm provides corporate law services with a particular emphasis on the financial sector, M&A, restructuring, insolvency, venture capital and secured lending for both large domestic clients and a range of foreign investors. The firm has a powerful network of domestic and international contacts and its experienced lawyers are also foreign educated with an excellent command of Bulgarian, English, French, German, Italian, Russian, Spanish, Armenian are strong prerequisites for the success of our clients. The tremendous results accomplished by our highly-qualified and competent team are what allows Georgiev, Todorov & Co. to be one of the leading law firms in Bulgaria. We guarantee the most accurate services to our clients, especially in the areas of large business transactions, Litigation and Dispute Resolution.

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Canada Frank P. Arnone

Blake, Cassels & Graydon LLP Madison Kragten

Securities Legislation 1 Setting the Scene – Sources and Overview Currently in Canada, securities laws are regulated provincially (rather than federally) and, as such, each of the Canadian provinces and territories has enacted its own securities law. While the rules have 1.1 What are the main corporate entities to be discussed? been generally harmonised throughout Canada, certain provinces may have nuances in respect of corporate governance requirements. This chapter addresses the corporate governance requirements of Canadian securities regulators set rules and guidelines regarding business corporations in Canada, with a focus on public entities listed corporate governance compliance, including: on the Toronto Stock Exchange (the “TSX”). Canadian corporations ■ National Instrument 52-110 – Audit Committees (“NI 52- can be formed federally under the Canada Business Corporations 110”) providing a number of mandatory requirements for Act (the “CBCA”), or may be formed under an equivalent provincial audit committees in publicly traded corporations; or territorial statute. In addition, Canadian law distinguishes ■ National Instrument 58-101 – Disclosure of Corporate between public corporations, which distribute their securities to the Governance Practices (“NI 58-101”) requiring corporations public, and private corporations, which generally limit the number to comply with set guidelines on corporate governance or of shareholders, restrict the transferability of their shares in some explain their lack of compliance in their public disclosure materials; manner, and prohibit the issue of securities to the public. Public corporations have typically taken steps under provincial securities ■ National Policy 58-201 – Corporate Governance Guidelines laws and stock exchange rules to permit their securities to be (“NP 58-201”) sets guidelines for most corporations in Canada in respect of corporate governance matters. While offered to, and traded by, the public. Private corporations are not compliance with NP 58-201 is voluntary, as noted above subject to the same provisions that are required in respect of public in respect of NI 58-101, Canadian securities regulators corporations. Public corporations, on the other hand, are required to have adopted a “comply or explain” approach where non- comply with both the corporate and public company requirements. compliance with the suggested guidelines must be disclosed; The main focus of our discussion throughout this chapter will be the ■ National Instrument 51-102 – Continuous Disclosure corporate governance requirements that apply to public corporations Obligations requires corporations to furnish security holders formed under the CBCA. with a detailed information circular in relation to a proxy solicitation (whether by management or by anyone else) that, among other things, contains detailed disclosure relating to 1.2 What are the main legislative, regulatory and other executive compensation; and corporate governance sources? ■ National Instrument 52-109 – Certificate of Disclosure in Issuers’ Annual and Interim Filings requires officer Corporate governance rules and policies are derived from the certification of the annual and interim filings ofthe following sources: corporation. Corporate Legislation Stock Exchange Rules Canadian business corporations are formed under and governed In addition to the requirements created by corporate and securities by the CBCA or equivalent provincial or territorial corporate laws, corporations listed or seeking to be listed on the TSX are legislation. Under the CBCA, directors are responsible for required to comply with the provisions of the TSX Company managing, or supervising the management of, the business and Manual. affairs of the corporation. The CBCA also establishes duties which Common Law directors must fulfil in undertaking this function, which can be Since Canada’s legal system is derived from the British common generally categorised as a “fiduciary duty” and a “duty of care”. The law system, certain requirements relating to corporate governance CBCA requires that directors, when discharging their duties, must in Canada are interpreted through case law. act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill of a reasonably Other Influences prudent person in comparable circumstances. Directors are also Corporate governance is also shaped through institutional required to comply with the CBCA, the regulations thereunder, shareholder groups such as the Canadian Coalition for Good and the corporation’s articles and by-laws (which address certain Governance (“CCGG”), director associations and proxy advisory corporate governance matters relating to the corporation). firms. These organisations monitor and comment on corporate

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governance of public corporations and are influential in the ■ Majority Voting development of corporate governance practices in Canada through Heightened shareholder involvement continues to be a trend in publications of various policies and guidelines. The media is also Canadian corporate governance with the proposed amendments influential in the development of corporate governance through the to the director election provisions of the CBCA, which align implementation of ranking systems and reporting on the results of the obligations of CBCA-governed public companies with the surveys or reviews. existing requirements of Canadian securities laws and TSX rules. Majority voting was implemented by the TSX in June 2014. Prior 1.3 What are the current topical issues, developments, to its implementation, director elections were a part of a “plurality trends and challenges in corporate governance? system” where shareholders would vote either “for” a director or “withhold” their vote (i.e. would not vote). In a plurality system, Canada Focusing on publicly traded companies, current governance withhold votes do not count, and technically, a director would need developments, trends and challenges include: only one “for” vote to be elected to the board. ■ Say-on-Pay The majority voting requirements provide that each director of a In Canada, “say-on-pay” is an advisory vote whereby shareholders TSX-listed corporation must be elected by a majority (50 per cent are provided with the right to approve, on a non-binding basis, the plus one vote) of the votes cast (i.e. more votes “for” than votes approach to executive management compensation disclosed in the “withheld”) with respect to his or her election, other than at contested corporation’s management proxy circular for the previous fiscal meetings (meetings at which the number of directors nominated for year. In contrast to the United States and United Kingdom, Canadian election is greater than the number of seats available on the board). corporate and securities laws do not obligate corporations to hold Currently, unless a TSX-listed corporation otherwise satisfies the say-on-pay votes, but according to published sources, approximately majority voting requirement in a manner acceptable to the TSX, 80% of Canada’s largest public corporations held such votes in 2016. it will be required to adopt a majority voting policy whereby any CCGG has recommended that companies hold an annual say-on-pay director must immediately tender his or her resignation from the advisory vote and that the board take the results into account when board of directors if he or she is not elected by at least a majority considering compensation policies, procedures and decisions. The of the votes cast with respect to his or her election. The board of results of a vote can also be useful to determine whether there has directors must determine whether to accept the director’s resignation been sufficient shareholder engagement. Those who oppose these (and must accept the resignation absent exceptional circumstances) measures, including the Institute for Corporate Directors, argue that within 90 days. The resignation will be effective upon acceptance compensation is best addressed indirectly through shareholders’ by the board. The TSX-listed corporation must promptly issue power to remove underperforming directors. We do not believe that a news release announcing the board’s decision and, if the board a mandatory advisory or binding vote on say-on-pay appears likely determines not to accept the resignation, the news release must fully given that Canadian shareholders afforded say-on-pay rights have state the reasons for that decision. rarely voted against a company’s executive compensation practices. The proposed changes to the CBCA would require that separate ■ Board Composition votes be held (i.e. would prohibit slate voting) for the election of Diversity on boards of directors of corporations continues to be an each candidate to the board of CBCA distributing corporations, important issue in Canadian corporate governance. New diversity impose a majority-voting requirement where such elections are disclosure rules were recently implemented by the provincial uncontested and permit shareholders to vote shares for or against securities regulators and continue to attract attention. The new (rather than “withholding” shares from voting) each nominee in securities regulations require public corporations to disclose such uncontested elections. Accordingly, each such candidate their policies regarding, and their consideration of, the levels of would only be elected if the number of votes cast in their favour representation of women on boards and in senior management, and represented a majority of the votes cast for and against them by the their actual and any targeted figures for such representation. The shareholders. This change would obviate the need for such a director new regulations also require disclosure as to whether director term to tender his or her resignation following an election in which they limits or board renewal mechanisms have been implemented, and if did not receive a majority of the votes cast. not, to explain why. Proposed changes to the CBCA contemplate ■ Proxy Access going further by requiring public corporations to disclose whether Proxy access continues to be on the radar of institutional shareholder they have adopted a written policy on diversity (other than gender) groups. Proxy access is very limited in Canada, where the only on boards and in senior management. As with the recently enacted form of proxy access offered is to shareholders who hold more than securities regulations, public CBCA corporations would be five per cent of the outstanding shares of a corporation (i) who may required to “comply or explain”. There continues to be discussion requisition a special meeting to replace a director, or (ii) provided surrounding the quality of disclosure elicited in light of the “comply that the statutory requirements are met, make a shareholder proposal or explain” approach adopted in Canada. to nominate a director. CCGG has recommended that shareholders In addition, director overboarding is an issue that Canadian who hold an aggregate of five per cent of outstanding shares in governance commentators continue to be concerned about. corporations with market capital of less than $1 billion and three per Institutional shareholder groups are now recommending that cent in corporations with market capital of greater than $1 billion, shareholders withhold their votes in respect of a director who is an be able to nominate the lesser of three directors and 20 per cent of executive officer of any public company while serving on a total of the total number of directors of the corporation. It is recommended more than two public company boards, or any other director who that information regarding shareholder nominees also be included serves on more than five public company boards. Other factors, in the management information circular in a form that is consistent including the director’s attendance record at all companies on with the way in which the corporation presents its own director which the director serves on the board, the size and location of nominees. the companies, the director’s duties at the companies in question, among others, will be considered in determining the suitability of a director on a public company board.

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2 Shareholders 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them?

2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ Publicly traded corporations are required to hold an annual entities? shareholder meeting no later than 15 months after the previous meeting and no later than six months after the corporation’s year Among the most fundamental rights afforded to shareholders is the end. At an annual meeting, the corporation’s financial statements are shareholders’ right to vote. Through voting, shareholders are able placed before the meeting and shareholders vote for the appointment to control the composition of the board of directors (who are in turn of directors and the external auditor. Shareholders can also vote on responsible for the management of the business and affairs of the other business matters at an annual meeting, and such a meeting will Canada corporation) and participate in major business decisions affecting the be considered to be an annual and special meeting of the corporation. corporation. In order to be effectuated, the corporate statutes require Special meetings of shareholders may be called separate from the that certain transactions be approved by the shareholders (including, annual meeting by the board of directors at any time. Shareholders for example, amalgamations (mergers) or changes to the corporation’s who hold no less than five per cent of the issued shares ofa constating documents). In addition, certain fundamental changes to corporation may also requisition the board of directors to call a a corporation entitle shareholders to formal dissent rights to oppose special meeting. such changes and to be paid the “fair value” of their shares. For public Shareholders are entitled to receive notice of each shareholder companies listed on the TSX, the TSX also requires shareholder meeting, and such notice is to be accompanied by a management approval for certain transactions where such approval may not information circular. The content of the management information otherwise be triggered under the corporate statutes. circular is regulated by Canadian securities legislation, and there is Of note, while shareholders may be influential in the operation little room to address matters at the meeting that were not previously of a corporation through the election or removal of directors, the disclosed in the management information circular. Under the practical effect of the majority voting rules implemented by the TSX corporate statute, shareholders also have the right to solicit proxies limits individual shareholders’ power to influence the composition by preparing and delivering a dissident proxy circular (in the of the board of directors of a public corporation. prescribed form) to each shareholder whose proxy is solicited, the Multilateral Instrument 61-101 – Protection of Minority Security corporation, each director and the auditor of the corporation. Holders in Special Transactions seeks to ensure equal treatment of For private companies, shareholder action may be taken without a all shareholders and provides protection for minority shareholders shareholder meeting by written resolution signed by all shareholders in certain transactions through implementing certain procedural who would be entitled to vote at a meeting. safeguards including, among others, minority shareholder approval of certain transactions. Shareholders’ rights also extend to shareholder meetings where 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? shareholders are able to vote on such matters as noted above. The CBCA entitles shareholders to submit a proposal describing a matter which the shareholders wish to raise at an upcoming shareholder In Canada, a corporation is considered to be a separate legal entity. meeting, provided that the proposal, among other things, is Since shareholders do not typically control the management of the signed by shareholders representing no less than one per cent of corporation, shareholders’ liability in a corporation is therefore the outstanding shares of the corporation (or five per cent in the limited to the amount of their investment in the corporation and case of a proposal which includes nominations for the election of shareholders are usually not liable for the debts of the corporation. directors). In addition, shareholders holding at least five per cent of However, there are certain limited circumstances whereby the issued and outstanding shares of the corporation are permitted to shareholders may be liable for acts of the corporation. requisition a shareholder meeting. In addition, certain jurisdictions in Canada permit the formation For private companies, a unanimous shareholders’ agreement of unlimited liability corporations where shareholder liability is can restrict the power of management to manage and control the unlimited, and shareholders will be liable for debts and obligations business of the corporation, placing more power in the hands of the of the corporation. shareholders. 2.5 Can shareholders be disenfranchised? 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate There are certain limited circumstances in Canada where entity/entities? shareholders of a public corporation can be disenfranchised; however, such transactions would require the approval of a majority Directors are generally responsible for overseeing corporate of shareholders and have other procedural requirements. governance matters of a corporation. However, for public companies, shareholder disclosure obligations arise when a shareholder holds 2.6 Can shareholders seek enforcement action against a significant interest in a corporation, as described in more detail members of the management body? in the response to question 2.7. Recent amendments to Canada’s “early warning” reporting regime require additional disclosure There are a variety of mechanisms under the corporate statutes that to that which has been required in the past, including disclosure enable a shareholder to take enforcement action against directors, of a decrease in security holdings. Such a decrease could occur including: outside of a direct sale by the shareholder, such as by way of a share issuance of the corporation. It is important that shareholders of ■ Oppression remedy. An application by the shareholder public corporations monitor their security holdings and understand to the court where directors have acted in a manner that is oppressive, unfairly prejudicial or that unfairly disregards the their reporting obligations.

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interests of the shareholder. The court has broad jurisdiction or any of its affiliates. Additional requirements regarding the to make an order to rectify the matters that are the subject of members of the audit committee are imposed by Canadian securities the complaint. legislation, including that all members of the audit committee be ■ Derivative action. An application by the shareholder to “financially literate”. the court to compel the corporation to take action against a director. 3.2 How are members of the management body appointed ■ Court order compelling compliance. An application by the and removed? shareholder to the court for an order compelling the directors of the corporation to comply with the governing corporate statute and constating documents of the corporation. The board of directors are elected and may be removed by the

Canada shareholders of a corporation. Directors are generally elected at the There is jurisprudence in Canada which suggests that other annual meeting of shareholders; however, in the event of a vacancy, stakeholders apart from shareholders (i.e. creditors, employees, additional directors may be appointed between annual meetings or suppliers, customers, etc.) may seek enforcement action against the the remaining directors may fill the vacancy until the next annual board of directors of a corporation under the oppression remedy, meeting unless the articles, by-laws or applicable corporate statute as the fiduciary duty of the board of directors to consider the best provide otherwise. A board of directors of a Canadian public interests of the “corporation” has been interpreted to include more corporation must consist of at least three directors, two of whom than the best interests of the shareholders. may not be officers or employees of the corporation, whereas private corporations in Canada are required to have at least one 2.7 Are there any limitations on, and disclosures director, unless otherwise specified in the articles of the corporation. required, in relation to interests in securities held by The CBCA requires at least 25 per cent of the directors on the shareholders in the corporate entity/entities? board to be Canadian residents, except where there are fewer than four directors, in which case at least one director must be resident In the public company context, a shareholder who acquires 10 per Canadian. Some jurisdictions in Canada do not impose residency cent or more of the issued voting or equity securities of a public requirements for directors. corporation is required to issue a press release and prepare and file A director may be elected for a term of up to three years. The length a report with securities regulators disclosing its interest and other of the term can be set out in the by-laws of the corporation; however, information relating to the acquisition. The shareholder must if the by-laws are silent, directors will hold office until the next follow the same steps each time it acquires or ceases to hold an annual meeting of shareholders. A director whose term has expired amount equal to two per cent or more of the applicable securities can be re-elected as a director. There are currently no statutory (or securities convertible into two per cent or more of that class limits imposed on the number of terms that a director may hold. of security), as well as in the event that there is a change in any However, as discussed in more detail in the response to question material fact previously disclosed. 1.3, recent amendments to NI 58-101 require public corporations In addition, a shareholder who acquires beneficial ownership of, to disclose whether or not they have adopted term limits for the or control or direction over, directly or indirectly, more than 10 directors on their boards or other mechanisms for board renewal per cent of the voting rights attached to all outstanding voting and, if they have not, to disclose why they have not done so. securities of a “reporting issuer” under Canadian securities laws, Shareholders may decide to remove a director which they had will be considered an “insider” of such issuer. Insiders of public previously elected. Removing a director generally requires the corporations are required to report security holdings as well as all approval of a majority of shareholders who cast their votes at a changes in security holdings on the System for Electronic Disclosure special meeting of shareholders called for the purpose of removing for Insiders (“SEDI”). the director. At such a meeting, the shareholders may elect another Finally, a shareholder who holds 20 per cent of the voting rights director to fill the vacancy created by the removal. The directors, attached to all outstanding securities of an issuer is considered a or shareholders holding at least five per cent of the issued and “control person” under Canadian securities laws. In addition to the outstanding shares, may call the special meeting at any time. insider reporting obligations of significant shareholders, additional requirements and restrictions apply to “control persons” upon the disposition or acquisition of shares of such issuer. 3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of members of the management body? 3 Management Body and Management The CBCA contains provisions relating to contracts with, and the remuneration of, directors. Director remuneration is determined by 3.1 Who manages the corporate entity/entities and how? the board of directors, and shareholder approval is not required in the determination of such remuneration. In accordance with securities Under the CBCA, the board of directors is responsible for managing, legislation, public corporations are required to disclose the processes or supervising the management of, the business and affairs of the by which a board determines compensation for the corporation’s corporation. The board will appoint officers and various committees directors and officers. If the board has appointed a compensation of the board who will conduct the day-to-day management of the committee, such disclosure must include the responsibilities, powers corporation; however, the board of directors remain ultimately and experience of the compensation committee of the board, and the responsible and accountable for the management of the corporation. identity, mandate and compensation paid to any advisers retained by Examples of board committees include an audit committee, the committee in the past financial year. compensation committee, governance and nominating committee Under the CBCA, directors are also required to disclose the nature and special committee. Public corporations are required to have a and extent of any conflict of interest that they have in a material separate audit committee composed of no fewer than three directors, contract or transaction with the corporation. Directors must also a majority of whom are not officers or employees of the corporation abstain from voting on any matter relating to such material contract

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or transaction (with the exception of contracts that involve the Directors may be subject to other statutory liabilities, such as with director’s remuneration, an indemnity in which the director has an respect to unpaid taxes and employee wages. interest or if the contract is with an affiliate of the corporation).

Public corporations are also required to describe any steps the 3.7 What are the main specific corporate governance board takes to ensure directors exercise independent judgment in responsibilities/functions of members of the considering such contracts and transactions. management body and what are perceived to be the key, current challenges for the management body? In addition, the TSX requires that a publicly listed corporation receive shareholder approval prior to providing certain security- based compensation arrangements to its insiders, including directors The board of directors must oversee the management of the corporation with a view to the best interests of the corporation and and officers (such as stock option plans). Canada the shareholders. In order to fulfil its stewardship responsibility, the board must establish the corporation’s approach to corporate 3.4 What are the limitations on, and what disclosure is governance by considering and implementing the corporation’s required in relation to, interests in securities held by strategy, monitoring its corporate performance and analysing its members of the management body in the corporate opportunities and risks. The board must also oversee that appropriate entity/entities? measures and monitoring systems, both internal and external, are implemented to ensure that the corporation’s governance regime Directors of a corporation are permitted to own shares in such fosters accountability and is both responsive and adaptable. The corporation. A director holding such an interest will be considered Canadian Securities Administrators (the “CSA”) recommends that an “insider” and will be subject to insider trading rules (which the board of directors of a corporation adopt a written board mandate prohibit the trading in securities with knowledge of undisclosed, which outlines the expectations and responsibilities of directors in material information) and insider reporting requirements (including implementing the corporation’s corporate governance approach. the requirement to report security holdings and all changes to such holdings on SEDI). 3.8 What public disclosures concerning management body practices are required? 3.5 What is the process for meetings of members of the management body? Securities regulators require public corporations to disclose certain information relating to the board and board committees (to the As will be discussed in more detail below, directors owe a fiduciary extent applicable) in their management information circulars when duty and a duty of care. In discharging their duties, directors are soliciting proxies from security holders for the purpose of electing required to meet on a regular basis to oversee the business operations directors. Among this information are the requirements imposed of the corporation. Board meetings may be held monthly, quarterly by the new diversity disclosure rules, whereby corporations are or annually, depending on the needs of the corporation. Directors required to disclose information relating to the representation may also meet occasionally to conduct special business. In all of women on the board and in executive officer positions of the cases, all directors must receive notice of the meeting. corporation and director term limits and other board renewal In order to conduct business, a quorum must be present. Directors mechanisms. Compliance with disclosure of corporate governance may participate in meetings by telephone or electronically, provided practices in Canada as governed by NI 58-101 typically entails a that all participants are able to communicate fully. For public “comply or explain” approach for disclosure. corporations, NP 58-201 recommends that independent directors hold regularly scheduled meetings at which non-independent In the context of a proxy solicitation in respect of approval for a directors and management are not in attendance. certain transaction (i.e. a takeover bid), the corporation must disclose the review and approval process that was undertaken by Directors may also conduct business of the corporation through the directors or special committee, if applicable, in its management signed resolutions instead of meetings; however, all directors must information circular. sign the resolution (rather than a quorum as required in a board meeting). The board of directors are also responsible for ensuring In addition, NI 52-110 requires disclosure of information relating that the minutes and any resolutions of the meeting are taken and to a public corporation’s audit committee in its annual information properly recorded as part of the corporation’s records. form.

3.6 What are the principal general legal duties and 3.9 Are indemnities, or insurance, permitted in relation to liabilities of members of the management body? members of the management body and others?

The principle duties of directors are a fiduciary duty and a duty of The CBCA allows a corporation to indemnify directors and officers, care. The CBCA requires that directors, when discharging their former directors and officers and individuals acting in such a capacity duties, shall act honestly and in good faith with a view to the best at the request of the corporation provided that the individual has interests of the corporation and exercise the care, diligence and acted honestly and in good faith with a view to the best interests of skill of a reasonably prudent person in comparable circumstances. the corporation. The CBCA also permits a corporation to purchase Directors are also required to comply with the CBCA, the insurance against any liability which may be incurred by directors regulations thereunder, as well as the corporation’s articles and by- and officers acting in such capacity. laws. Directors cannot contract out of these duties and may be held A corporation is permitted to include director indemnification personally liable in the event of breach. provisions in its by-laws. Corporations are also permitted to enter Under the CBCA, directors are also required to disclose the nature into indemnity agreements with individual directors. Further, and extent of any conflict of interest and must abstain from voting the conflict provisions of the CBCA allow directors who would on any matter relating to such interest. otherwise be unable to vote due to conflicts of interest to vote on matters relating to an indemnity in which the director has an interest.

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4 Other Stakeholders 5 Transparency and Reporting

4.1 What, if any, is the role of employees in corporate 5.1 Who is responsible for disclosure and transparency? governance? The board of directors is responsible for overseeing the management Employees of corporations are generally expected to comply with of the corporation. However, management is generally responsible corporate policies, and corporations will often extend their code of for compliance with disclosure obligations of the corporation in business conduct to employees. their management of the day-to-day operations of the corporation.

Canada In addition, NI 52-110 requires audit committees of public In order to ensure compliance with all continuous disclosure corporations to establish procedures whereby employees may requirements, corporations may adopt a disclosure policy or submit concerns regarding questionable accounting or auditing establish a corporate governance committee to address all matters matters or procedures, on a confidential basis. relating to disclosure compliance. The CSA recommends, where a corporation chooses to appoint a corporate governance committee, The Ontario Securities Commission (the “OSC”) also recently that the committee should have a majority of independent directors adopted OSC Policy 15-601 – Whistleblower Program (“OSC with the remaining directors being “non-management” directors. Policy 15-601”). OSC Policy 15-601 describes a whistleblower programme that encourages the reporting of serious securities- related misconduct in Ontario to the OSC. The policy is meant 5.2 What corporate governance related disclosures are to attract high quality information about matters such as insider required? trading, accounting and disclosure violations, and registrant misconduct. Although reporting is not mandatory under the policy, Canadian securities legislation requires public corporations to a monetary incentive is made available to certain eligible individuals disclose their corporate governance practices in accordance with who provide timely, credible, and specific facts pertaining to an act specific guidelines issued by Canadian securities regulators in their of misconduct. Subject to certain exceptions, external auditors, management information circular and/or annual information form. internal audit and compliance personnel, in-house counsel, officers In addition, public corporations must adhere to specific disclosure and directors of a corporation are generally ineligible to receive the requirements with respect to the filing of financial statements, monetary award. OSC Policy 15-601 also prohibits reprisals by a constating documents, any code of business conduct, and any corporation against an employee who has provided information or documents that affect the rights of shareholders, e.g. a shareholders’ cooperated in an investigation related to a breach of securities laws. rights plan, on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website maintained by the Canadian 4.2 What, if any, is the role of other stakeholders in securities regulators, at www.sedar.com. corporate governance? 5.3 What is the role of audit and auditors in such The CBCA requires that directors, when discharging their duties, disclosures? act honestly and in good faith with a view to the best interests of the corporation. In so doing, Canadian jurisprudence has held Public corporations are required to engage an external auditor to that directors are permitted to take into account non-shareholder review the financial statements of the corporation. The auditor’s stakeholder interests, including creditors, suppliers, employees and role is to conduct an audit of the corporation’s financial statements customers. With respect to creditors, the CBCA affords them an to obtain reasonable assurance that such financial statements are free added layer of protection by prohibiting directors from distributing of material misstatement and to provide an opinion on the financial capital or assets to shareholders where such distributions would statements based on the results of the audit. In Canada, auditors are render the corporation unable to pay debts owed to creditors. not required to review or opine on a public corporation’s corporate However, Canadian courts have noted that, in the context of a governance disclosure. corporation’s insolvency, directors’ primary duties generally remain TSX-listed corporations are required to file their audited annual to the corporation and do not shift to creditors. financial statements on the SEDAR website. Unaudited quarterly To enforce their rights and ensure their interests are protected, financial statements must also be filed on SEDAR in accordance creditors can avail themselves of the derivative action and oppression with the rules set out in Canadian securities legislation. remedy, which are discussed in more detail in the response to question 2.6. Canadian courts have consistently refused, however, to extend these remedies to other stakeholders who may have a 5.4 What corporate governance information should be grievance with a corporation. published on websites?

For TSX-listed corporations, all mandated disclosure documents 4.3 What, if any, is the law, regulation and practice must be filed on SEDAR. Corporations are not required by Canadian concerning corporate social responsibility? law to publish information regarding corporate governance on their websites. However, corporations will generally provide access to The CSA provides guidelines to corporations on their corporate information filed on SEDAR on their corporate websites (as well governance structure and practices. These guidelines address legal as their corporate policies, code of business conduct and committee compliance and the reporting of illegal or unethical behaviour. In charters). this context, social and environmental issues are integral components of corporate governance in Canada.

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Frank P. Arnone Madison Kragten Blake, Cassels & Graydon LLP Blake, Cassels & Graydon LLP 199 Bay Street 199 Bay Street Suite 4000, Commerce Court West Suite 4000, Commerce Court West Toronto ON M5L 1A9 Toronto ON M5L 1A9 Canada Canada

Tel: +1 416 863 4295 Tel: +1 416 863 2256 Email: [email protected] Email: [email protected] URL: www.blakes.com URL: www.blakes.com Canada Frank P. Arnone is a partner in the Securities Group at Blake, Cassels Madison Kragten is an associate in the Securities Group at Blake, & Graydon LLP. His practice emphasises domestic and cross-border Cassels & Graydon LLP. Her primary focus is on securities law M&A and corporate finance. He has extensive experience working matters in the areas of M&A, capital market transactions including on complex transactions in a wide range of industry sectors. He offerings of equity and debt, corporate governance, and continuous also provides ongoing advice on securities law, stock exchange disclosure compliance. Madison also assists a variety of clients with compliance, corporate governance, and corporate matters to a wide general corporate and commercial matters. variety of issuer, underwriter and private equity clients. Frank has been recognised as a leading lawyer in the following publications: ■■ IFLR1000: The Guide to the World’s Leading Financial Law Firms - 2017 Edition (Capital Markets). ■■ The Best Lawyers in Canada 2017 (Leveraged Buyouts and Private Equity Law, and Securities Law). ■■ The Canadian Legal Lexpert Directory 2016 (Corporate Finance & Securities, Corporate Mid-Market, Mergers & Acquisitions, and Private Equity). ■■ The 2016 Lexpert Guide to the Leading US/Canada Cross-Border Corporate Lawyers in Canada (Corporate Finance & Securities). ■■ Who’s Who Legal: Canada 2016 (Capital Markets and Mergers & Acquisitions).

As one of Canada’s top business law firms, Blake, Cassels & Graydon LLP (“Blakes”) provides exceptional legal services to leading businesses in Canada and around the world. Blakes continues to receive a number of awards and top rankings in 2017. For the third time and second year running, Blakes is ranked as having the leading law firm brand in the Acritas Canadian Law Firm Index. Blakes also remains the top-ranked Canadian firm in Chambers Global: The World’s Leading Lawyers for Business and they are recognised as one of Canada’s Best Diversity Employers by Mediacorp Canada Inc. for the seventh time. In 2016, Blakes was named Canada Law Firm of the Year in the Who’s Who Legal Awards, an honour they have held for eight consecutive years. In addition, according to Bloomberg and Thomson Reuters, Blakes is No. 1 in Canadian M&A deals by deal value and count and the No. 1 Canadian law firm in global M&A deals by deal count for this period, 2007-2016. Serving a diverse national and international client base, Blakes’ integrated network of 11 offices worldwide provides clients with access to the firm’s full spectrum of capabilities in virtually every area of business law. Whether an issue is local or multi-jurisdictional, practice-area specific or interdisciplinary, Blakes handles transactions of all sizes and levels of complexity.

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China Fang Jian

Linklaters LLP / Zhao Sheng Law Firm Grace Yu

2. The Guideline of Articles of Association of Listed Companies 1 Setting the Scene – Sources and (2016 version) (the “Articles Guideline”), which provides Overview a template of articles for a listed company. A company applying for a listing on either Exchange must ensure that its Articles comply with the Articles Guideline. The 1.1 What are the main corporate entities to be discussed? Articles Guideline requires a listed company to formulate procedural rules for the meetings of its shareholders, board This chapter discusses joint stock companies incorporated in the of directors (“Board”) and supervisory board (“Supervisory People’s Republic of China (the “PRC”, which excludes Hong Board”), which are required to be annexed to its Articles. Kong, Macau and Taiwan for these purposes). Joint stock companies Companies with a dual listing outside the PRC are subject to additional requirements; for example, a longer notice period are one of two types of companies recognised by PRC law (the other for shareholders’ meetings and minimum votes required at is limited liability companies). Joint stock companies are the only Board meetings for approval of certain matters, as provided entities whose shares can be traded on the PRC exchanges (i.e. the in the Mandatory Provisions of Articles of Associations of Shanghai Stock Exchange and Shenzhen Stock Exchange, each Companies Listed Overseas (“Overseas Provisions”) (issued an “Exchange”). At the end of 2016, more than 3,200 joint stock by the State Council in 1994). This chapter, however, only companies were listed on these two Exchanges, representing a total discusses companies with a sole listing in the PRC. market value of about RMB 53 trillion. References to a company in 3. The Rules on Shareholders’ Meetings of Listed Companies this chapter refer to both listed and unlisted joint stock companies. (2016 version), which concern the procedural rules for shareholders’ meetings, and which must be (and are, in practice) generally reflected in the Articles of a listed 1.2 What are the main legislative, regulatory and other company. corporate governance sources? 4. The Guidance Opinions Regarding Formulating Rules Concerning Independent Directors of Listed Companies As of 28 April 2017, the primary legislation, which applies to (issued in 2001), which require all listed companies to appoint all companies, is the Company Law of the PRC and the judicial independent directors. These guidance opinions specify the interpretations thereon made by the PRC Supreme Court (the independent directors’ functions, qualification requirements “Company Law”). In addition to observing the Company Law, and nomination and appointment procedures. each company must also have a principal constitutional document, 5. The Administrative Measures on Takeover of Listed known as its articles of association (the “Articles”). The Articles Companies (2014 version) (the “Takeover Code”), which prescribe regulations and rules for the company and reflect the addresses substantial shareholding disclosure and takeover contract and relationship among shareholders. The Articles contain procedures. important details regarding governance issues which supplement 6. The Administrative Measures on Information Disclosure what is provided by legislation. by Listed Companies (issued in 2007) (the “Disclosure Listed companies must also adhere to a number of additional Measures”), which govern the disclosure of information corporate governance related laws, regulations and guidelines. by a listed company, including what is subject to disclosure, regular and interim disclosure and responsibility for For example, the PRC Securities Law (the “Securities Law”) disclosure. contains provisions regarding substantial shareholding disclosure, prohibitions on market misconduct and penalties for misleading 7. The listing rules of each Exchange (the “Listing Rules”), which govern disclosure of information of listed companies, statements. Further rules and guidelines are provided by the China as well as approval of material matters. Securities Regulatory Commission (the “CSRC”) (the key regulator 8. The Guidance on Launch of Preference Share Pilot of the PRC securities market), as well as by the Exchanges. These Programme (issued in November 2013) (the “Preference additional regulations and guidelines include: Shares Guidance”), which enables Chinese listed and 1. The Corporate Governance Guidelines of Listed Companies unlisted public companies to issue preference shares. (issued in 2002) (the “Governance Guidelines”), which set In addition to the main sources summarised above, other out the basic principles and rules of corporate governance for listed companies, protection of shareholders’ rights and code miscellaneous rules on corporate governance can be found scattered of conduct for management personnel. The provisions of the throughout a number of other regulations. Detailed reference to Governance Guidelines must be observed by a listed company these additional regulations is, however, beyond the scope of this and are generally reflected in the Articles of a listed company. chapter.

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1.3 What are the current topical issues, developments, 2 Shareholders trends and challenges in corporate governance?

2.1 What rights and powers do shareholders have in the The past five years have witnessed China’s great effort of operation and management of the corporate entity/ reformation in respect of corporate governance. Significant entities? developments have taken place, or are taking place in various aspects; for example, the reform of state-owned enterprises The shareholders’ committee is the highest decision-making promoting mixed ownership structure and encouraging foreign authority of a company. Generally, shareholders entrust and shareholdings, the preference share pilot programme launched at

delegate day-to-day operation and management of companies to China the end of 2013 giving the green light to a new class of securities the Board through the Articles, and a separate Supervisory Board in the share capital of a company, the overall climate of cracking is set up to supervise the performance of the Board and senior down on corruption and bribery and, with respect to foreign- management reporting to the Board. The Company Law reserves invested entities (“FIEs”), the upcoming new PRC Foreign certain important matters to the shareholders’ committee. Such Investment Law is expected to have a revolutionary impact on the matters include: review and approval of the company’s business overall foreign investment legal regime by abolishing the existing policy and investment plans; appointment and dismissal of directors rules governing FIEs and integrating all FIEs under the overall and supervisors; review and approval of annual budget and final regulatory framework of the Company Law. The widely published accounts; review and approval of the Articles; increasing or dispute between the major shareholders and the management of decreasing registered capital; and merger, division, liquidation or Vanke, one of the leading Chinese companies, has attracted a great change of corporate form. deal of discussions on corporate governance issues. In addition, In the case of listed companies, additional matters must also be continuous efforts have been made to improve the corporate decided by the shareholders’ committee; for example, acquisition or governance and legal compliance of listed companies. sale of material assets above a certain threshold and provision by the Given the relative immaturity of the PRC corporate governance company of security for its shareholders or actual controllers. The regime, as well as that of PRC capital markets generally, there is Articles Guideline explicitly states that certain matters (including an ongoing interest and strengthened effort in exploring the best those matters mentioned above) are reserved for shareholders of corporate governance practices and methods of implementation by listed companies and cannot be delegated to management. The the PRC government, as demonstrated by various pilot programmes, Listing Rules provide further examples of specific transactions guidance opinions and enforcement practices. With respect to listed subject to the shareholders’ approval, including material transactions, companies, the current discussion focuses, in particular, on the as well as material related party transactions. protection of minority shareholders, the regulation of controlling Whilst shareholders have the right to reserve any other matters for shareholders or actual controllers, and the transparency and disclosure their decision by stating so in the Articles or through a shareholders’ obligations, etc. Various measures have been taken recently in this resolution, listed companies in the PRC, as a matter of practice, regard, including: (i) the launch of the pilot scheme of the Minority typically only reserve matters that are required by law to be decided Shareholder Service Center, which is composed of professionals by the shareholders. and is entitled to hold up to 100 A shares of listed companies in Preference shareholders are generally not entitled to attend the the pilot regions and exercise the rights as ordinary shareholders on shareholders’ general meeting, unless the matters to be resolved behalf of minority shareholders, with a view to generating certain relate to the material interests of the preference shareholders (such demonstrative effects and encouraging more minority shareholders as an amendment to the Articles which relates to the preference to protect their rights; (ii) the State Council’s opinion urging listed shares, a single or cumulative reduction of the registered capital companies to disclose their dividends distribution policies and of the company exceeding 10%, merger, division, liquidation or fulfil their related commitments; (iii) the joint enforcement by 22 change of corporate form, and issuance of new preference shares), PRC authorities against any breaches of good faith and unlawful in which case, the preference shareholders will be entitled to vote conducts by listed companies and its responsible persons; and (iv) at a separate class meeting with respect to these matters. There are the strengthened enforcement by the CSRC with respect to the also circumstances where preference shareholders will be entitled compliance by listed companies with their disclosure obligations, to vote at shareholders’ general meetings together with ordinary etc. Concerns have also been extended to employees in light of the shareholders, such as failure by the company to pay dividends continuous initiative to launch the employee share scheme pilot to to preference shareholders, as agreed, for three financial years in allow the employees to legally hold the shares of listed companies aggregate or two consecutive financial years, until the full amount in the long run. of the relevant due dividends has been paid. Looking ahead, the focus remains on improving corporate governance for listed companies in the areas of transparency, protection of minority shareholders and regulation of controlling 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate shareholders or actual controllers. More particularly, echoing the entity/entities? “new normal” of China’s economy, there is a strong desire from regulators to improve the self-discipline regime of listed companies Shareholders are under a general requirement to comply with laws, and, in particular, to address: (i) the imbalance between controlling regulations and the Articles. Other than that, most shareholder shareholders and minority shareholders; (ii) the transparency and responsibility in respect of corporate governance rests with the disclosure obligations; (iii) the operation of the board of directors; controlling shareholders. The general principle is that controlling and (iv) the promotion and management of employee share schemes. shareholders may not abuse their position to impair the interests of the company or any other shareholders. If they do cause harm in this manner, they may be held liable for the damages caused.

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The duties of controlling shareholders of a listed company extend RMB denominated shares and shares traded under the Shanghai- further. Under the Governance Guidelines, controlling shareholders Hong Kong Stock Connect Pilot Scheme). Beneficial owners have are obliged to support the reform of labour, personnel and distribution to exercise their shareholders’ rights through nominees. systems of the listed company. When nominating directors and supervisors, controlling shareholders have a duty to ensure that the 2.4 Can shareholders be liable for acts or omissions of nominated candidates have sufficient professional expertise and the corporate entity/entities? management capabilities to perform their roles. The fundamental principle in this respect is that in a company, 2.3 What shareholder meetings are commonly held and the liability of a shareholder is limited to the amount of capital China what rights do shareholders have as regards them? contribution in respect of the shares for which he has subscribed or agreed to subscribe. This, combined with the principle of separate Listed companies are required to hold annual meetings of legal personality, means that, in principle, a company’s “corporate shareholders, as well as extraordinary meetings of shareholders. veil” is not pierced and shareholders are not held liable for a At the annual meeting, which should be held within six months company’s actions. of each financial year end, shareholders typically vote on the In exceptional circumstances, the corporate veil can be pierced. following: review and approval of annual budget and financial According to the Company Law, if a shareholder is found to have reports; appointment of the company’s auditors, directors and abused the limited liability status of the company and materially supervisors; and declaration of dividends. Extraordinary meetings prejudiced the rights of the company’s creditors, the shareholder may be held as needed (for example, to approve a specific corporate may be held jointly and severally liable, along with the company, action or a material transaction) and, in addition, the Company Law to the creditor who has been prejudiced and called for the piercing requires an extraordinary meeting to be held within two months of of the corporate veil. Because the statute does not specify what the occurrence of certain circumstances, such as when the number constitutes “abuse of limited liability status”, and given the lack of of directors of the company falls below two-thirds of the number case law and official interpretation from the PRC Supreme Court, prescribed by either the Company Law or the Articles. courts are left with a great deal of discretion, and concerns exist Shareholders (including preference shareholders who are entitled regarding the possibility of inconsistent practices arising across the to voting rights, as described in question 2.1 above) are entitled country. To date, no listed company has, however, been subject to a to receive notices of all shareholders’ meetings. A company must court order piercing the corporate veil. formally notify its shareholders (including preference shareholders who are entitled to voting rights, as described in question 2.1 above) at least 20 days (in the case of the annual meeting) or 15 days (in the 2.5 Can shareholders be disenfranchised? case of an extraordinary meeting) prior to the date of the meeting. Listed companies must deliver the notice of the shareholders’ Shareholders can only be disenfranchised in very limited meetings via a public announcement. circumstances. For example, shareholders who engage in insider Voting at shareholders’ meetings requires either an ordinary trading or market manipulation may be stripped of shares which resolution (requiring a simple majority of those voting in person or they acquired as a result of such illegal behaviour, and voting rights by proxy) or a special resolution (requiring a majority of no less than attached to shares held by the listed company itself are suspended. two-thirds of those voting in person or by proxy). Special resolutions A further example is that of certain related party transactions, in are required for specific matters, such as amendments to articles, an respect of which the relevant related party shareholder cannot vote increase or decrease of registered capital, the acquisition or sale of on the relevant shareholder resolution. material assets and the adoption of stock incentive schemes. In certain regulated sectors (for example, commercial banks Shareholders (including preference shareholders who are entitled and securities companies), shareholders’ rights to dividends, to voting rights, as described in question 2.1 above) individually appointment of management and share transfers may be restricted or collectively holding 3% or more of the shares of a company by the regulators if the company is in financial difficulty. may require certain matters of their choosing (which are within the In a takeover scenario, the relevant Exchange will cancel the listing power of the shareholders’ committee) to be included on the agenda of a company where a majority shareholder, as a result of a takeover of a shareholders’ meeting. bid, holds more than 75% or 90% of the shares of the company Whilst the default position is for the Board to convene, and the (depending on the number of shares issued by the company). chairman to chair, shareholders’ meetings, shareholders (including Unlike several other jurisdictions, however, PRC law does not force preference shareholders who are entitled to voting rights, as minority shareholders to sell their shares to the majority shareholder. described in question 2.1 above) individually or collectively holding Rather, a minority shareholder has the right to sell his shares to the 10% or more of the shares of a company for a consecutive period of majority shareholder after the expiration of the takeover offer on at least 90 days may convene and chair a shareholders’ meeting if the same terms as those proposed in the general offer, even if the the Board (as well as the Supervisory Board) fails to do so. minority shareholder did not accept the offer during the general Shareholders may attend shareholders’ meetings in person or by offer. proxy. Listed companies are encouraged to make online voting platforms available to shareholders, and the Exchanges also 2.6 Can shareholders seek enforcement action against prescribe a list of matters for which online voting platforms must members of the management body? be set up, including resolutions relating to new issues of shares, material restructuring and related party transactions. Where a Yes. The Company Law confers the right on shareholders to bring shareholder intends to appoint a proxy to attend the meeting, the an action against directors, supervisors or senior management for power of attorney must be in writing and an original must be breach of law or violation of the Articles in performing their duties. submitted during the meeting. Such actions may be brought in the name of the shareholders but Beneficial ownership of PRC listed shares is not common and is only must be in the interests of the company, with any damages awarded used in limited circumstances (for example, foreign exchange traded

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being payable to the company. Exercise of this right is subject to certain conditions, including that the shareholders individually 3 Management Body and Management or collectively have held and continue to hold 1% or more of the shares in the company for 180 or more consecutive days and 3.1 Who manages the corporate entity/entities and how? the management body, or the Supervisory Board, in the case of misconduct by directors or senior management, has failed to file a Companies are managed by a Board (consisting of five to 19 claim on behalf of the company after the shareholders have served a directors) which reports to shareholders of the company and is written notice of the claim. subject to the supervision of a Supervisory Board (consisting of Where directors or senior management infringe on a particular at least three supervisors). The Board will also appoint senior shareholder’s rights by breaching laws or the Articles and such management to manage the daily operation and business of the China infringement results in a loss to that shareholder, the shareholder company. A director or senior manager cannot take a concurrent may seek enforcement action on its own behalf against such position as a supervisor of the company. personnel. Further, under the Securities Law, a shareholder may The Company Law does not expressly provide for a concept of request directors, supervisors and senior management to bear joint executive directors and non-executive directors, nor for their and several liability with the listed company if such shareholder respective responsibilities. It is common in PRC listed companies suffers a loss due to false, misleading or incomplete disclosure by that a majority of directors are internal or executive directors. In the listed company. response to this, and to protect the interests of minority shareholders, a listed company is required to introduce independent directors (i.e. 2.7 Are there any limitations on, and disclosures external directors who are independent from the company and its required, in relation to interests in securities held by major shareholders) comprising at least one-third of its Board. The shareholders in the corporate entity/entities? main responsibilities of independent directors include: approval of material related party transactions before the same are considered A company may issue ordinary shares and/or preference shares (on by the Board; proposing to appoint or dismiss accounting firms; a pilot basis) to shareholders. Preference shareholders are given and providing independent opinions to the Board or shareholders priority in dividends distribution and the allocation of liquidated on matters such as the appointment and remuneration of directors assets while being restricted in terms of voting rights – please see and senior management, and other matters which, in the view of the the paragraph regarding preference shares’ limited voting rights in independent directors, may adversely affect the interests of minority question 2.1. shareholders. As a general rule, there is no limit on the total number of securities Furthermore, listed companies may (and in practice, do) establish that shareholders may hold in a company, other than in respect of several committees (although the Board remains responsible for certain industry-specific or foreign ownership limitations. That ultimate decisions), including a strategic committee responsible for said, there is a limit on the number of preference shares a company long-term development strategies, an audit committee monitoring can issue, as well as the proceeds that may be raised by issuing the internal audit system, a nomination committee leading the preference shares. More specifically, the number of preference process of the selection of directors and managers, as well as a shares to be issued by a company cannot exceed half of the number remuneration and appraisal committee reviewing the remuneration of ordinary shares of that company, and the proceeds raised through policy. Independent directors should comprise at least half of issuing such preference shares cannot exceed 50% of the company’s the positions on each of the nomination, audit and remuneration net assets. committees. The Securities Law and the Takeover Code provide detailed requirements regarding disclosure of substantial shareholdings. In 3.2 How are members of the management body appointed general, the threshold for a shareholder to notify the listed company, and removed? to report to the CSRC and the Exchange, and to make a public announcement, is 5% of the equity interest in a listed company and Except for directors or supervisors appointed by employees (see any subsequent change of 5% or more. A substantial shareholder question 4.2 below), shareholders control the appointment and must also suspend any further trading of the shares of the company removal of the members of the Board and Supervisory Board by in question before the public announcement is made and, in certain a simple majority resolution. The term of office for directors and circumstances, for a period of time after the announcement. A supervisors is three years, which can be extended if they are re- general offer to all shareholders to acquire all or part of the shares elected (and independent directors can have a maximum of six years of a listed company is triggered if a 30% shareholder continues to in total). purchase shares in the company (unless otherwise exempted). On To protect the rights of minority shareholders, a cumulative a separate note, a shareholder that holds 5% or more shares in a voting system is encouraged to be put in place, and this system is listed company is prohibited from selling (or purchasing) shares mandatory for the appointment of directors in a listed company during a period of six months after he initially purchased (or sold) whose controlling shareholder holds more than 30% of its shares. such shares. When calculating the percentage referred to in this Under this system, the number of votes for each shareholder is paragraph, or with respect to foreign ownership or industry-specific multiplied by the number of directors to be appointed, after which restrictions, a case-by-case analysis needs to be done with respect to the shareholders need to distribute their votes among the different whether preference shares should be taken into account. candidates (each vote may only be assigned to one candidate). As The PRC regime is less developed as to the disclosures of derivatives a result, the majority shareholder no longer automatically controls on shares of a listed company, although in practice, people look to all appointments, and this system leaves room for the minority to the principle that disclosable interests are interests in shares either appoint some candidates as well. held or controlled (in respect of the voting rights attached to the Generally, preference shareholders do not have voting rights shares) by that person and make disclosures on this basis. Short in respect of the appointment and removal of members of the positions are not disclosable under PRC law. management body.

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than 50% of all directors. Directors may attend Board meetings in 3.3 What are the main legislative, regulatory and other person or by proxy. Each director has one vote. In listed companies, sources impacting on contracts and remuneration of directors who are related to the matters to be voted on must refrain members of the management body? from voting on such matters. The Supervisory Board must hold meetings at least once every The Company Law requires remuneration of directors and six months and interim meetings may be called if proposed by a supervisors to be approved by a shareholders’ meeting, and certain number of supervisors, as provided in the Articles. The law prohibits directors and senior management from engaging in does not specify the notice period for such meetings, leaving the business similar to the business of the company without obtaining Articles to provide the details. A resolution may be passed by the approval at a shareholders’ meeting. The Governance Guidelines China Supervisory Board if 50% or more of the supervisors vote for the require listed companies to enter into engagement letters with their matter in question. directors and senior management. The Governance Guidelines further set out high-level principles on setting up a transparent performance appraisal system for the Board (or its remuneration 3.6 What are the principal general legal duties and and appraisal committee) to use in reviewing the performance liabilities of members of the management body? of directors and senior management, and for supervisors and independent directors to use for purposes of self-appraisals. Where Under the Company Law, directors, supervisors and senior a listed company intends to adopt a stock incentive scheme, it must management are subject to duties of loyalty and diligence. These observe the Administrative Measures on Stock Incentives by Listed duties are not expressly defined, but are generally understood to Companies issued by the CSRC, which require any such scheme to require that these persons perform their responsibilities diligently be approved by a shareholders’ meeting, as well as by the CSRC. and with due care, avoid conflicts of interest, and act in the best The performance report, appraisal results and remuneration of interests of, and for the benefit of, the company. each director and supervisor must be disclosed to shareholders and The Company Law provides examples of acts in breach of the included in the company’s annual report. For certain regulated duty of loyalty, including but not limited to: misappropriation of sectors (such as banking, securities and insurance), industry- company funds; the use of one’s position to divert commercial specific regulations by the relevant authorities in connection with opportunities of the company; engaging in business similar to the the remuneration of members of the management body (e.g. delayed business of the company for one’s own benefit (or for the benefit payment of performance related bonus) must also be complied with. of another) without obtaining approval at a shareholders’ meeting; accepting commissions for transactions between other parties and 3.4 What are the limitations on, and what disclosure is the company; and disclosing company secrets without authorisation. required in relation to, interests in securities held by The Securities Law, the Articles Guideline and the Governance members of the management body in the corporate Guidelines set out further detailed duties and prohibited acts of entity/entities? a director, supervisor or senior manager, covering both the duty of loyalty and the duty of diligence. For example, under the A director, supervisor or senior manager is allowed (but not Securities Law, directors and senior management must sign written required) to hold shares in a listed company subject to notification to confirmatory opinions in respect of periodic reports prepared by the the company. The Company Law imposes the following limitations listed company, and the Supervisory Board must review the reports on the transfer of such shares by these individuals: in any given and issue a written opinion on the same. All these members must year, he may transfer no more than 25% of his total shares held ensure that there are no false statements, misleading representations in the company; the totality of shares he held prior to the listing or major omissions in information disclosed by the listed company of the shares cannot be transferred within one year from the date in any accounting reports, annual reports, half-yearly reports and of the listing; and in the event of departure from the company, he other disclosed information in respect of which such member has cannot transfer any shares within the first six months after departure. provided a confirmatory opinion. Further examples under the Further, a short swing rule applies to a director, supervisor or senior Governance Guidelines include that directors must devote sufficient manager of a listed company, pursuant to which such individual is time and energy to perform their duties, and independent directors prohibited from selling (or purchasing) shares during a period of six must ensure their independence and protect the overall interests of months after he or she purchased (or sold) such shares. the company, with a particular focus on the protection of the legal Listed companies must disclose the shares held by directors, interests of the minority shareholders. supervisors and senior management, as well as any changes, on a A director, supervisor or senior manager who has breached his yearly basis in their annual reports. duties under the law or the Articles may be dismissed, required to compensate the company or investor for any loss incurred as a result 3.5 What is the process for meetings of members of the of such breach, or may be subject to confiscation of any income management body? obtained as a result of the breach. Administrative penalties or criminal liabilities may also be imposed. The Board must convene Board meetings at least twice a year, On a related note, the Company Law expressly prescribes that with a notice being served at least 10 days in advance. Interim collective responsibility may fall upon all directors if a specific Board meetings should be called within 10 days if proposed by Board resolution was passed in violation of laws, administrative shareholders collectively holding 10% or more voting rights, or by regulations, the Articles or a shareholders’ resolution, and causes the one-third or more of the directors or by the Supervisory Board of company to incur serious loss. A director may be released from such the company. The listed company is required to provide the notice liability, however, if he is proven to have expressed his opposition to period for interim Board meetings in its Articles. The quorum for a such resolution when it was put to the vote and the opposition was Board meeting and the votes required for a resolution are both more recorded in the minutes of the Board meeting.

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regulations or the Articles of the company. However, the purchase 3.7 What are the main specific corporate governance of such insurance is not currently very common in the PRC, given responsibilities/functions of members of the the cost and the fact that there have been relatively few cases where management body and what are perceived to be the directors have been sued. key, current challenges for the management body?

The principal responsibility of the Board is to oversee the 4 Other Stakeholders business and affairs of the company. As a general matter, this responsibility consists of formulating the basic management system and establishing the internal management bodies of the company, 4.1 What, if any, is the role of employees in corporate identifying and hiring senior management, proposing and overseeing governance? China long-term corporate strategy, proposing the appointment of external auditors and approving the internal auditing controls and procedures Employees do not play a direct role in the corporate governance of a and duties of internal auditors. The senior management operates company, but they may have some influence through representatives the day-to-day business of the company under the oversight of the serving on the Board or Supervisory Board, as well as consultation Board. rights on certain matters. Under the Company Law, the Board may (but is not required to) include employee representatives and at least The Supervisory Board’s role is to supervise performance of the one-third of the members of the Supervisory Board must comprise directors and senior management. Its responsibilities include, but representatives of the company’s employees. Further, a company are not limited to, examination of the financial status of the company, should consult with its labour union and gather the thoughts and monitoring the Board and senior management’s performance of recommendations of the employees in its decision-making process their duties and compliance with law, regulations and the Articles, with respect to restructuring, company operations or the formulation proposing the removal of any director or senior manager and of important company rules and systems. requiring directors and senior managers to correct any act that is harmful to the company’s interests. The key challenges facing the management body of a listed company 4.2 What, if any, is the role of other stakeholders in include: (i) independence by the directors from the controlling corporate governance? shareholder in order to enable independent decision-making; and (ii) finding eligible directors, particularly independent directors, with Generally there is no specific role for other stakeholders in corporate sufficient industry experience and legal and accounting knowledge. governance of a Chinese company.

3.8 What public disclosures concerning management 4.3 What, if any, is the law, regulation and practice body practices are required? concerning corporate social responsibility?

The Disclosure Measures set out matters that should be addressed The Company Law expressly requires all companies to observe in both periodic (annual, semi-annual and quarterly) and interim social morals and commercial ethics, act in good faith, accept reports of listed companies. Such matters include appointment, the supervision of the public and undertake social duties. Whilst removal, appraisal and annual remuneration of directors, supervisors these provisions are seen more as promotional provisions rather and senior management, and a report from the Board which includes than as imposing mandatory obligations per se, the principles that a general business review and summary of the Board’s manner of they articulate are reflected in other areas of PRC legislation, and operation. are expected to lead over time to greater consciousness of social responsibility on the part of companies, government agencies and A listed company will usually have a dedicated section on corporate courts. governance in its annual report (see further question 5.2 below). In recent years, an increasing number of companies have proactively promoted corporate social responsibility. The Exchanges have 3.9 Are indemnities, or insurance, permitted in relation to also published guidelines to emphasise the responsibility of listed members of the management body and others? companies in protecting the interests and rights of creditors and consumers, promoting the safety, health and education of employees PRC law does not expressly address the issue of indemnities being and ensuring the quality of products and the sustainable development given by a company to its directors or other officers. In practice, of the environment, economy and society. the validity of such an indemnity can be challenged if it appears The disclosure of social responsibility reports is not mandatory but to permit a director or officer to contract out of their statutory highly encouraged. Increasingly, listed companies are including duties, particularly if the person benefiting from the indemnity has annual corporate social responsibility reports in their annual reports acted in bad faith or breached his duty of loyalty to the company. (or publishing them separately), covering the topics mentioned Furthermore, enforcing an indemnity claim in a PRC court may not above. be straightforward as PRC law does not expressly recognise the concept of an indemnity. The closest concept under PRC law to an indemnity, as commonly 5 Transparency and Reporting understood under common law, is the concept of damages, which is awarded to compensate a party for actual loss suffered after such party proves causality, foreseeability and mitigation. 5.1 Who is responsible for disclosure and transparency? Under the Governance Guidelines, companies may, subject to Public disclosure (except for any disclosure made by the Supervisory approval of a shareholders’ meeting, maintain insurance for Board) by listed companies is prepared and issued in the name of the directors in respect of their potential liabilities, except where the Board as a whole. However, each director, supervisor and senior liabilities result from the directors’ breach of laws, administrative

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manager is responsible for the truth, accuracy and completeness of such information disclosed by the company. In particular, directors 5.3 What is the role of audit and auditors in such and senior management must each give a written confirmatory disclosures? opinion on the periodic reports of the company, and the Supervisory Board is responsible for reviewing the report and issuing a written A listed company is required to engage an external accounting firm verification opinion. to audit its internal control system for such matters as corporate governance, capital structure and any deficiency in respect of internal controls. The internal control audit may be conducted 5.2 What corporate governance related disclosures are separately or together with the audit of the financial accounts of the required? company and must be disclosed to the public. China The Governance Guidelines provide that at least the following corporate governance related information must be disclosed: 5.4 What corporate governance information should be (i) the composition of the Board and the Supervisory Board; (ii) published on websites? reports on the work of the two boards and the evaluation of their performance; (iii) reports on the work of independent directors and In principle, all disclosed information must be made available to the evaluation of their performance; (iv) the composition and work investors by efficient and economical means (for example, over the of each Board committee; (v) general description and commentary internet). In practice, all information that needs to be disclosed by on the corporate governance of the company and any deviation from listed companies relating to corporate governance is available on the the Governance Guidelines, if any; and (vi) the definitive plan and website of the relevant Exchange and of the company itself. measures intended to improve corporate governance. Additionally, a listed company must periodically disclose financial reports to the public.

Fang Jian Grace Yu Linklaters LLP (Shanghai Office) Zhao Sheng Law Firm 29th Floor, Mirae Asset Tower 30th Floor, Mirae Asset Tower 166 Lu Jia Zui Ring Road, Shanghai, 200120 166 Lu Jia Zui Ring Road, Shanghai, 200120 People’s Republic of China People’s Republic of China

Tel: +86 21 2891 1858 Tel: +86 21 2051 8580 Email: [email protected] Email: [email protected] URL: www.linklaters.com URL: www.linklaters.com

Fang Jian is a partner in our China Corporate practice, specialising in Grace Yu specialises in cross-border M&A transactions and PRC cross-border M&A transactions and corporate finance, as well as in financial markets. She advises international financial institutions on financial markets regulation. He advises leading international financial their PRC activities, including assisting them in the establishment institutions, corporates and PE houses on their activities in China, of their operations in the PRC and advisory work in relation to their including assisting them in the acquisition of interests, establishment daily operations, in or relating to, the PRC. She also advises leading of joint ventures, disposal of assets and restructuring of operations. Chinese corporates on their overseas investments. He also advises leading Chinese corporates on their overseas Grace Yu is a native Mandarin speaker and is fluent in English. investments and listings outside China. Fang Jian is a native Mandarin speaker and is fluent in English.

Linklaters supports clients in achieving their strategies across emerging and developed markets around the world. We use our expertise and resources to help the world’s leading organisations pursue opportunities and manage risk wherever they do business. In China, Linklaters has over 200 lawyers working across three major business centres: Beijing; Shanghai; and Hong Kong. Our team includes some 100 Mandarin-speaking lawyers who offer a well-balanced mix of international expertise and local knowledge. Our experience in China includes advising international institutions in setting up business operations, making acquisitions and conducting ongoing business activities in China and advising Chinese clients in overseas acquisitions and finance projects. Our lawyers combine local and international experience, and above all understand our clients’ businesses, which enables them to anticipate and meet their needs. Creative thinking and determination are the key drivers of our approach. Zhao Sheng Law Firm has a close friend relationship with Linklaters and the two firms work seamlessly to provide integrated services to clients.

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Cyprus Maria Raphael

I. Frangos & Associates LLC Nikoleta Pogiatzi

The company’s articles of association should be read in conjunction 1 Setting the Scene – Sources and with the Companies Law and any other relevant law, provided Overview herein, in cases where corporate governance issues are concerned. Subject to the provisions of the Companies Law, which prevails over the articles of association of a company in the event of a 1.1 What are the main corporate entities to be discussed? conflict, the articles prescribe regulations for companies and set out the rights and duties as between the company, the shareholders and The distinction between private and public companies is well the directors. recognised by Cyprus Companies Law, Capital 113 (“Companies Law”). One principle statutory difference is that in respect of a UK common law rules and equitable principles, having been public company, the public at large may be invited to subscribe for incorporated, by statute, in the Cypriot legal system are applicable securities (shares and debentures), whereas a private company is in relation to the fiduciary duties of directors and employees in prohibited from doing so. certain circumstances. Despite the fact that corporate governance concerns all types The CSE was established under the Securities and Stock Exchange of companies, this Chapter will concentrate on public limited Law of 1993 and is supervised by CySEC. The provisions of the companies listed on the Cyprus Stock Exchange (“CSE”), the shares aforesaid law together with the regulations issued thereunder, of which are traded on the main market, the main projects market balance the interests of issuers and investors, by providing proper and the shipping companies market. These companies are obliged protection to local and foreign investors, without making it to fully implement the Code of Corporate Governance (“Code”) increasingly difficult for public limited companies to be listed on issued by the CSE. Public limited companies are not necessarily the CSE. obliged to be listed on the CSE and if so, they enter into a private By the Cyprus Securities and Exchange Commission Law of 2009, contractual arrangement with the Cyprus Securities and Exchange a supervisory power regarding capital market and transactions is Commission (“CySEC”) to gain access to CSE, a sophisticated vested in CySEC. market for its shares, falling within CySEC’s regulatory ambit. Adherence to the provisions of the CSE’s Code (4th edition, April Where a listed company applies the provisions of the Code of the 2014) is obligatory for companies listed on the CSE, the shares of CSE, it is deemed that the Code also applies to the whole group of which are traded on the main market, the main projects market and companies to which the company belongs, including any subsidiary the shipping companies market. In so far as companies listed on through central subcommittees and where the subsidiary companies all other markets of the CSE, they may voluntarily comply with the of the listed company themselves maintain committees referred Code provisions, however, paragraph B.3.1. of the Code shall be to in the Code, namely the Nomination, Remuneration and Audit applied by all listed companies, excluding companies of the non- Committees, then the subsidiary companies themselves must also regulated market of the CSE. apply the provisions of the Cyprus Governance Code of the CSE. Further to directly applicable EU regulations, such as the EU Market Public limited companies and, to a greater extent, listed public Abuse Regulation 596/2014 (“MAR”) which entered into force limited companies are subject to a more onerous legislative and on 03/06/2016 and the EU Regulation on specific requirements regulatory regime, aiming to protect the general public and investors. regarding statutory audit of public interest entities (“New EU Audit Regulation”) which entered into force on 17/06/2016, the following national laws, of which the supervision and application is vested 1.2 What are the main legislative, regulatory and other corporate governance sources? in CySEC, are the basic corporate governance sources and were intended to harmonise national law with EU directives: The principal piece of primary legislation governing the formation ■ The Market Abuse Law of 2016. and operations of companies in Cyprus is the Companies Law, ■ The Investment Services and Activities and Regulated which is virtually identical to the former UK Companies Act 1948. Markets Law of 2007 (the “Investment Services Law”). Indicatively, the Companies Law sets out, inter alia, the provisions ■ The Transparency Requirements (Securities Admitted relating to the incorporation of companies and matters incidental to Trading on a Regulated Market) Law of 2007 (the thereto, the rights and powers reserved for shareholders and the “Transparency Law”). powers and duties of the directors. ■ The Takeover Bids Law of 2007 (the “Takeover Law”).

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The provisions of the Market Abuse Law of 2016 apply within the 1.3 What are the current topical issues, developments, scope provided in MAR. trends and challenges in corporate governance? Under MAR, the definition of inside information for the purposes of insider dealing (see question 3.4 below) remains the same, Corporate Social Responsibility/Non-financial reporting however MAR now clarifies that information which, if it were made By initiating a national action plan for CSR (2013-2015) through public, would be likely to have a significant effect on the prices the Directorate General for European Programmes, Coordination of financial instruments, derivative financial instruments, related and Development and approved by the Council of Ministers on spot commodity contracts, or auctioned products based on emission 11/02/2013, the Government has shown more of an interest in allowances, shall mean information that a reasonable investor would creating a favourable environment for businesses to develop, in

Cyprus be likely to use as part of the basis of his or her investment decisions. a systematic and coordinated way, practices of corporate social Inside information, insider dealing and market manipulation is responsibility (“CSR”) (see question 4.3 below). redefined and unlawful disclosure of inside information isnow Recently, the Office of Registrar of Companies and Official defined and regulated by MAR, whereas legitimate behaviour is Receiver prepared a bill, titled “the Companies (amending) (no.2) also defined and regulated for cases of insider dealing and unlawful law of 2017” which aimed to harmonise the Companies Law with disclosure. Directive 2014/95/EU as regards disclosure of non-financial and The requirement to announce inside information as soon as possible, diversity information by certain large undertakings and groups. except under certain circumstances, remains the same and what has The bill was approved by the Council of Ministers on 15/02/2017, changed is the introduction of more extensive record keeping if submitted to the House of Representatives on 24/02/2017 and was the decision has been made to delay such disclosure. Further, the scheduled to be brought before the House for voting on 19/05/2017. information to be included on the insider list has been extended to The bill, in line with the EU directive and with regard to public- include additional information on national identification numbers, interest entities (such us listed companies on regulated markets, personal telephone numbers and the precise time at which the credit institutions and insurance undertakings) which are large person has acquired the information. undertakings and parent undertakings of a large group, in each The supervisory powers of competent authorities, such as CySEC, case having more than 500 employees, establishes a minimum have now increased. Cooperation between Member States, third legal requirement in relation to the disclosure of a non-financial countries and the European Securities and Markets Authority statement in their management report containing information to (ESMA) is enhanced, whereas the administrative sanctions and the extent necessary for an understanding of their development, other administrative measures have been revised. performance, position and impact of their activity relating at least to social, environmental and employee matters, respect for human The new EU Audit Regulation rights, anti-corruption and bribery matters. This Regulation applies to statutory auditors and audit firms carrying Additionally, the bill intends to implement the EU directive in so far out statutory audits on public-interest entities. Under the new as it requires public entities, which are not small or medium sized framework, the majority of audit committee members must now and are listed on a regulated market, to include in their corporate be independent and one member must be competent in accounting governance report a description of the diversity policy applied by or auditing. The Regulation also requires the statutory auditors and the Board with regard to aspects such as, age, gender, or educational audit firms to submit an additional report to the audit committee on and professional backgrounds of members, the objectives of that the results of the statutory audit, expanding the auditor’s reporting policy, how it is implemented and the results from the reporting requirements with the intention of providing greater transparency in period. If no such policy is applied, the statement shall contain an the auditor’s report on key audit matters such as areas identified as explanation as to why this is the case. The responsibilities of the significant deficiencies in the entity, significant matters involving auditors have expanded so that they are now required to express actual or suspected non-compliance with law and regulations or their opinion regarding the diversity policy in the report and to articles of association in so far as they are considered to be relevant check if the information on the diversity policy was provided. in order to enable the audit committee to fulfill its tasks and other significant matters arising from the statutory audit. The statutory Gender balance on the Boards of listed companies auditor and audit firm are now under a duty to report promptly to the On 21/04/2016 the percentage of women participating on Boards supervising authorities of the public-interest entities any information of companies listed on the regulated market and on the emerging which come into their attention while carrying out the audit about a companies market were 10% and 15% respectively, which is below material breach of the laws, regulations or administrative provisions the average share of women (23.3%) participating on the Boards related to the conditions governing authorisation or which of the largest publicly listed companies registered in all Member specifically govern pursuit of such entity, a material threat or doubt States in April 2016. According to the latest CSE statistics, the concerning the continuous functioning of the entity and a refusal to participation of women had not increased by 21/04/2017, remaining issue an audit opinion on the financial statements or the issuing of at 10% in the regulated market and increasing by only 1% in the an adverse or qualified opinion. emerging companies market. Since there are no national measures in place in order to improve gender balance on the companies’ Boards, in April 2017 the CSE’s 2 Shareholders advisory committee submitted a suggestion to the CSE’s Council to take measures encouraging and promoting increased participation 2.1 What rights and powers do shareholders have in the of women on Boards. operation and management of the corporate entity/ The new EU Market Abuse Regulation entities? For the purpose of effectively implementing the MAR and Directive 2014/57/EU on criminal sanctions for market abuse (market abuse The shareholders of the company are in a position, through the directive), the Market Abuse Law of 2016 was enacted and repealed articles of association, to determine the role of the Board and the Insider Dealing and Market Manipulation (Market Abuse) Law. divide the decision-making powers between the shareholders and

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the Board. Since the division of powers between the Board and the shareholders is determined by the articles, it is not possible to 2.3 What shareholder meetings are commonly held and generalise about the patterns of division found in practice. what rights do shareholders have as regards them? Of paramount significance is the statutory power οf shareholders, Statutory meeting by simple majority, to appoint and remove a director, before the expiration of her/his period of office. The power to remove a Every company, within a period of not less than one month and director cannot be excluded by the articles of association or by any more than three months from the date on which the company was other agreement between the company and its directors, serving entitled to commence business, shall hold a general meeting of the as a powerful inducement to the directors not to disregard the members of the company, called the statutory meeting (“SM”), whereby the directors shall, at least 14 days before the day on which shareholders’ management views and positions. Cyprus the meeting is held, forward a statutory report to every member of Despite the flexibility given to the company to divide decision- the company. The statutory report incorporates various particulars, making powers between shareholders and the Board, there are such us an account or estimation of the preliminary expenses of a number of situations where the legislation requires that the the company and the particulars of any contract. The shareholders shareholders are mandatorily involved in corporate decisions by present at the meeting shall be at liberty to discuss any matter approving the Board’s decisions. Indicatively, the share capital may relating to the company’s formation or arising out of the statutory be altered by ordinary majority as per the ways described in the report. Essentially, the SM provides the shareholders with the Companies Law. Also, by way of majority of 75%, the shareholders opportunity to assess the status of the ground before the company is may approve, amongst others, any alterations to the company’s fully engaged in business. objects and articles, company’s type and company’s name and may approve the acquisition of a public company’s own shares by Annual General Meetings and Extraordinary General Meetings the company, the reducing of the share capital, the approval of a The law differentiates between the two most important types of merger or acquisition plan and may decide to wind up the company general meetings, the AGMs and the EGMs. voluntarily. The conveyance and holding of an AGM, with 21 days’ notice, in each calendar year is obligatory and no more than 15 months 2.2 What responsibilities, if any, do shareholders have as shall elapse between one AGM and the next. It is not required regards the corporate governance of their corporate for the company to hold an AGM within its first calendar year of entity/entities? incorporation or in the following year, provided that the company holds its first AGM within 18 months from its incorporation. In the With a view to promoting the effective engagement of shareholders event of default, the Companies’ Registrar may, upon application in the corporate governance of the companies they invest in, the of any shareholder, direct the calling of a general meeting and give Code establishes the principle that the Board uses the annual general relevant instructions. meetings (“AGMs”) in a constructive way, in order to communicate Regarding public listed companies, irrespective of any contrary with investors and encourage their participation therein. The Code’s provision in their articles, the directors must duly proceed to provisions under this principle, however, do not place any direct convene an EGM, if required by the shareholders holding not less responsibilities on the shareholders’ shoulders, but they rather than one-twentieth of the paid-up capital, which confers voting recognise the importance of their participative role by imposing rights at general meetings of the company. Ιn the event that the responsibilities on the Board, inter alia, by requiring the Chairman directors omit to convene a meeting within 21 days of the date of of the Board to ensure that the Presidents of the Committees are the deposit of the requisition, the requisitionists or any of them available to answer the shareholders’ questions and that the agenda representing more than half of the total voting rights of all of them, and the organisation of the general meetings do not eliminate may themselves convene a meeting within three months of the date substantial dialogue and the decision-making procedure. In regard to of deposit of the requisition. In so far as the articles of association proposals submitted to an extraordinary general meeting (“EGM”) do not provide otherwise, two or more shareholders holding not less or proposals considered to be of unusual nature, these should be than one-tenth of the issued share capital, may themselves call an adequately and clearly explained to shareholders, who shall be EGM. given sufficient time before the date of the meeting to evaluate them. Where it is impracticable to call a meeting or to conduct such a The Code also includes provisions aiming to guarantee the equitable meeting in accordance with the articles or the Companies Law, the treatment of the shareholders, including minority shareholders. Court, at its own motion or on the application of any director or Once again, the emphasis is on the Board to safeguard the shareholder entitled to vote at the meeting, may order a meeting of equitable treatment of all shareholders at general meetings such the company to be called, held and conducted in such manner as it us by requiring that the Board appoints a management executive thinks fit and give relevant directions. or an officer of the company as Investor Liaison Officer, thatall Every shareholder of a listed company shall have the right to ask information pertaining to the company shall be distributed fairly, questions related to issues on the agenda of a general meeting and in a timely fashion and in a costless manner to all shareholders and to receive answers subject to any measures that a company may that the Board gives timely and precise reports to the shareholders take to endure the identity of the shareholder, unless the answer on all material changes concerning the company. Within the context would interfere in an appropriate manner with the preparation of of achieving equitable treatment of all shareholders, the Code the meeting or the protection of confidentiality or with the business directly requires that shareholders furnish themselves with timely interests of the company or the answer has already been given on its and sufficient information, including the date, place and agenda of website in a special position in a question and answer format. the general meeting, as well as being fully briefed on issues to be discussed at the meeting. In addition, institutional investors must A shareholder may participate at a meeting by a proxy or through enter into constructive dialogue with the companies. other electronic means, if these are offered by the listed company. Regarding the electronic means, these may be subject to such proportionate conditions and restrictions, ensuring the identity of the shareholder and the security of the electronic communication.

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The shareholder in a listed company is also entitled to appoint a proxy by electronic means. Following a recent amendment to the 2.5 Can shareholders be disenfranchised? Companies Law, subject to any contrary provision in the articles, a shareholder in a listed company may participate at a general meeting The Companies Law provides that if a majority in number through telephone or by any other means, by which the persons representing three-fourths in value of the creditors or shareholders, participating may in parallel hear and be heard by all other persons. as the case may be, present and voting, agree to any compromise or Types of resolutions arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or shareholders, as the case An ordinary resolution (“OR”), is passed by a simple majority of may be, and also on the company. Further, there is a statutory right votes cast by persons who are present and entitled to vote. An OR to an offeror who holds not less than 90% of the shares in a company Cyprus is sufficient for the removal of directors and auditors and whenever following a scheme or contract involving the transfer of shares to the law or articles do not specifically provide for a special resolution acquire the shares of any dissenting shareholder. (“SR”) or extraordinary resolution (“ER”). An SR is passed by a majority of 75% of the votes cast by persons who are present and There is also a “squeeze-out” right pursuant to Takeover Bids entitled to vote at a general meeting of which a notice no less than 21 Law for listed companies, which applies to companies registered days, although shorter notice may be given if agreed by a majority in Cyprus, whose securities are admitted to trading on a regulated of shareholders holding at least 95% in nominal value of the shares market in Cyprus or companies not registered in Cyprus (provided giving the right to attend and vote at the meeting. An SR is required, that certain requirements are fulfilled). An offeror holding not less amongst others, for amending the objects clause, the share capital, than 90% of the shares in a company is enabled to exercise his or the articles of association, the company name, for reducing the her “squeeze-out” right. share capital and for voluntarily winding-up. An ER is passed by at least 75% of the votes cast by persons who are present and entitled 2.6 Can shareholders seek enforcement action against to vote at a meeting which has been duly convened by a notice members of the management body? specifying the intention to propose the ER. This type of resolution is required for a voluntary winding up where the company resolves Adhering to the principle that directors’ common law duties are that it cannot by reason of its liabilities continue its business and it owed to the company as a whole and not any other persons, such is advisable to wind up. The required period of notice is at least 21 as its shareholders, the proper claimant in case of infringement of days if the ER is proposed at an AGΜ, and a minimum of 14 days if the directors’ duties is the company. The decision to sue against it is proposed at an EGM. wrongdoing directors lies with the Board, however, it is open to the Following a recent amendment in 2015, shareholders have been shareholders collectively by ordinary resolution to initiate litigation. granted the right to include in the company’s articles a requirement A minority shareholder may exceptionally and on the company’s so that resolutions at general meetings are passed with a greater behalf be allowed to sue the wrongdoing directors by way of a majority. The imposition of such requirement, however, is not derivative action, such as when fraud (e.g. misappropriation of possible for resolutions removing a director. company’s assets) is committed against her/him. The minority shareholder needs to satisfy the Court that fraud exists and that 2.4 Can shareholders be liable for acts or omissions of the alleged wrongdoers are in control of the company, so that the corporate entity/entities? the company which is the “proper claimant” cannot institute proceedings itself. A core feature of company law is the separate legal personality of There are various remedies available such as restraining injunctions, the company, which is distinct from its shareholders. The company damages payable to the company and rescission of contract, if any. has unlimited liability for its debts. In contrast, the shareholders’ Ordinarily, the directors do not owe any duties to shareholders liability to pay the company’s debts is limited to the amount which collectively or individually, however a director may owe fiduciary remains unpaid, in respect of the nominal value of their shares and duties to a shareholder if a special factual relationship arises between in case of shares that have been taken up at a premium, their liability the directors and the shareholder, e.g. where there is a supply of is limited to the total amount that they have agreed to pay for the specific information and advice on which the shareholder has relied. shares. Shareholders, acting for themselves, may assert a claim against a The Companies Law, in various instances, statutorily lifts the veil. director where they have suffered loss directly in circumstances in For example, where the minimum number of shareholders in a which no loss has been suffered by the company. public company is reduced and the company carries on business for more than six months, any shareholder who is aware of this fact 2.7 Are there any limitations on, and disclosures is severally liable for the payment of the whole of the company’s required, in relation to interests in securities held by debts contracted subsequent to the expiration of the six-month shareholders in the corporate entity/entities? period and while she or he was a shareholder. The responsibility of a shareholder to pay all or any of the company’s debts or other There are no statutory limitations regarding the number of securities liabilities may also exist in case of fraudulent trading with the intent a shareholder can hold in a company, however, the articles of to defraud creditors, in the course of winding-up of a company, association may in rare situations provide otherwise. where she or he is knowingly party to the carrying on of business For listed companies, the Takeover Bids Law provides that every in this way. takeover bid for acquisition of the total of the offeree company Only in rare circumstances the Courts judicially decide to lift the securities is considered successful, if the acceptances, added to the corporate veil and hold the shareholders liable, inter alia, where the percentage already held by the offeror, would in aggregate carry company is used for fraud or illegal or improper purpose or where 50% or more of the voting rights of the offeree company. the issue of controlling interest is to be determined for tax purposes. There are disclosure obligations with regards to securities held by shareholders in a company. Companies Law requires any company

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to keep a register of members and enter therein the names and is independent, even if not all the provisions of independence are addresses of the shareholder, and in the case of a company having a fulfilled, a comprehensive explanation should be given in the annual share capital, a statement of the shares held by each shareholder, the report on corporate governance. date at which each person was entered in the register as a shareholder The Board should identify in the annual report the Chairman and the and the date at which any person ceased to be a shareholder. The Chief Executive officer (“CEO”), who is responsible for the proper register of members should be opened for inspection during business running of the Board and shall ensure that all the issues on the hours by any member without charge and by any other person, on agenda are sufficiently supported by all available information. The payment of a fee. Further, it is mandatory for a company to notify roles of the Chairman and CEO should not be exercised by the same the Registrar of Companies as to any change in relation to the name individual and the division of responsibilities between the two shall or address of any shareholder as entered in the register of members.

be clearly established, set out in writing and agreed by the Board. Cyprus Any person may inspect the documents kept by the Registrar of The Board is also required to set up four distinct committees, while Companies, upon payment of the relevant fee. retaining the right to establish more committees. The committees Disclosure is also required by the Transparency Law, where any required by the Code are the following: person acquiring or selling, directly or through a third person, a ■ A Nomination Committee leading the process for Board participation in a company incorporated in Cyprus whose shares are appointments and making recommendations to the Board. listed on CSE or on a regulated market of another Member State of ■ A Remuneration Committee to make recommendations to the EU. In particular, a shareholder who acquires or disposes shares the Board on the context and level of the ED’s remuneration to which voting rights are attached, has an obligation to notify and the formation of specific packages for each of the EDs the issuer, CySEC and the CSE under the Securities and Stock (including pension rights and any compensation payments). Exchange Law (if the shares concerned are shares listed on the CSE) ■ An Audit Committee, which submits proposals to the Board in relation to the percentage of voting rights held, provided that as regarding the appointment, termination and remuneration of a result of such acquisition or disposal the shareholder’s percentage the company’s auditors and keeps under continuous review reaches or exceeds the threshold of 5%, 10%, 15%, 20%, 25%, 30%, the scope and results of the audit and its cost-effectiveness 50% or 75% of the total voting rights of the issuer. and the independence and objectivity of the auditors, as well as any non-audit services provided to the company by the auditors. 3 Management Body and Management ■ A Risk Management Committee.

3.1 Who manages the corporate entity/entities and how? 3.2 How are members of the management body appointed and removed? The role of the Board as the most important decision-making/ managing body within the company is the core of the first principle The Code’s principle requires a formal and transparent procedure laid down by the Code, which states that “every listed company for the appointment, in listed public companies, of new directors to should be headed by an effective Board, which should lead and the Board, which shall consist of competent and suitable individuals control the company”. As mentioned above, the Companies Law able to participate in the Board, taking into consideration, apart largely leaves the determination of the Board’ role to the provisions from their knowledge and experience, their honesty and integrity. of the articles of association, though which the shareholders delegate As mentioned above, a Nomination Committee must be in place authority to the Board. and it shall lead the process for Board appointments and make Under the Companies Law, a minimum of two directors is required recommendations to the Board. The majority of the Nomination and is sufficient for a public company to exist. For listed public Committee shall be NEDs and its Chairman should be either companies, the Code’s second principle requires that the Board the Chairman of the Board (if she or he is NED) or a NED. The includes a balance of independent non-executive directors (“NED”) Chairman and members of the Nomination Committee shall be and remaining directors, such that no individual director or small expressly identified in the annual report. group of directors can dominate the Board’s decision making. All directors shall be subject to election by shareholders at the first The Board should include executive directors (“EDs”), as well as general meeting after their appointment. They are also obliged a sufficient number of NEDs, with sufficient abilities, knowledge to resign at regular intervals and at least every three years, on the and experience, so that their opinion carries significant weight in the understanding, however, that they may submit themselves for re- Board’s decision making. In respect of companies which are listed election. In regard to NEDs, they shall be appointed for a specific either on the CSE’s Main Market or on the Major Projects Market term, and their re-election should not be automatic. or on the Shipping Companies Market, a minimum of 50% of the The Companies Law provisions apply in respect to the directors’ members of the Board (excluding the chairman) should consist removal, granting the power to the shareholders to remove a director of independent NED. For companies listed on other markets, at before the expiration of her/his period of office, by OS, following least the one third of the Board must be independent NEDs and a prescribed procedure which gives the right to the director in additionally the companies shall give an explanation for the number question to make written representations of reasonable duration and of the directors who are not independent NEDs and who exceed the to request that such representations are notified to the shareholders percentage of 50%, in the second part of their annual report, and prior to the meeting. If these representations are not sent, due to submit an application to the Council of the CSE for a reasonable late receipt by the company or because of the company’s default, time for compliance. The Board shall also appoint one of the the director may insist that the representations be read out at the independent NEDs to be the senior independent director, who must meeting where, in any event, she or he will also have the right to be be available to shareholders if they have concerns which through the heard orally. As mentioned above, the shareholder’s statutory power normal channels had failed to resolve. The Code lays down several to remove a director may not be excluded. minimum requirements which must be met in order for a NED to be considered independent. Where the Board considers that a director

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directors of listed companies shall ensure that they do not abuse, or 3.3 What are the main legislative, regulatory and other place themselves in breach of the provisions of MAR and Market sources impacting on contracts and remuneration of Abuse Law 2016 regarding inside information and insider dealings members of the management body? by acquiring or disposing of, for its own account, securities to which inside information relates. Whilst the Companies Law is in essence silent as to the manner in With regards to disclosure requirements, the Companies Law which directors of a company are to be remunerated, the issue is requires that every company keeps a register showing each director’s most commonly dealt with by the applicable articles of association. interests in the shares of the company. The said register shall be kept In the absence of any provision to the contrary, and subject to at the company’s registered office and shall be open to inspection the model articles of Companies Law not being excluded, the

Cyprus during business hours. remuneration of directors shall from time to time be determined by the company in the general meeting. It is, however, unlawful As to the shareholding of listed companies, the disclosure under the provisions of the Companies Law, for a company to pay requirements described in question 2.7 above, are equally applied to a director remuneration, whether as director or otherwise, free of directors who hold such securities. Further, the MAR also imposes income tax, or otherwise calculated by reference to or varying from additional disclosure obligations to persons discharging managerial the amount of his income tax. The Companies Law requires that responsibilities, including directors and persons closely associated full details of directors’ emoluments are included in any accounts with them, to notify their company and CySEC, within a prescribed of a company laid before it in the general meeting, or in a statement period of time, of every transaction conducted on their own account annexed thereto. Emoluments for the abovementioned purposes relating to the company’s shares or other financial instrument linked include emoluments paid to or receivable by directors either in thereto. The listed company, in turn, shall ensure that the above relation to their directorial services, or in respect of other services information is made public promptly not later than three business performed in the course of their directorship or in relation to any days after the transaction and in a manner which enables fast access managerial aspect pertaining to the company. Further, directors’ thereof. The abovementioned notification of transaction shall service contracts shall be approved by shareholders in a general contain, inter alia, the name of the person, the reason for notification, meeting. the name of the relevant company, a description and the identifier of the financial instrument, the nature of the transaction, the date and For listed companies, the Code requires that companies establish a place of transaction and the price and volume of the transaction. formal and transparent procedure for developing a policy on EDs’ Further, subject to certain exceptions, the MAR restricts the conduct remuneration and for fixing the remuneration packages of individual of the above transactions during a closed period of 30 calendar days directors. Directors shall not be involved in deciding their before the announcement of an interim financial report or a year-end remuneration and in order to avoid potential conflicts of interests, report which the issuer is obliged to make public. the Board shall set up a Remuneration Committee, consisting exclusively of NEDs, responsible for making recommendations to the Board on the executive’s context and level of remuneration and 3.5 What is the process for meetings of members of the determining on their behalf specific packages for each of executive, management body? the final package to be offer to each executive, should be approved by the shareholders at a general meeting. The members of the The process for Board meetings is largely left to be regulated by the Remuneration Committee shall be listed each year in the Board’s articles, and in the absence of relevant provisions, the model articles remuneration report to the shareholders. The Code also provides of Companies Law apply as stated below. The directors regulate that the level of remuneration shall be sufficient to attract and their meetings, as they think fit, while the decisions are reached by retain the directors needed to run the company successfully, but a majority of votes, with the chairman having the second or casting also shall avoid paying more than is necessary for this purpose. vote in case of equality of votes. A director may, and the secretary It is also stated in the Code that a proportion of executive’s on the requisition of a director shall, at any time summon a meeting remuneration is to be structured, so as to link rewards to corporate of the directors with no need to give notice of a meeting of directors and individual performance. The Code also advises the Board to to any director who is abroad at the relevant time. The Board is set fixed employment contracts, which do not exceed five years and allowed to determine the quorum necessary, and unless so fixed, reduce the notice period of indefinite contracts to one year or less. the number shall be two. The directors are obliged to declare the The employment contracts of EDs shall not contain clauses that nature of their direct or indirect interest in a contract or proposed can be interpreted as being prohibitive in the event of a merger or contract with the company at meeting of directors and they will not acquisition of the company, nor shall there be any clauses subjecting be allowed to vote or their vote shall not be counted, nor shall they the company to fines imposed on directors. be counted in the quorum present at the meeting. The Code requires A remuneration report shall be submitted to the company’s that the Board meets regularly, at least six times a year. shareholders each year and shall be annexed to the company’s annual report. Listed companies on all markets of CSE shall also 3.6 What are the principal general legal duties and contain a statement in the company’s report on corporate governance liabilities of members of the management body? of the remuneration policy and related criteria as well as details of the remuneration of each ED and NED. Directors owe fiduciary duties to the company as a whole, emanating from UK common law and equitable principles. Deriving from the 3.4 What are the limitations on, and what disclosure is fiduciary doctrine of loyalty, the directors are under a duty to avoid required in relation to, interests in securities held by a conflict of interest between their duties and their self-interest, to members of the management body in the corporate make sure their duties to one company do not conflict with their entity/entities? duty to another company and to make sure they do not make any profit where their own interests are conflict with their dutyto There are no statutory or regulatory limitations regarding the number the company. The latter duty has been rationalised by statute as of securities that directors can hold in their companies, however, requiring the directors to account for their interest to any contract

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or proposed contract of the company. Additional duties imposed on financial reports, are prepared and published in conformity with the directors, intending to control the exercise of the directors’ fiduciary requirements of the aforesaid law and the International Accounting powers, are their duties to act within their powers delegated to them, Standards. The company’s accounts must be presented no later than with care and skill and in good faith for the benefit of the company 18 months from the date of incorporation of the company and each as a whole. The remedies available against the directors include year thereafter and must give a true and fair view of the company restraining injunctions and/or compensation for any loss sustained and its financial situation. If the directors fail to take such action, and/or rescission of the contract which relates to the breach of duty they can be found guilty of a criminal offence and could be liable in question. In a conflict of interest situation, the director is liable upon conviction by the courts to imprisonment for a period not to account for any profit made or loss sustained, but it is possible for exceeding one year or to a fine, or both. the company to excuse the breach by way of an ordinary resolution,

The company’s financial accounts shall be accompanied by a Cyprus except where the breach of duty constitutes a fraud on the minority. director’s report, the purpose of which, in essence, is to reflect the company’s state of affairs. The director’s report shall provide, inter 3.7 What are the main specific corporate governance alia, information regarding any change during the financial year responsibilities/functions of members of the in the nature of the business of the company or in its subsidiaries management body and what are perceived to be the or in the classes of business in which the company has an interest, key, current challenges for the management body? any change to the share capital and any significant change to the structure, the allocation of responsibilities, or the compensation of A list of all the functions which are imposed on the Board by the the Board of directors. Companies Law is beyond the scope of this chapter, however these Listed companies have an obligation to include a report by the Board relate to two main areas of corporate life, the production of the on corporate governance in their annual report. Apart from the other annual accounts and reports (please refer to questions 3.8 and 5.2 obligatory inclusions in the corporate governance report outlined in below) and the regular administration of the company. questions 3.3 and 3.7 above and any other disclosure requirements Τhe Code provides that the Board should meet regularly, at least six provided by the Companies Law, the Company shall state in the times a year and sets out specific matters which must be reserved for corporate governance report whether it complies with the Code and its authority, which as a minimum requirement shall include matters the extent to which it implements its principles. The company shall such as the objects and strategic policy of the company, its annual also confirm that it has complied with the Code provisions and in the budget and business plan, any unusual or material transactions of event that it has not, it shall give an adequate explanation. the company and/or its subsidiaries and associated companies in relation to which any director, CEO, senior executive, senior 3.9 Are indemnities, or insurance, permitted in relation to executive, secretary, auditor or major shareholder of the company members of the management body and others? who directly or indirectly holds more than 5% of the company’s issued share capital or voting rights might have a direct or indirect The Companies Law explicitly provides that any provision interest. whether contained in articles or in any contract with the company The Code also provides that the Board shall submit a balanced, or otherwise for exempting any director or other officers of the detailed and understandable assessment of the company’s financial company, including its auditor, or indemnifying her or him against position and prospects. A healthy system of internal control shall any liability in respect of any negligence, default, breach of duty or be maintained in order to safeguard shareholders’ investments and breach of trust of which she or he may be guilty in relation to the the company’s assets. To this end, the Board shall annually conduct company shall be void. However, a company may indemnify its a review of the effectiveness of the Company’s internal control directors or other officers (including its auditor) against any liability systems and certify in the report on corporate governance the incurred by them in defending any proceedings, whether civil or accuracy, completeness and validity of the information provided to criminal in which judgment is given in their favour or in which they investors. The Board shall certify annually to CSE that the company are acquitted or in connection with any application, whereby a Court has adopted and complies with the procedure of verification of by exercising its discretion may wholly or partly relieve them from the accuracy and completeness of the information provided to liability. shareholders and that to the best his/her knowledge there has been There is no statutory provision prohibiting companies from no violation of the Cyprus Securities and Exchange Commission maintaining insurance for directors or other officers against personal Law. liability arising from the exercise of their duties. In practice, Cypriot It is not possible herein to refer to the entirety of the Board- companies usually do maintain such insurance and pay the insurance related matters regulated by the Code, but it should be noted that premium. all directors should bring an independent and unbiased judgment, while dedicating the required time and attention in carrying out their duties and should be appropriately briefed and trained upon their 4 Other Stakeholders appointment. It should be also pointed out that the aim of the Code is to strengthen the monitoring role of the Board, to protect small shareholders, to adopt greater transparency and to provide timely 4.1 What, if any, is the role of employees in corporate governance? information, as well as to sufficiently safeguard the independence of the Board of Directors in its decision-making. There is no requirement in the Companies Law or elsewhere for any form of employee participation on the Board or any rules on 3.8 What public disclosures concerning management employee profit-sharing. Employees are permitted, though to body practices are required? acquire shares and this is in fact a common phenomenon, especially in listed companies, which enables the employees to participate to Companies Law imposes a duty on company’s directors to ensure some degree in the decision-making process of the company and in that annual accounts and where required, the annual consolidated the profit-sharing system. In order to facilitate the acquisition of

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shares by employees, the Companies Law allows an exception to through dialogue with stakeholders and the provision of annual the prohibition of the company to provide financial assistance for social and environmental information in ways that ensure the the purchase or subscription of its shares, where the shares are to process of documentation and transparency. be held by or for the benefit of employees, including any director The NAP has been prepared with the involvement and contribution holding a salaried employment or office in the company. In regard of all involved governmental bodies, Cyprus business, semi- to listed companies in particular, the allotment of shares without governmental organisations, business entities and non-governmental any contribution is permitted to the company’s employees, whereas organisations and was approved by the Council of Ministers on a company is permitted to acquire its own shares without special 11/02/2013. Based on the survey carried out during the process of resolution of the general shareholders’ assembly, if the shares are drafting the NAP, only 4.7 out of 10 businesses stated that they have acquired for the purpose of being transferred to the company’s

Cyprus adopted CSR practices. employees or to the employees of an associate company. The plan includes specific actions which were promoted and Employees’ participation at EU level has to some extent been are being gradually promoted, such us the organisation of CSR safeguarded by the implementation of Directive 2001/86/EC into information days, the preparation and dissemination of information national law (no.277(I)/2004) on supplementing the statute for materials and others. It is expected that revision of the plan may European companies with regards to the involvement of employees arise as a result of the new CSR strategy that is currently under and the right of employees to be involved in uses and decisions preparation by EU. affecting the European company. Cyprus Organisation for Standardization has issued the Cyprus Cyprus has also implemented, by way of national law standard CYS ISO 26000:2014-Guidance on Social Responsibility, (no.106(I)/2011), the directive 94/45/EC on the establishment of where information is provided for CSR and how it can become part a European Works Council or a procedure in Community-scale of everyday business practice. undertakings and Community-scale groups of undertakings for the There is no legislative and regulatory framework in place for the purposes of informing and consulting employees. incorporation of CSR practices into a company’s business, however, The company’s employees may, in circumstances arising from the the Office of Registrar of Companies and Official Receiver prepared terms of their employment contract, be deemed to owe fiduciary a bill to harmonise national law with directive 2014/95/EC as duties towards the employer, inter alia, where they are required to regards disclosure of non-financial and diversity information by act solely in the employer’s interest or are not permitted to place certain large undertakings and groups. This bill was submitted to themselves in a position of conflict or to make an unauthorised profit the House of Representatives on 24/02/2017 and it was scheduled to and where they are obliged, if they do make profits, to pay them to be brought before the House for voting on 19/05/2017 (see question the employer company. In light of UK case law, some situations 1.3 above). are likely to give rise to the imposition of fiduciary duties to the employees, such as where employees have control of company property or where they are autonomous or exercise a high-level 5 Transparency and Reporting management function or they interact with clients or suppliers without supervision or in case of fraud perpetrated on the employer or bribery. 5.1 Who is responsible for disclosure and transparency?

The Board, as a whole, is statutorily responsible for transparency 4.2 What, if any, is the role of other stakeholders in and disclosure allowing shareholders or potential investors to have corporate governance? access to relevant information so that they can have a fair view of the development and progress of the company’s activities and its Cyprus, by way of law or regulations, has yet to adopt a more current status. The Code supports the above and vests obligations holistic view by considering the interests of stakeholders in for transparency and disclosure to the Board. corporate decision-making and by embodying their engagement and involvement in corporate governance. Further, no duties to be owed by the Board to any stakeholders have yet to be recognised or 5.2 What corporate governance related disclosures are established. required?

Key for the corporate governance is for the Board to ensure that 4.3 What, if any, is the law, regulation and practice the company complies with its financial reporting requirements and concerning corporate social responsibility? that all significant information that may assist the shareholders and public to assess the prospect of the company are disclosed. The The Directorate General for European Programmes, Coordination relevant provisions of the Companies Law and Code related to the and Development, under its revised role and having been appointed Board’s remunerations and financial reporting requirements are as the National Coordinator for the promotion of CSR in Cyprus, outlined in questions 3.3 and 3.8 above. developed a national action plan (“NAP”) of 2013-2015, to Annual financial statements and included reports promote, in a coordinated manner, the concept of CSR in Cyprus, to encourage responsible entrepreneurship and to motivate companies Listed companies shall comply with the disclosure requirements to take into account the impact of their activities on society. The main provided in Securities and Stock Exchange Law, which requires objective is to increase the number of Cypriot companies engaging companies whose shares are listed on CSE to publish as soon in CSR and raise awareness that CSR does not concern only large as possible and at the latest within four months of the end of companies, making it obvious that even the smallest companies can every financial year, the annual financial statements, audited by take actions that promote responsible entrepreneurship, limiting independent auditors. The financial statements must include the the negative impact on society and achieving a balance between audited annual financial statements together with the report by profitability and sustainable growth. The NAP purports to play an independent auditors, the directors’ report and a statement by the effective role in the implementation of the “Europe 2020” strategy Board that according to the knowledge of employees, who are

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responsible for the preparation of the annual financial statements, marketing of its activities. Regardless of the aforesaid obligation, the accounting records are true and complete. Copies of the annual an issuer may, on its own responsibility, delay disclosure to the financial statements and a copy of the published half yearly report public of inside information, provided that the immediate disclosure of the company’s activities and its results for the first half of every is likely to prejudice the legitimate interest of the issuer, such delay financial year are sent to CSE and CySEC. is not likely to mislead the public and the issuer is able to ensure Periodic and ongoing information by issuers confidentiality of the information. In this case, an issuer is obliged to inform CySEC accordingly, by providing a written explanation The disclosed annual and half-yearly financial statements of thereof. companies listed on a regulated market shall remain available to the public for at least 10 years. The requirement for publishing quarterly financial reports has been abolished by the Transparency 5.3 What is the role of audit and auditors in such Cyprus Law (Amendment) Law of 2016. An issuer is also under a duty to disclosures? disclose, no later than the end of the day after it was notified, the total amounts of shareholding in it, as well as any notification it The required financial statements, as described in question 5.2 receives from the shareholders in relation to their transactions (see above, must be audited by a properly licensed and independent question 2.7 above) and disclose to CySEC any increase or decrease auditor, appointed by each company and thereafter the Board is in the number of voting rights and capital at the end of each calendar responsible for publishing the audited accounts. The Companies month, as well as any change to the rights of classes of shares and Law provides that whenever the financial statements are published in derivatives or any change in the rights of holders of such securities. full they must be published in the form in which they were presented Additionally, every issuer shall publish notices or distribute circulars by the auditors and accompanied by their duly signed and dated concerning, inter alia, the place, time and agenda of meetings, the report. The auditors express an opinion on whether the directors' payment of interest and the right of shareholders to participate in report is compatible with the financial statements and whether the the meeting. relevant legal requirements are fulfilled. Further, the auditors shall Disclosures related to meetings state whether they have identified any essential discrepancies in the directors’ report and give indications in relation to their nature. Apart from the abovementioned obligations, listed companies have Lastly, the auditors shall ensure that the duly signed auditors’ report an obligation to announce at least 10 days in advance the date on is made available to the shareholders of the company. It shall be which the Board meeting will take place in order to decide certain noted that the auditors’ and audit firm’s reporting responsibilities matters. The subject of issues upon which such matters are to be have significantly expanded under the new EU Audit Regulation disclosed involve payment or non-payment of a dividend, approving (see question 1.3 above). financial statements or discussing any matter regarding the listed securities of the company. Further, listed companies are obliged to announce to CSE immediately, and at least one hour before trading, 5.4 What corporate governance information should be decisions relating to certain matters such as new bond issues, published on websites? changes to the capital structure and amendments to the company’s constitutive documents. The disclosure of any information relating All information and documents disclosed, as outlined in question to the acquisition or disposal of a substantial interest in a company, 5.2 above, shall be published on the companies’ websites. The must also disclosed, as described in the answer to question 2.7 Investment Services Law also requires that a CIF shall have a above. website, the address of which must be notified to CySEC and the Disclosure for takeover bids number and content of its authorisation shall be entered herein, as well as the fact the company is supervised by CySEC, and any The Takeover Bids Law provides that the offeror announces to CSE other element CySEC may define by way of directives. Further, the and CySEC and publishes her/his decision to make a takeover bid Companies Law provides that a listed company shall make available on the offeror’s website, if such exists, provided that it is final and to its members on its website the notice for the calling of a general she/he has every reason to believe that it can be implemented. meeting, the total number of shares and voting rights at the date of Disclosure of inside information the notice, the documents to be submitted to the general meeting, MAR provides that an issuer shall inform the public as soon as copies of the draft resolutions or where no resolution is proposed possible of inside information which directly concerns him/her. to be adopted, comments from the directors for each item on the Namely, the issuer shall ensure that the inside information is made proposed agenda of the general meeting, copies of the forms to be public in a manner which enables fast access and complete, correct used by a proxy to vote and copies of the forms to be used to vote and timely assessment of the information by the public and shall not by correspondence, unless these forms have been sent directly to combine the disclosure of inside information to the public with the each member.

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Maria Raphael Nikoleta Pogiatzi I. Frangos & Associates LLC I. Frangos & Associates LLC Patron 10 Patron 10 6051-Larnaca 6051-Larnaca Cyprus Cyprus

Tel: +357 2481 2581 Tel: +357 2481 2581 Email: [email protected] Email: [email protected] URL: www.frangoslaw.com URL: www.frangoslaw.com Cyprus Maria Raphael is a partner at I. Frangos & Associates LLC and is Nikoleta Pogiatzi is a qualified attorney of the Corporate and heading the legal and litigation department of the firm. Mrs. Raphael Commercial department of I. Frangos & Associates LLC. She obtained is involved in many complex civil and corporate litigation cases and her LL.B. degree from The University of Southampton in 2012, and has gained great experience in litigating cases with corporate, cross- then completed the Legal Practice Course (LPC) at The University border and foreign elements. She is a member of the Cyprus Bar of Law, London, UK, before becoming a member of the Cyprus Association and as of 2014 she became an ADR Group Accredited Bar Association in 2014. Her recent practice includes the handling Civil & Commercial Mediator recognised by the Civil Mediation of corporate litigation cases and the provision of legal opinions in Council, Bar Council and the Law Society of England and Wales. complex corporate and commercial issues. She graduated in Law from the Aristotle University of Thessaloniki and holds a Master’s degree (LL.M.) in Criminology and Criminal Justice from the University of London, as well as a Postgraduate Diploma in Common Law and a Postgraduate Certificate in International Criminal Justice.

I. Frangos & Associates LLC is a leading law firm established in 2000 situated in Larnaca, Cyprus, providing a comprehensive range of legal services. The firm is divided in three main departments: Legal and Litigation; Real Estate and Property Investment; and Corporate and Tax Planning. Our firm is also affiliated with Bybloserve Management Ltd which provides specialised corporate management, trust, fiduciary and financial services to a respectable volume of high-net-worth corporations and individuals around the globe. Our team of lawyers has specialist knowledge of corporate and civil law with expertise in the fields of corporate litigation, civil and cross-border litigation.

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Denmark Peter Lyck

Nielsen Nørager Law Firm LLP Thomas Melchior Fischer

Financial Supervisory Authority (the “Danish FSA”) also carries 1 Setting the Scene – Sources and out supervision of accounts under the Financial Statements Act with Overview respect to listed companies that are financial institutions. In addition, listed companies are subject to the Danish Securities 1.1 What are the main corporate entities to be discussed? Trading Act and the EU Market Abuse Regulation (Regulation 596/2014) (“MAR”). The Danish FSA is the competent authority The Danish Companies Act (the “Companies Act”) facilitates four monitoring compliance with this legislation. types of companies in which the shareholders’ liability is limited Under the authority of the said acts, the Danish Business Authority to the capital contributed as payment for the shares: (i) the public and the Danish FSA have adopted a number of executive orders limited company (in Danish: aktieselskab or A/S); (ii) the private providing a more detailed regulation on specific matters. Generally, limited company (in Danish: anpartsselskab or ApS); (iii) the non-compliance with the legislation is subject to fines and/or limited partnership company (in Danish: partnerselskab or P/S); reprimands and to some extent sanctions are published revealing the and (iv) the entrepreneur company (in Danish: iværksætterselskab identity of the listed company and/or the natural person in question. or IVS). Market abuse violations are subject to imprisonment. Only public limited companies, as opposed to, e.g. private limited The primary constitutional document is the articles of association companies, are admitted to official listing. ‘Nasdaq Copenhagen (the “Articles”) which prescribes the overarching rules governing the A/S’, which is owned by Nasdaq, Inc., is the only regulated market company. The Articles are publicly available and can be requested in Denmark. It also operates an alternative marketplace for smaller from the Danish Business Authority. The Articles reflect the legal growth companies called Nasdaq First North Denmark, which is relationship between the shareholders (and the company) and categorised as a multilateral trading facility and is not a regulated include rules on the company’s corporate objective, its share capital market. and rights attached to the shares, the meetings of shareholders, the This chapter focuses on public limited companies whose securities powers to bind the company, the duties of the board of directors are admitted to trading and official listing on Nasdaq Copenhagen and the management board, restrictions on share transfers, the A/S. There are certain governance related provisions in the Danish company’s financial year, and many other aspects relating tothe Financial Business Act applicable only to financial institutions. governance. These have been excluded from this chapter, unless otherwise stated. Companies listed on Nasdaq Copenhagen A/S must adhere to the terms and conditions set out in the latest revised version of the Nasdaq Copenhagen A/S’ ‘Rules for issuers of shares’, which 1.2 What are the main legislative, regulatory and other corporate governance sources? were updated on 3 July 2016 due to the entry into force of and in order to be aligned with MAR. Nasdaq Copenhagen A/S monitors compliance with these market place rules and may in the event of The key sources of corporate governance for Danish listed companies non-compliance give the issuer a reprimand, a fine, decide to delete consist of a combination of legislation (acts and executive orders), the issuer’s securities from admittance to trading and/or publish any corporate documents (e.g. the articles of association of a company), such sanction and the identity of the issuer. This rule book includes stock exchange regulations, codes/recommendations of a soft-law listing and disclosure requirements and adopts the “comply or nature containing generally accepted best practices, and guidelines. explain” principle whereby the issuer shall give a statement on how The Companies Act lays down the fundamental rules under the company addresses the Danish Recommendations on Corporate which public and private limited companies operate in Denmark. Governance of May 2013 (revised as of November 2014) issued by Being a public limited company, a listed company is subject to the Committee on Corporate Governance. Listed companies must the Companies Act. The Danish Financial Statements Act (the either comply with those recommendations or explain why they do “Financial Statements Act”) also includes certain provisions not comply. The practice developed by Nasdaq Copenhagen A/S regarding corporate governance in a similar manner to the Danish suggests that it is not sufficient to merely explain the reason for non- Act on Approved Auditors and Audit Firms, which deals specifically compliance. The company must also specify its different approach with auditors and the audit of financial accounts. The Danish to the recommendation. The recommendations do not have legal Business Authority operates the Danish Central Business Register force but is considered “soft law”; however, the “comply or explain” and is the authority surveilling compliance with the Companies Act, principle is embedded in the Financial Statements Act, requiring the Financial Statements Act and the Auditors Act. The Danish issuers to present a statement in its annual report or on its website

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concerning any given applicable code on corporate governance proxy advisors. The predominant proxy advisors covering Danish (i.e. in this context, the Danish Recommendations on Corporate listed companies are Institutional Shareholder Services Inc. and Governance). Glass, Lewis & Co. The current set of Danish Recommendations on Corporate Lately, following larger private equity driven IPOs, substantial focus Governance affords more attention than before on value creation, the and political voicing of the need for regulation has been directed framework for active ownership and board assessment procedures. towards very profitable management incentive schemes. In November 2016, the Committee issued a new set of Since the spring of 2013 legislation has been aiming at equalising Danish Recommendations on Shareholder Activism (seven the gender composition by requiring that larger companies – recommendations) applicable to Danish institutional investors such including listed companies – should set specific target figures and as pension funds and insurance companies making investments in implement a policy seeking to achieve a greater balance between Denmark Danish listed companies. These new recommendations apply to men and women at board and management levels. Companies are financial years commencing on 1 January 2017 or later. According required to include a statement in their annual reports describing the to these recommendations, each institutional investor shall publish company’s gender policy and reporting the target figures and current its policy on active ownership, addressing its methods for escalating status. Alternatively, the reporting may be made on the company’s active ownership, collaborative efforts with other shareholders, website or as a supplement to the annual report if reference thereto voting policies including use of proxy advisors and disclosure of is made. If the target figures are not met, an explanation must be how votes are cast and policies for identification and handling of provided. New guidelines issued in March 2016 by the Danish possible conflicts of interest. Further, it is recommended that the Business Authority emphasise the flexible nature of these rules investors at least annually report on their activities pertaining to by clarifying that new target figures do not necessarily have to be active ownership, including voting activity. Although considered higher than target figures already achieved. “soft law”, non-observance must be explained in accordance with the “comply or explain” principle. 2 Shareholders On 1 January 2018, the Danish Securities Trading Act will be subject to a revision and be replaced with a new Act carrying the name ‘Capital Markets Act’. While the new Act will implement MiFID II 2.1 What rights and powers do shareholders have in the into Danish law and include provisions related to the MiFIR, the Act operation and management of the corporate entity/ will not change the existing rule of law on most of the substantial entities? areas in the existing Danish Securities Trading Act such as the rules on takeovers, major shareholder flagging, etc. The new Act Shareholders exercise their power of decision-making at the general is, however, expected to increase the offering threshold for when a meeting. Besides that, being a shareholder does not entail additional prospectus is required from DKK 1.0 million to DKK 5.0 million. rights to make decisions regarding the company or to act on behalf The revision of the existing Shareholders’ Rights Directive of the company. The rights of the shareholders are protected through (2007/36/EC) was finally adopted on 3 April 2017, following the general corporate law principles including equal treatment of all which each Member State will have to implement it into domestic shareholders and the fiduciary duties of the board of directors and law within a timeframe of two (2) years. The aim of this new the management board. directive is to strengthen corporate governance in listed companies A shareholder is entitled to attend and address the general meeting and by encouraging shareholder engagement in the long term and to exercise voting rights, if any, on the shares. In a public company increasing transparency. The new requirements will apply to: (i) whose shares are admitted to trading and are officially listed on a the remuneration of directors and managers; (ii) the identification regulated market, the shareholder’s right to attend and the ability of shareholders; (iii) the facilitation of exercise of shareholders’ to vote shall, however, be determined based on the shareholding rights; (iv) information distribution; (v) the transparency regarding one week before the date of the general meeting (record date). In institutional investors, asset managers and proxy advisors; and (vi) addition, the Articles may provide that shareholders are required to related party transactions. notify the company no later than three days before the date of a general meeting if they wish to attend.

1.3 What are the current topical issues, developments, trends and challenges in corporate governance? 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate entity/entities? While having been in existence for some time, many aspects of the corporate governance debate in Denmark remain topical and The shareholders do not have an obligation to promote the interests important and focus on: (i) diversity (in terms of qualifications, age, of the company. Thus, the shareholders are not obliged to attend the international experience and gender issues, etc.; (ii) independence general meetings of the company, and the shareholders do not have of the board of directors; (iii) transparency in terms of individual a duty to vote for or against specific proposals at such meetings. management and board remuneration and policies related thereto; However, there is legal basis for holding shareholders liable in (iv) the duties of the board of directors in connection with a public damages for losses caused to the company, to other shareholders takeover bid; (v) the impact of corporate social responsibility; (vi) or to third parties as a result of acts or omissions by a shareholder risk-taking with particular focus on remuneration as well as the carried out with intent or gross negligence. board of directors’ duties in insolvency situations; (vii) nomination committees in respect of election of members of the board of directors For instance, shareholders can be instrumental in wrongful and assessment of existing members of the board of directors; and decisions if, through their influence, ownership interest, voting (viii) shareholder activism, e.g. in the form of an increased number rights or similar, the shareholder has participated in deciding on of shareholder proposals and statements at general meetings and the proposals at the general meeting which they know will cause the practical implications for the companies as a result thereof, and the company to suffer a loss or give certain shareholders an unjustified need to enhance the transparency on the operation and activities of benefit. It should, nevertheless, be stressed, that imposing liability on shareholders is a rare phenomenon under Danish law.

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Voting rights cannot be exercised on treasury shares or shares in a 2.3 What shareholder meetings are commonly held and parent company held by its subsidiary. what rights do shareholders have as regards them? A shareholder is barred from voting at general meetings in matters on legal proceedings against him or concerning the liability of others Annual and extraordinary general meetings are convened and if he has a material interest that may conflict with the interests of the organised by the board of directors. company. By way of example a director who is also a shareholder Any shareholder may attend a general meeting either electronically is prohibited from voting on a proposal for discharge of the board in the case of an electronic meeting, or physically in the case of a of directors. physical meeting. Furthermore, any shareholder may vote by letter, If a shareholder holds more than 90% of the shares and votes of a email or other written instrument or attend and vote by proxy. company, such a shareholder may demand that the other shareholders The general meeting is omnipotent and may decide on any matter shall have their shares redeemed by that shareholder (squeeze-out). Denmark which is not explicitly made a prerogative of the board of directors. The remaining shareholders shall, in such cases, transfer their shares Matters reserved for the general meeting are amendments of the to the majority shareholder within a period of four weeks. If the Articles, election and removal of members of the board and the redemption price cannot be agreed upon, the redemption price must company’s auditor, remuneration of the members of the board and be determined by an independent expert appointed by the court of the approval of the annual report. jurisdiction of the company’s registered office. If the redemption is Any shareholder is entitled to address the general meeting (cf. executed in connection with a voluntary or public takeover, certain question 2.1 above), to request and is entitled to receive specific minority protection rules must be observed. information on issues related to the annual accounts, the financial If a shareholder holds more than 90% of the share capital of the position of the company and items on the agenda, provided always company and a corresponding share of the votes, each minority that conveyance of such information is not exposing the company shareholder of the company may demand redemption by the to a risk for substantial damage. If information is not available at majority shareholder. the general meeting, it must be made available to the shareholders (e.g. on the company’s website) no later than two weeks thereafter. Moreover, the Articles may contain provisions on redemption. A holder of bearer shares may not be entitled to vote if the identity Shareholders holding 5% of the share capital or such smaller of such a shareholder is not disclosed or registered; cf. question 2.7 fraction of the capital provided for in the Articles can request for an below. Further, in the event of grievous or repeated non-compliance extraordinary general meeting to be held to resolve specific issues. with the disclosure requirements under the Securities Trading Act A meeting must be convened within two weeks after receipt of the request. (cf. question 2.7 below), a shareholder’s voting rights may be suspended by the Danish FSA. Resolutions at general meetings are passed by a simple majority of votes unless the proposal in question relates to an important matter which requires qualified or super majority (or unanimity) pursuant 2.6 Can shareholders seek enforcement action against to the Companies Act, e.g. an amendment to the Articles which members of the management body? as a general rule can only be passed by at least two-thirds of the votes cast and of the votes represented at the general meeting. The Shareholders or the company may bring an enforcement action Articles may provide increased or additional requirements. against members of the management board and the board of directors if these corporate bodies have breached their duties under the Companies Act or the Articles and/or if individual members, in 2.4 Can shareholders be liable for acts or omissions of the performance of their duties, have intentionally or negligently the corporate entity/entities? caused damage to the company and/or shareholders. A decision to commence legal actions against members of the management board A public limited company is characterised by the fundamental and/or members of the board of directors is a matter to be resolved principle that the shareholders are not personally liable for the acts by the shareholders at a general meeting. and/or omissions of the company, and the liability of shareholders is limited to their investment. While the applicability of the “piercing the corporate veil” doctrine 2.7 Are there any limitations on, and disclosures remains to be discussed in legal theory, the only express authority required, in relation to interests in securities held by shareholders in the corporate entity/entities? for holding a shareholder liable is a provision in the Companies Act according to which a shareholder is liable for any loss inflicted intentionally or with gross negligence on the company, the other Certain governmental approval requirements in the Financial shareholders or any third party, e.g. through the shareholder’s Business Act apply to acquisitions of qualified holdings in Danish participation by way of voting for an unlawful proposal at the financial business undertakings. In regard to other companies, an general meeting. investor’s ability to invest in shares is not subject to any limitations under the Companies Act. However, the Articles may include It should be noted that EU antitrust case law establishes that a parent provisions which generally limit ownership to the effect that no company may be held liable for its subsidiary’s participation in shareholder is allowed to hold more than a specific predetermined cartel arrangements. percentage of the share capital and/or voting rights or provisions to the effect that no matter how large a percentage of shares any 2.5 Can shareholders be disenfranchised? shareholder possesses, the attached votes may only count for a certain predetermined percentage. The rights attached to the shares held by an individual shareholder Disclosure requirements under the Securities Trading Act apply cannot be reduced without the consent of the shareholder. However, to shareholders in a company which has its securities admitted to in a company having several share classes, the rights of an entire trading and official listing on Nasdaq Copenhagen A/S as they are class of shares can be reduced by amending the Articles subject to under an obligation to notify the company and the Danish FSA of the certain voting majority requirements being observed. shareholdings in the company when the holding of shares (i) reach

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or exceed 5% of the share capital’s voting rights, or (ii) account for The management board must consist of at least one person and is no less than 5% of the share capital. In addition, notification shall appointed and removed by the board of directors (or the supervisory be made when the shareholding reaches or passes the thresholds of board). 10%, 15%, 20%, 25%, 50% and 90%, as well as one-third and two- Members of the management board (and the board of directors) thirds of the total outstanding share capital/voting rights on the day must be registered as such with the Danish Business Authority. of trading. The notification obligations have been extended further as of 26 November 2015, in that in computing the holding, financial instruments related to already-issued shares should now be included. 3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of A new registration regime has recently been introduced in the members of the management body? Companies Act introducing a public register of major shareholders. Denmark For listed companies, this means that major shareholders must The Companies Act provides that members of the board of directors notify their holdings to the company and the company must record and management board may receive remuneration, both in the this in the public register. The reporting thresholds are, by and large, form of base pay and a performance-related bonus. The amount similar to those of the major shareholder disclosure requirement of remuneration may not exceed what is considered ordinary given under the Securities Trading Act. The statutory obligation for the nature and extent of the position, as well as what is considered a company to keep a (non-public) register of shareholders is not financially reasonable and sound relative to the financial situation affected by these new rules. of the company. In line with the purpose of fighting tax evasion by enhancing The rights and obligations of the members of the management transparency with respect to ownership information, as of 1 July board are governed by the individual terms of employment (i.e. the 2015, it is no longer possible for Danish companies to issue bearer service contracts). Such service contracts are generally subject to shares. the freedom of contract and regulate the employee’s functions and duties, remuneration and bonus, termination, vacation rights and 3 Management Body and Management pension plan, etc. Before a listed company can enter into a specific agreement for incentive-based remuneration for a member of the board of directors 3.1 Who manages the corporate entity/entities and how? and/or the management board, the shareholders must adopt general guidelines for such incentive-based remuneration at a general According to the Companies Act, Danish public limited companies meeting. The Committee on Corporate Governance has prepared a may opt for a two-tier corporate governance structure by which a board guideline containing practices with respect to remuneration policies of directors is responsible for the overall and strategic management and incentive-based remuneration recommending that the board of while appointing a management board to be responsible for the day- directors does not receive warrants and stock options. The guidelines to-day management of the company. Alternatively, but rarely used in also recommend that incentive programmes to the management that Denmark, a management board may be appointed by a supervisory are equity based are revolving (consecutive allocation) and with board which shall monitor the management board. The board of vesting periods of at least three years, and that severance payments directors or the supervisory board must have at least three members. do not exceed two years’ salary. While executives may also be appointed/elected to the board of The Danish FSA has issued an executive order on remuneration in directors, the Companies Act provides that the majority of the board the financial sector. In addition to certain disclosure obligations, shall not be members of the management board. Further, no member the executive order covers rules on how the salary of directors and of the management board may be chairman or deputy-chairman of managers shall be allocated between fixed and variable elements the board of directors. and equity-based instruments. The Companies Act offers more flexibility with regard to the governance structure for private limited companies and 3.4 What are the limitations on, and what disclosure is entrepreneurial companies. required in relation to, interests in securities held by members of the management body in the corporate entity/entities? 3.2 How are members of the management body appointed and removed? In connection with the entering into force of MAR, the Danish regulators opted for an increase in the reporting threshold from EUR Shareholders are entitled to elect the members of the board of 5,000 to EUR 20,000 for members of boards of directors and of directors at the general meeting, unless public authorities or others the management board and certain other high-ranking employees have been granted a right under the Articles to appoint directors. In trading in the securities of a listed company. The reporting regime in public limited companies, the majority of board members (or the MAR which has replaced similar rules in the Securities Trading Act supervisory board) must be elected by the general meeting. Any provides that the reporting threshold is determined on a 12-month shareholder may, even as late as at the general meeting, propose one basis. The rules impose upon the reporting persons and their or more candidates. However, amongst Danish listed companies related parties (e.g. spouses, minors and legal entities controlled by the general practice is that candidates are proposed by the board of the reporting person and/or his family) an obligation to notify the directors following a search and screening process and for larger Danish FSA and the company of trading in securities of the company. companies it is conducted by a nomination committee. High-ranking employees not formally being part of the registered A board member may resign or be removed at any time. While the management board are only subject to the rules if they have access normal tenure is one year, the maximum term of office is four years. to inside or privileged information which directly or indirectly Re-election is possible, unless restricted by the Articles. relates to the issuer, and always provided that the employee has the Employees may be entitled to employee representation on the board authority independently to make executive decisions of a superior of directors; cf. question 4.1 below. nature regarding the company’s future development.

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Notifications to the Danish FSA and the company must be made The board of directors and the management board may be held liable promptly and no later than three days after a transaction. if the directors or managers in their performance of their duties have With the entry into force of MAR, the former rules in Danish intentionally or negligently caused damage to the company, to the legislation on the obligation of issuers to adopt internal rules for shareholders or any third party. trading in securities issued by the company, etc. have been abolished. 3.7 What are the main specific corporate governance responsibilities/functions of members of the 3.5 What is the process for meetings of members of the management body and what are perceived to be the management body? key, current challenges for the management body?

The Companies Act requires that the board of directors has a set of The main corporate governance responsibilities and functions of the Denmark rules of procedure governing its function and duties. The chairman members of the board of directors and the management board, as of the board of directors shall ensure that the board of directors determined by the Danish corporate governance committee are: are convened whenever necessary and, in addition, ensure that all members receive due notice of any meeting. (i) to strengthen the relationship with shareholders through continuous dialogue; Any member of the board of directors or of the management (ii) to ensure that the management board and board of directors board may request that a board meeting is held. Members of the have the required expertise, diversity, etc.; management board (or the company’s auditor) who are not members (iii) remuneration policy and incentive schemes; of the board of directors have the right to be present and to speak at meetings, unless the board in the specific situation decides (iv) quality and transparency in financial reporting; otherwise. (v) monitoring internal control and risk management; and The board of directors forms a quorum when more than half (vi) open and transparent investor relations activities. of the members are present, unless the Articles require a larger Some of the current key challenges in respect of corporate governance representation. The opinion of the majority normally constitutes the are: (a) the implementation of gender diversity policies; and (b) in decision of the board. In the event of a tie, the chairman of the board the current low interest rate environment to consider whether excess of directors shall have the casting vote if so provided in the Articles. cash should be allocated to investments or be distributed. Meetings of the board of directors are held in person, unless the board decides that members may participate by electronic means and 3.8 What public disclosures concerning management such participation is compatible with the members carrying out their body practices are required? duties. Certain defined duties may be dealt with by written procedure if the decision to do so has been made in advance. However, any Listed companies are subject to certain detailed disclosure member of the board of directors or of the management board may requirements concerning management body practices on, e.g. demand an oral discussion. gender diversity, remuneration policies and general guidelines on Depending on size, market cap, area of industry, listed companies incentive remuneration to executives and directors, corporate social have a variety of committees, typically composed of fractions responsibility, etc. of the board of directors. While audit committees are required by accounting laws, other committees such as nomination, 3.9 Are indemnities, or insurance, permitted in relation to remuneration and risk committees are established on a voluntary members of the management body and others? basis and by reference to corporate governance recommendations. It is not uncommon that the shareholders at the annual general 3.6 What are the principal general legal duties and meeting decide to discharge the board of directors and/or the liabilities of members of the management body? management board for liability with respect to the past financial year. Legal action may, nevertheless, be commenced by shareholders if the The board of directors is entrusted with the ultimate responsibility passed resolution on discharge was made based on information that of the company as they have both the supervisory function of the was not essentially correct or complete. The discharge resolution management board and the overall strategic responsibility of the does not shield against law suits from shareholders for claims for company. Therefore, it is a primary function of the board of directors losses suffered exclusively by one or more of the shareholders (as to determine the company’s policies in relation to business strategy, opposed to the company itself). Similarly, a discharge resolution is organisation, accounting and finance, and the board of directors also not a shield against legal actions taken by creditors and other undertakes such policies to ensure the observance of: (i) book- third parties. keeping and financial reporting; (ii) risk management and internal Members of the board of directors will sometimes, as a condition control; (iii) reporting on the company’s financial position; (iv) the for accepting nomination and election, require the company or management board’s overall performance and duties; (v) sufficient its controlling shareholder(s) to indemnify the member of his/her liquidity in the company; and (vi) appointment and removal of the liability related to the performance of his/her duties as a board management board. member. The management board is responsible for the day-to-day Companies are also permitted to and usually do maintain insurance operations of the company and must observe the guidelines and coverage (i.e. D&O insurance) for directors and managers. Special recommendations issued by the board of directors. The day-to- coverage is normally obtained for public offerings. day management does not include transactions which, considering the scope and nature of the company’s activities, are of an unusual nature or magnitude. These decisions can only be made with the approval of the board of directors, unless awaiting the approval will be to the detriment of the company.

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4 Other Stakeholders 5 Transparency and Reporting

4.1 What, if any, is the role of employees in corporate 5.1 Who is responsible for disclosure and transparency? governance? In accordance with the general principle of collective responsibility, Employees in listed companies are entitled to elect employee it is the board of directors as a whole, not any one individual member representatives on the board of directors if such companies had on that is responsible for transparency and disclosure of information. average employed at least 35 individuals during the preceding three Market practice in Denmark is, nevertheless, that the chairman of years. The employee representatives account for at least two and the board of directors in cooperation with the CEO is delegated the Denmark may equal up to half of the number of the members elected by the responsibility of handling market disclosures and official statements, shareholders. press releases, etc. An employee representative has the same rights and obligations as other members of the board of directors, i.e. in relation to conflict of 5.2 What corporate governance related disclosures are interests, confidentiality, remuneration, etc. required? Special provisions entitle employees of a Danish parent company and its subsidiaries registered in Denmark, as well as the foreign MAR sets out the main statutory disclosure requirements relating to branches of such subsidiaries situated in an EU/EEA country, to continuous disclosure of price-sensitive information relating to the representation at group level. company and publication of financial reports, etc. Annual reports and company releases may now be published in 4.2 What, if any, is the role of other stakeholders in the English language only. Listed companies are no longer legally corporate governance? required to disclose an interim management statement or quarterly interim reports. Please refer to the description of the recommendations set out in the According to the Nasdaq Rule Book, the annual report (submitted Danish Recommendations on Corporate Governance and the new for shareholder approval) of a listed company must be published recommendations on Shareholder Activism applying to institutional no later than three months after the end of the financial year. The investors (cf. question 1.2 above), as well as the rules on CSR (cf. audited annual report as approved by the shareholders must be question 4.3 below). filed with the Danish Business Authority without undue delay after approval, and must be received no later than four months after the 4.3 What, if any, is the law, regulation and practice end of the financial year. Listed companies must disclose half-year concerning corporate social responsibility? financial reports within a recently revised deadline of three months. The Financial Statements Act requires that information on how In recent years, the Danish Government has afforded much focus companies apply the principles of corporate governance be included on corporate social responsibility (“CSR”) for Danish businesses either in the management’s review in the annual report, which will aiming at fostering best practice by ensuring compliance with be audited by the auditor(s), or posted on the company’s website internationally-agreed principles and guidelines and by encouraging together with a reference thereto in the management’s review. actions from the companies that go beyond compliance, integrating socially responsible behaviour and ethical values into the core 5.3 What is the role of audit and auditors in such values of the organisations. disclosures? Implementing the new Directive 2013/34/EU on annual financial statements, etc., the amended Financial Statements Act introduces The annual report is prepared by the management board, adopted by more stringent requirements regarding the amount of information the board of directors and audited by the company’s auditor(s). The that larger companies must provide on CSR in accordance with report, which is subject to final approval by the shareholders at the the International Financial Reporting Standards issued by the annual general meeting, must include statements from the auditor(s) International Accounting Standard Board. Listed companies with regarding whether the auditor finds that the annual report gives a fewer than 500 employees may, however, choose not to observe true and accurate view of the financial situation of the company. the new stringent requirements until the financial year beginning According to Regulation (EU) No 537/2014 of the European on 1 January 2018, provided that such companies supplement their Parliament and of the Council of 16 April 2014 on specific current CSR-reporting with a report on environmental policies. requirements regarding statutory audit of public-interest entities and According to the Financial Statements Act, listed companies shall repealing Commission Decision 2005/909/EC, listed companies in their annual reports provide a description of their business model (and other large entities) must: (i) ensure periodic rotation on and address CSR matters including considerations on human auditors and audit firms; (ii) limit the volume of non-audit services rights, social matters, employees, environment and climate, anti- assigned to the elected audit firm; (iii) increase responsibilities corruption and bribery, etc. The statutory requirement means that of the audit committee of the company; (iv) comply with certain the companies must account for their policies on CSR or explain the search, election and nomination procedures by the audit committee lack of a CSR-policy. when new audit firms are to be elected; and (v) opt for inclusion of external members of the audit committee who are not members of the board of directors.

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Information disclosed on the company’s website must be available 5.4 What corporate governance information should be for at least five years. Financial reports, however, must be available published on websites? for a minimum of 10 years from the date of disclosure. A listed company shall announce the voting results of a general Listed public limited companies shall as soon as possible after meeting on its website no later than two weeks after the general the publication of inside information make all such information meeting. Any questions raised by shareholders are deemed to have available to all investors on the company’s website. been answered by the company if the information is available on the As regards corporate governance, company announcements to company’s website by way of a Q&A function. Nasdaq Copenhagen A/S and approved guidelines for the company’s The company’s mandatory duty to prepare a statement on CSR incentive pay system must be published on the company’s website (cf. question 4.3 above), must be included in the annual report together with basic information about the issuer (i.e. the company Denmark or, alternatively, with a reference in the annual report, in another name, the address of the corporate headquarters, the company supplementary report or on the company’s website. registration number, etc.).

Peter Lyck Thomas Melchior Fischer Nielsen Nørager Law Firm LLP Nielsen Nørager Law Firm LLP Frederiksberggade 16 Frederiksberggade 16 1459 Copenhagen K 1459 Copenhagen K Denmark Denmark

Tel: +45 30 10 39 15 Tel: +45 31 18 04 34 Email: [email protected] Email: [email protected] URL: www.nnlaw.dk URL: www.nnlaw.dk

Peter Lyck is partner in Nielsen Nørager Law Firm LLP in the M&A and Thomas Melchior Fischer is a lawyer with several years of experience Capital Markets practice group and has vast experience with public specialising in M&A and in the field of general company law, corporate M&A and ECM transactions. He has assisted both listed and unlisted finance and capital markets law, including substantial cross-border companies on corporate governance structures and documentation IPO experience in recent years. and has advised a number of blue-chip companies on a range of transactions covering public tender offers, IPOs and bond and rights issues.

Nielsen Nørager Law Firm LLP is a mid-sized, well-respected commercial law firm with broad experience in assisting a multitude of international and domestic clients. Nielsen Nørager Law Firm LLP’s legal services are based on a commitment shared by the firm’s attorneys to providing clients with the most specialised and cost-effective advice. Nielsen Nørager Law Firm LLP’s core values – quality, commercial approach, efficiency and accessibility – are well-reflected by the firm’s and its lawyers’ rankings by international rating firms such asChambers & Partners, IFLR1000, The Legal 500, etc. Nielsen Nørager Law Firm LLP benefits from its strong international relations. Located in the centre of Copenhagen and employing some of Denmark’s most talented and experienced lawyers, Nielsen Nørager Law Firm LLP provides legal advice within a wide range of areas including: corporate and commercial, private and public M&A; IPOs, public tender offers; securities regulation, venture and private equity; debt and equity capital markets; tax; banking and finance; IP and TMT; IT; infrastructure; shipping and transport; energy; EU, competition and procurement; restructuring and insolvency; litigation and dispute resolution; insurance; employment; real estate; and construction, etc.

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Finland

Waselius & Wist Fredrik Lassenius

comply with all recommendations but may depart from specific 1 Setting the Scene – Sources and recommendations if the company has good reasons for doing so. Overview The company must further report which recommendations it has departed from and why, as well as how the decision to depart from the recommendations was made. 1.1 What are the main corporate entities to be discussed? Listed companies further have to comply with the Rules of the This chapter will address the two main corporate entities used in Helsinki Stock Exchange of NASDAQ OMX Helsinki (available business in Finland. First, the private limited liability company, at http://business.nasdaq.com/list/Rules-and-Regulations/European- or private company (“yksityinen osakeyhtiö” in Finnish, usually rules/nasdaq-helsinki/index.html). Under the Rules of the Exchange, referred to as “osakeyhtiö” and abbreviated as “Oy”, and “privat all listed companies must notify that they comply with the corporate aktiebolag” in Swedish, usually referred to as “aktiebolag” and governance rules in the jurisdiction where they are incorporated. abbreviated as “Ab”). Second, the listed limited liability company, As a consequence, the CG Code is mandatory for listed companies or listed company (“julkinen osakeyhtiö” in Finnish, abbreviated as domiciled in Finland. “Oyj”, and “publikt aktiebolag” in Swedish, abbreviated as “Abp”). The Finnish Financial Supervisory Authority (“FSA”) has This chapter focuses on listed companies. issued regulations consisting of both legally binding rules and recommended provisions. The rules and recommendations apply, for instance, when a company is listing securities or is subject to or 1.2 What are the main legislative, regulatory and other corporate governance sources? is making a public takeover bid, whether voluntary or mandatory. If a company fails to comply with the rules or recommendations, both the FSA and the Helsinki Stock Exchange can impose sanctions. The main legislative, regulatory, and other corporate governance sources governing limited liability companies are the Companies Act (624/2006, as amended), the Securities Market Act (746/2012, 1.3 What are the current topical issues, developments, as amended), the Auditing Act (1141/2015, as amended), and the trends and challenges in corporate governance? Accounting Act (1336/1997, as amended). The Securities Market Act requires that listed companies, either Gender representation on the board of directors in listed companies directly or indirectly, belong to a Finnish independent body that remains a topical issue. According to a survey published in April has issued recommendations on the actions of the management of a 2015 by the Finland Chamber of Commerce, the share of female target company subject to a takeover bid, in order to promote good directors on the boards of listed companies has risen to 25% in 2016, securities market practice. The Securities Market Association (http:// up from 24% in 2015. The share of female directors in large-cap cgfinland.fi/en/) functions as that particular independent body, and it companies has arisen to 32% in 2016. was established in December 2006 by the Confederation of Finnish The Finnish government adopted a resolution in principle in January Industries, EK, NASDAQ OMX Helsinki Ltd and Finland Chamber 2015, setting a target level of female board directors of 40% for of Commerce. The Securities Market Association administers the mid- and large-cap listed companies, to be reached in 2020. The recommendation on public bids and the Helsinki Takeover Code resolution sets out that mid- and large-cap listed companies must (the “Takeover Code”), as well the Finnish Corporate Governance publish their progress towards the set goal in the beginning of 2017. Code for Listed Companies of 2015 (the “CG Code”). The government must, based on the reports, re-evaluate the need The CG Code and the Takeover Code set out recommendations for imposing quota rules but so far no mandatory general quota on corporate governance for listed companies in Finland and rules have been introduced. The CG Code, however, requires that companies contemplating making a takeover bid on Finnish both genders shall be represented in the board of directors and that companies (available at http://cgfinland.fi/en/recommendations/ the company reports its objectives relating to both genders being recommendations/). represented in the company’s board of directors as well as the means to achieve these objectives. In companies where the state holds a The CG Code is applicable to all companies listed on the Helsinki majority or minority stake, the change has been significant over the Stock Exchange, provided that the recommendations are not in last 10 years. Some 40% of the female directors in state-owned conflict with mandatory regulations applicable in the domicile of listed companies have been selected since 2009. the company. The CG Code is based on the “comply or explain” principle. The starting point is, thus, that a company must

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As described in further detail in question 2.4 below, the Supreme Court, in a case from early 2015, held the shareholder jointly liable 2.2 What responsibilities, if any, do shareholders have as with its subsidiary, and thus established that the corporate veil can regards the corporate governance of their corporate entity/entities? be pierced in certain circumstances. The Finnish government has set a principal aim to reduce Under the Companies Act and the CG Code, shareholders have, bureaucracy and simplify regulation. While there has been progress in general, been granted certain rights and not obligations, while in many areas, such as in relation to environmental permits, the company’s board of directors has the primary responsibility for harbours, agriculture, retail opening hours, and electronic dealing corporate governance. with authorities, the sentiment is that the government will have to do significantly more to achieve its goals. Despite the government’s The Companies Act, however, sets out the requirement for equal Finland aim to reduce bureaucracy, there has been an increase in regulation treatment of shareholders as a main principle, i.e. that all shares due to new EU regulation, such as for instance the EU Regulation carry equal rights in a company, unless otherwise provided for in the No 596/2014 on market abuse and the EU Directive 2014/57/EU on articles of association. The general meeting, the board of directors criminal sanctions for market abuse which entered into force on 3 and the managing director may not make decisions that could give July 2016. undue benefit to a shareholder at the expense of the company or another shareholder. The purpose of the principle of equal treatment Other topical issues on the board agenda include cyber security, risk is primarily to protect minority shareholders. The principle does not management, and the increasing regulatory pressure in many areas. prevent the use of majority rule, but it prevents favouring majority In addition, transfer pricing or matters relating to the corporate tax shareholders at the expense of other shareholders. footprint continue to be on the board agenda, especially after the recent Panama papers and the so-called Luxembourg leaks. Further, the changes caused by the EU audit reform legislation, including 2.3 What shareholder meetings are commonly held and for instance the obligations to report on “key audit matters”, and what rights do shareholders have as regards them? to rotate audit firm, will have an impact on boards of directors. The European Data Protection Regulation intended to come into force The shareholder meeting commonly held is the annual general during the spring of 2018 is also likely to attract the attention of meeting, in addition to which the extra general meeting is held when boards of directors. called upon or if so required under the articles of association. The annual general meeting is mandatory and must be held within six months of the end of the financial period. The annual general 2 Shareholders meeting shall decide on: a) the adoption of the annual accounts, including group accounts 2.1 What rights and powers do shareholders have in the if the company is the parent company in a group; operation and management of the corporate entity/ b) the use of profit shown by the balance sheet; entities? c) the discharge from liability for the members of the board of directors and the supervisory board, if any, as well as the Shareholders exercise their power of decision-making (and other managing director; powers) at the general meeting of shareholders. Shareholders have d) appointment of members of the board of directors and an extensive right to make proposals to the general meeting and ask the supervisory board, if any, as well as auditors, unless questions regarding management at the general meeting. Outside the Companies Act or the articles of association requires the general meeting, shareholders, as a rule, have no special rights or otherwise about their appointment or term; and powers in the operation and management of the corporate identity. e) other matters to be dealt with by the annual general meeting A shareholder may, of course, share his or her view with the under the articles of association. company’s directors and executives, who may then take the views An extra general meeting must be held if so required by the articles into account when making decisions. According to the CG Code, of association, the board of directors, the auditor, or if shareholders it is an established view in Finland that in matters falling within the representing at least 10% (or a smaller portion set out in the articles competence of the general meeting, it may be in the interests of the of association) of the shares so require to deal with a specific matter. company and all its shareholders that the board of directors is aware Each shareholder is entitled to participate in a general meeting of the opinions of the shareholders with significant voting rights in either in person or by proxy representation. A shareholder, or a the matter being prepared. proxy representative, may also have an assistant, such as a legal The CG Code suggests that if the board of directors, having counsel, present at a general meeting. A shareholder in a listed carefully evaluated the situation, has come to the conclusion that company may appoint multiple proxy representatives, representing it is possible and in the interests of the company to discuss with the shareholder’s shares on different book-entry accounts. an individual shareholder and disclose information, the board shall Each participant at a general meeting can vote with the total amount ensure that any subsequent decisions are taken in an appropriate of votes attached to the shares which he or she represents, unless manner considering the company and all of its shareholders. The otherwise required by the articles of association. As a general rule, CG Code further stresses that a clear definition of the procedure the majority rule applies, i.e. a proposal supported by more than and individuals involved in the discussions support pertinence of the half of the votes cast at the general meeting will prevail, and in the decision-making of the board. case of elections, the person receiving the most of the votes will Certain shareholders’ rights, such as equal treatment of shareholders, be deemed elected. A qualified majority of at least two-thirds of are protected through the general principles of company law, of the votes cast and the shares represented at the general meeting is which the key ones are described in the Companies Act. In addition, required for certain decisions, such as changes to the articles of the Companies Act includes certain provisions regarding the rights association, a directed share issue or acquisition of own shares, of minority shareholders, representing at least 10% of the shares of merger, de-merger or liquidation. the company.

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Shareholders further have extensive rights to request information While a shareholder cannot be disenfranchised, a shareholder with from the managing director and the board of directors at the general more than 90% of all the shares and votes in a company has the right meeting on circumstances that may affect the evaluation of a matter to redeem the shares of the other shareholders at a fair price (squeeze- dealt with at the meeting. Information which can considerably harm out). A minority shareholder whose shares may be redeemed has the the company may not, however, be disclosed. right to demand that his or her shares are redeemed.

2.4 Can shareholders be liable for acts or omissions of 2.6 Can shareholders seek enforcement action against the corporate entity/entities? members of the management body?

Finland The Companies Act sets out the main principle that a limited liability A shareholder can, either in its own name or jointly with other company is a separate legal person and that its shareholders are not shareholders, pursue a claim on behalf of the company against a liable for the company’s obligations. A shareholder cannot, as a director, a member of the supervisory board, or the managing rule, be held liable for the acts or omissions of the corporate entity. director, if it is likely that the company will not see to it that the claim The legal literature has further generally rejected the possibility that is pursued. It is further required that the shareholders pursuing the the corporate veil can be pierced or that the corporate entity and the claim hold at least 10% of all the shares in the company, or if it can limited liability can be set aside. be demonstrated that the failure to pursue the claim would violate In a Supreme Court ruling published 9 March 2015, the Finnish the principle of equal treatment of shareholders. shareholder of an Estonian limited liability company was, however, A member of the above management bodies is liable in damages held jointly liable with its subsidiary. The shareholder was ordered to for losses caused in office to the company, either negligently or pay approximately EUR 4.4 million in compensation for the breach intentionally, in violation of the Companies Act or the articles of of the obligation to pay private copyright levies. The Supreme Court association. decided to pierce the corporate veil of the Estonian limited liability A shareholder can also pursue a claim against a member of the above company, and found that the shareholder of the company could be management bodies for a loss caused in office, either intentionally held jointly liable with its subsidiary due to the circumstances at or negligently, by such members in violation of the Companies Act hand. The Supreme Court found that the shareholder had sought or the articles of association. to avoid paying copyright levies in Finland by conducting part of its business through an Estonian subsidiary. According to the A shareholder may, under certain circumstances, apply for Supreme Court, the main purpose of the corporate structure was the precautionary measures at the company’s district court to prohibit avoidance of the statutory obligation to pay levies. The Court thus the company, a management body or the general meeting from concluded that the shareholder’s actions had been so culpable that taking an action contrary to the Companies Act or the articles of the company’s limited liability could be set aside and the shareholder association, if the action could infringe the applicant’s right. was to be held liable for the levies imposed on the subsidiary. While the Supreme Court confirmed that the corporate veil can be pierced, 2.7 Are there any limitations on, and disclosures it stressed the fact that the circumstances were exceptional. required, in relation to interests in securities held by A shareholder is further liable for damage caused, either intentionally shareholders in the corporate entity/entities? or negligently, to the company, another shareholder or a third party by the shareholder’s contribution to a violation of the Companies Under the Securities Markets Act, a shareholder in a listed Act or the articles of association. company shall notify both the company and the FSA of changes in the shareholder’s holdings and voting rights when the holding or proportion of voting rights reaches, exceeds or falls below 5%, 2.5 Can shareholders be disenfranchised? 10%, 15%, 20%, 25%, 30%, two-thirds, 50% or 90% of the voting rights or number of shares of the company. The obligation to notify The Companies Act does not provide for disenfranchisement of does not, however, apply to holdings and voting rights in First North shareholders. As a general rule, all shares carry the same rights listed companies. in the company, unless otherwise provided for in the articles of association. It is, however, possible to set out in the articles of If the shareholder’s holding in a listed company exceeds 30% or association that the company shall, or may, have shares carrying 50% of the voting rights, the shareholder must make an offer to rights deviating from other shares as to, for instance, the right to purchase all the remaining shares in the company. In addition, the vote or right to profit distribution. In such cases, the shares shall be right to squeeze out a minority or to be squeezed out by a majority divided into two or several classes of shares. shareholder mentioned above in question 2.5 also applies in listed The general meeting, or any other corporate body, may not make companies. any decisions or take any measures that are aimed to grant an In addition, certain short positions in listed companies and in undue benefit to a shareholder or another person at the expense government bonds will need to be notified to the FSA in accordance of a shareholder. Further, the Companies Act provides that a with EU Regulation 236/2012. shareholder’s consent is specifically required if certain rights of the shareholder are reduced. Thus, it is not possible to reduce such rights without the shareholder’s consent even if the change formally 3 Management Body and Management concerns all shareholders. In addition, reducing a shareholder’s right is only possible by amending the articles of association, which 3.1 Who manages the corporate entity/entities and how? requires a qualified majority as discussed above. If there are several classes of shares and the change reduces the rights of a share class, A company is primarily managed by its board of directors. The the change of the articles of association requires a qualified majority board of directors is responsible for the administration of the of the shares of all share classes present at the meeting as well as the company, and it shall see to both the appropriate arrangement of the consent of at least 50% of the shareholders of each class of shares operations and the control of the company’s accounts and finances. representing the shareholders whose rights are to be reduced.

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A board of directors shall, unless otherwise set out in the articles board or a third party to appoint and remove members of the board of association, have between one and five ordinary members. If of directors has been cancelled, the general meeting can also remove there are fewer than three members, there must be at least one such members which have not been appointed by the general deputy member. A chairperson must be elected for the board of meeting. directors if there are several members. The chairperson is elected The Companies Act sets out that the term of a director in a listed by the board of directors unless otherwise set out in the articles of company ends at the closing of the annual general meeting association or decided by the general meeting when appointing succeeding the meeting in which the member was appointed, unless the board of directors. While the Companies Act does not restrict otherwise provided for in the articles of association. That said, the the appointment of the managing director as chairperson, the CG CG Code recommends that the entire board of directors of a listed Code recommendation is that the managing director should not be company is appointed annually at the annual general meeting to give Finland appointed chairperson, as it is the duty of the board to supervise the the shareholders the possibility to evaluate the performance of the managing director. members on a regular basis. A limited liability company must have a board of directors, in In a private company, the term of the members of the board of addition to which a company may have a managing director and/ directors is until further notice, unless otherwise set out in the articles or supervisory board. The managing director is appointed by the of association. A director may resign before the end of his or her term. board of directors, and his or her task is to see to the day-to-day Neither companies nor persons without legal competence can be management of the company pursuant to the instructions given by appointed as members of the board of directors. In addition, at least the board of directors. The managing director further has to see to one of the members should be resident within the European Economic it that the accounts comply with law and that the management of Area, unless an exemption is granted by the registration authority. the company’s assets and financials has been arranged in a reliable manner. The managing director has the right to participate at The CG Code sets out that a listed company shall establish meetings of the board of directors unless otherwise decided by the principles concerning the diversity of the board of directors. The board. principles should take into account the scale of the business and its development. Factors to be taken into account may include, Almost all Finnish listed companies use a unitary board structure, for example, age, gender, and occupational, educational and in which the administration is the responsibility of the board and international background. the managing director. A limited company may, however, have a supervisory board if the articles of associations provide for one. The task of a supervisory board is to supervise how the board of directors 3.3 What are the main legislative, regulatory and other and the managing director administrate the company. It can further sources impacting on contracts and remuneration of be set out in the articles of association that the supervisory board members of the management body? appoints the board of directors. Decisions on the remuneration of the board of directors falls under A board of directors may include both executive and non-executive the competence of the general meeting. The board of directors directors, but the boards of directors of a majority of Finnish approves the service contract as well as the remuneration of the listed companies consist exclusively of non-executive directors, managing director. The Companies Act does not specifically i.e. directors who are not members of the company’s operative restrict the terms of a service contract for a managing director or management. The CG Code, however, recommends that the the remuneration of a member of the management. Due to the majority of the members of the board of directors should not have managing director’s executive role, he or she is not considered as an an interdependent relationship with the company. employee from an employment law point of view. Therefore, many The board of directors can increase its efficiency by forming of the limitations set out for employment contracts do not apply to a committees for specific tasks belonging to the board’s managing director’s service contract. responsibilities. The committees do not have any formal legal The CG Code sets out certain recommendations for the managing status or powers beyond the authority of the board of directors, and director’s service contract as well as the remuneration of the the responsibility for a committee’s decisions will remain with the members of the management bodies. According to the CG Code, board. the objective of remuneration is to promote the long-term financial Companies often have a management or executive board for the success and competitiveness of the company and the favourable company, or, if applicable, the group, consisting of the managing development of shareholder value. Remuneration should further be director and the executives of the operative business and the based on predetermined and measurable performance criteria. chief financial officer and, where applicable, managers of support One of the key purposes of the CG Code is to promote openness functions. The management team or the executive board is not a and transparency with regard to remuneration. A listed company corporate body as such, and its main task is to assist the managing shall disclose the remuneration and other financial benefits of each director in the management of the company. director for board and committee work as well as other possible work. If a director has an employment or service contract with 3.2 How are members of the management body appointed the company or acts as the company’s advisor, the company shall and removed? disclose the salaries and fees, as well as other financial benefits paid or granted for the services during the financial period. The board of directors is appointed and removed by the general meeting, unless the articles of association provide that the 3.4 What are the limitations on, and what disclosure is supervisory board appoints and removes the board. The articles of required in relation to, interests in securities held by association can further set out that fewer than half of members shall members of the management body in the corporate be appointed and removed by other means. The corporate body entity/entities? appointing a director also has the power to remove that member (later also referred to as “director”). If the articles of association A listed company may issue shares in the company to the managing have been changed to the effect that the right for the supervisory director and the members of the board of directors as a form of

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remuneration. While it is generally recommended in the CG Code Under the Takeover Code, the board or management body of a that directors hold shares in the company, the Code recommends target company subject to a takeover bid must act in the interests that at least two of the independent directors are independent of of the company as a whole and must not deny the shareholders the significant shareholders of the company. The Code also notes that opportunity to decide on the merits of a bid of serious nature. If the insider regulations have to be complied with if the members of the board of a listed company has received a takeover bid of a serious board of directors either receive shares as part of their remuneration nature, the board shall evaluate what measures may be required to or otherwise hold shares in the company. secure the interests of the shareholders. The board must then take A listed company must, under the CG Code, disclose the active steps to ensure that the best possible outcome is achieved for shareholdings of its members of the board of directors, as well as its the shareholders. managing director and other executives. A director, a member of the supervisory board and the managing Finland director are liable in damages for the loss that he or she, in violation of the duty of care, has, in office, caused to the company either 3.5 What is the process for meetings of members of the management body? intentionally or negligently. In addition, a director, a member of the supervisory board and the managing director are liable in damages for the loss that he or she, in violation of the Companies Act or The chairperson of the board of directors shall see to it that the the articles of association, has, in office, caused to the company, a board of directors meets when necessary. A meeting shall also be shareholder or a third party either intentionally or negligently. If the convened if a director or the managing director so requests. If the damage has been caused through a breach of the Companies Act chairperson does not convene the meeting despite such a request, (other than a breach of certain principles set out in the Companies the meeting may be called by a member (if at least one-half of the Act), the articles of association, or through an action benefitting members approve of the call) or by the managing director alone. a related party, it is assumed that the damage has been caused To achieve a quorum, more than one-half of the members of the negligently, unless the defendant can show that he or she has acted board of directors must be present, unless a larger proportion is with due care. required in the articles of association. The proportion should be If the violation of the Companies Act constitutes a criminal offence calculated on the basis of the number of appointed directors. A at the same time, criminal liability may also occur. disqualified director shall be deemed absent. No decision shall be made unless all members have been given the chance, as far as possible, to participate in the consideration of the matter. If a 3.7 What are the main specific corporate governance director is unavailable for a meeting, the deputy director, if any, responsibilities/functions of members of the shall be given the chance to participate in the meeting. management body and what are perceived to be the key, current challenges for the management body? The opinion of the majority shall constitute the decision of the board of directors, unless the articles of association require that a qualified The main corporate governance responsibilities under the majority is required. In the case of a tie, the chairperson has the Companies Act and the CG Code lie with the company, and the casting vote. responsibilities are divided among the management bodies, i.e. A director shall be disqualified from the consideration of a matter the board of directors and the managing director, based on their relating to a contract between that member and the company, or responsibilities for the administration. As mentioned above, the between the company and a third party if the member is to derive an general duty of the board of directors is to see to the administration of essential benefit in the matter and that benefit may be contrary to the the company and the appropriate organisation of its operations. The interests of the company. board shall further be responsible for the appropriate arrangement Minutes shall be kept of the meetings, and they shall be signed by of the control of the company accounts and finance. the person chairing the meeting and, if there are several members of The general duty of the managing director is to take care of the the board of directors, at least by one other member designated by day-to-day management of the company. The managing director is the board of directors. A dissenting member has the right to require responsible for the executive management of the company pursuant that his or her dissent is recorded in the meeting minutes. The to the instructions given by the board of directors, and for ensuring decisions shall be numbered and archived in a reliable manner. If a that the company’s accounts comply with law. In addition, the decision is made without a meeting being held, the decision shall be managing director shall see to it that the company’s financial affairs recorded as a board decision, signed and numbered as provided for have been arranged in a reliable manner. regular board meetings. The increasing regulatory and reporting obligations remain a topical challenge for management bodies. Reference is made to question 3.6 What are the principal general legal duties and 1.3 for other topical matters. liabilities of members of the management body?

3.8 What public disclosures concerning management The main general duty of the management is to promote the body practices are required? company’s interests and act with due care. Furthermore, the Companies Act specifically sets out that the purpose of the company The CG Code recommends that a listed company discloses certain is to generate profits for the shareholders, unless otherwise set out in information about the operations of the management bodies, as the articles of association. As described above in question 3.1, the well as the managing director in the annual Corporate Governance managing director shall further see to the day-to-day management Statement. The information disclosed should describe, among other of the company, whereas the board of directors is responsible for things, the procedures relating to the changes in the composition the administration of the company. In general, the members of the and the operation of the board of directors and the committees board of directors shall represent all the shareholders as a whole and appointed by the board, the internal control procedures, and main act in the interests the company, as opposed to acting in the interests features of risk management systems, as well as the auditing. In of the shareholders who have appointed the member. addition, the company should disclose the procedures relating to

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third-party transactions, remuneration of the members of the board to tax planning and certain employee unions have recommended of directors, the managing director and other executives, and insider companies to change their corporate healthcare provider. In administration. particular, environmental groups and consumer groups have been active advocating their interests both in traditional and social media.

3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? 4.3 What, if any, is the law, regulation and practice concerning corporate social responsibility? D&O insurance is permitted for management body members and other executives. Both listed and larger private companies The guidelines on management reports published by the Accounting

commonly purchase such insurance protection for its directors. Board of the Ministry of Employment recommend that companies Finland address personnel and environmental responsibility issues in their annual reports. Companies may also elect to publish a separate 4 Other Stakeholders corporate social responsibility report. The guidelines do not require that all limited companies publish a full scope account of personnel and environmental responsibility issues, but the practice is, however, 4.1 What, if any, is the role of employees in corporate governance? recommended. The voluntary nature of corporate social responsibility reporting will, Employees do not have any statutory right to be represented on the however, change for the financial year ending on 31 December 2017 board of directors or the supervisory board. There is, however, a for larger enterprises, such as listed companies, credit institutions statutory right for employees to be informed and consulted with and pension companies, which regularly employ more than 500 respect to changes in the company or the employees’ working employees, or which have a turnover exceeding EUR 40 million or a conditions. In addition, there is a statutory right for the personnel in balance sheet of at least EUR 20 million. The forthcoming changes companies regularly employing at least 150 employees to participate are based on the EU Directive 2014/95 as implemented through the in decision-making on executive, supervisory or advisory bodies of revisions to the Accounting Act as of 31 December 2016. Under the companies, when such bodies are handling matters that involve the new rules, companies will have to include a non-financial statement company’s business operations or the position of personnel. The containing information to the extent necessary for an understanding right to participate has not, however, been interpreted as giving of the company’s development, performance, position and impact employees a standing representation on either the board of directors of its activities, relating to, at least, environmental, social and or the supervisory board, if any. employee matters, respect for human rights, anti-corruption and anti-bribery matters in the management report. The new regulation will be based on the “comply or explain” principle and will thus be 4.2 What, if any, is the role of other stakeholders in aligned with the recommendations on corporate governance set out corporate governance? in the CG Code and the Takeover Code.

The Companies Act protects the creditors of a company, for instance, through the prohibition on unlawful distribution of the 5 Transparency and Reporting company’s assets, or the obligation to file for liquidation if the equity of the company has been consumed. As described in question 3.7, a member of the board of directors or the managing director 5.1 Who is responsible for disclosure and transparency? may become liable for damages caused to a third party, and thus the management may face liability claims if they ignore third parties Under the CG Code, the responsibility for disclosure and interacting with the company. It is in general easy to become a transparency lies with the company. The Code does not obligate shareholder in a listed company and as a shareholder has the right specific officers or executives to ensure compliance with the to make proposals to, and ask questions at the general meeting, as obligations. Thus, the responsibility would be partly with the board described in question 2.1, the management of a company has to bear of directors based on its responsibility for the administration of the the possibility in mind that other stakeholders may elect to become company, and partly with the managing director based on his or her shareholders almost at any given point in time. responsibility for the day-to-day operations. Other stakeholders (other than shareholders, management and employees) of a limited liability company may include creditors, 5.2 What corporate governance related disclosures are customers, suppliers, trade unions, end-users or consumers, required? authorities or local communities, and groups representing public interests such as the environment or tax. They may have a significant A limited company shall register its financial statements with impact on the management and the corporate governance despite the Finnish Trade Register within two months of their adoption. lacking a direct access to the meetings of the board of directors or Listed companies are, in addition, required to publish a Corporate the shareholders. The impact can be based on their direct or indirect Governance Statement in connection with their annual report. The financial leverage on the company. CG Code, in addition, requires listed companies to maintain current Because of the increased transparency in today’s society and the way corporate governance-related information on their websites. the media and social media work and interact, listed companies who Listed companies further have to prepare and publish interim reports maximise their profits without regard to what external stakeholders as well as annual financial statements and reports, and make them expect from a good corporate social citizen may face challenges available on their websites. detrimental to their business interests. For instance, private equity In addition to the above obligation to disclose periodic information, back healthcare companies have faced significant criticism due a listed company must, without undue delay, disclose all such

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decisions made by it, as well as circumstances relating to it and its ■ Information on compliance with the CG Code: activities which are likely to affect its share price. ■ If the company has departed from an individual recommendation, information on this, as well as the explanation for the departure. 5.3 What is the role of audit and auditors in such disclosures? ■ Statements: ■ Corporate Governance Statement. The annual accounts of a listed company must be audited. If the ■ Remuneration Statement. interim report of a listed company is not audited, the audit report ■ General meeting: for the annual report shall include a statement to that effect. The ■ General meeting documents, including the notice to the

Finland company’s auditor shall further verify that the Corporate Governance meeting, the proposals issued by the company, the minutes Statement has been issued, and issue a statement regarding this, including the voting results and any appropriate appendices. in case the description of the main features of the internal control ■ Information on the board and any committees. and risk management systems relating to the company’s financial ■ Information on the managing director and other executives. reporting process is inconsistent with the description included in the company’s financial statements. If the company presents ■ Information on risk management and control. its Corporate Governance Statement in the report by the board of ■ Information relating to the auditor and audit. directors, the statement will be audited as a part of that report.

Fredrik Lassenius 5.4 What corporate governance information should be Waselius & Wist published on websites? Eteläesplanadi 24 A 00130 Helsinki Under the Companies Act, a company must publish the board Finland proposals, financial statements, annual and interim reports and Tel: +358 9 6689 5216 the auditor’s reports on the company’s website before the general Email: [email protected] meeting. The minutes from the general meeting shall be made URL: www.ww.fi

available on the website after the meeting.

The Securities Markets Act requires that the company keeps the Fredrik Lassenius is a specialist partner and co-head of the M&A interim reports, interim board reports, financial statements and practice of Waselius & Wist. Fredrik advises on corporate law matters annual reports available on the company’s website for at least five and M&A. He has extensive experience in M&A transactions and years. corporate matters as the head of Nokia’s M&A Legal Team, the head of Deloitte’s Legal Services in Finland, and as an attorney with the The following detailed information shall, pursuant to the CG Code, law firm Roschier. Fredrik’s dual experience as both in-house and be made available on the company’s website: external counsel, combined with his involvement in Nokia’s landmark ■ Compliance with the CG Code. transactions, give him a unique perspective and insight in assisting clients in complex transactions.

Waselius & Wist is a Finnish commercial law firm, committed to providing highly-specialised legal services in complex business transactions. We are especially renowned for high-end advice within the fields of capital markets, banking and finance, M&A, EU and competition law, and dispute resolution, in addition to tax law.

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Germany Moritz Kopp, LL.M.

BEITEN BURKHARDT Dr. Markus Ley

to the implementation of the EU Transparency Directive Amending 1 Setting the Scene – Sources and Directive (2013/50/EU). Overview a) Securities Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) (last amended on 30 June 2016) 1.1 What are the main corporate entities to be discussed? Governs all tenders for the acquisition of securities of listed Companies. Compliance with the Act’s mandatory provisions is overseen by the Federal Agency for the Control of Financial Stock corporations (Aktiengesellschaft), SEs (Societas Europaea) Services (Bundesanstalt für Finanzdienstleistungsaufsicht, (“ ” or “ ”) and partnerships limited by shares Company Companies “BaFin”). (Kommanditgesellschaft auf Aktien, KGaA) are German entities b) Securities Trading Act (Wertpapierhandelsgesetz) (last which can be listed on a stock exchange. The majority of listed amended on 30 June 2016) German companies are stock corporations. Governs services relating to securities, trading of financial instruments on and outside of stock exchanges, conclusion 1.2 What are the main legislative, regulatory and other of financial transactions, financial analysis and changes of corporate governance sources? voting rights in listed Companies. Compliance of the Act’s provisions is also overseen by the The German corporate governance sources can be divided into the BaFin. following three categories: c) Stock Exchange Act (Börsengesetz) (last amended on 30 June General Regulatory Sources 2016) a) Stock Corporation Act (Aktiengesetz) (last amended on 10 Governs the activities and organisation of stock exchanges, May 2016) the admission of trading parties (Handelsteilnehmer), financial instruments, rights and assets for trading on stock Governs all relations between shareholders including the exchanges and the assessment of stock exchange quotes. annual general meeting (“AGM”; Hauptversammlung), the management board (Vorstand) and the supervisory board d) Market Abuse Regulations, EU No. 596/2014 (Aufsichtsrat), as well as provisions on affiliated Companies (Marktmissbrauchsverordnung) (entered into force 3 July 2016) (Konzernrecht). Most provisions are mandatory. Governs the combat of insider trading and market manipulation b) German Corporate Governance Code (Deutscher Corporate on the European financial markets. Together with the Market Governance Kodex, “DCGK”) (last amendment decided on Abuse Directive 2014/57/EU (Marktmissbrauchrichtline), it 7 February 2017) forms the European legal framework against market abuse. The DCGK does not constitute law since it contains mainly Compliance of the Acts’ provisions is overseen by the relevant recommendations for Companies to organise their corporate Stock Exchange Control Agency (Börsenaufsichtsbehörde) for each governance. The Code is therefore not binding in a legal German federal state (Bundesland). sense. Under the Stock Corporation Act, however, listed Non-Regulatory Sources Companies have to declare annually in the Electronic Federal Gazette (Elektronischer Bundesanzeiger) if and to what a) Articles of Association (Satzung) extent they have complied with the recommendations of the Govern all relations between shareholders including the DCGK (“comply or explain”). AGM, the management board and the supervisory board, as c) Commercial Code (Handelsgesetzbuch) (last amended on 5 well as provisions on affiliated Companies in addition to the July 2016) Stock Corporation Act and in more detail. The Commercial Code contains provisions on accounting b) Rules of Procedure (Geschäftsordnung) for the management and annual financial statements of Companies and group board and the supervisory board. Companies. Regulate the formalities of the meetings of the members of d) SE EU Council Regulation (EC) No. 2157/2001 of 8 October these bodies such as invitations, absences, proxies, adoption 2001 and also the German SE Act (SE-Ausführungsgesetz; of resolutions, allocation of specific responsibilities, voting last amended on 10 May 2016) rights, etc. Regulatory Sources Related to Capital Markets Rules of procedure may also be established with regard to the AGM. The regulatory sources related to capital markets have changed due

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■ election of members of the supervisory board; 1.3 What are the current topical issues, developments, ■ use of profits; trends and challenges in corporate governance? ■ discharge (Entlastung) of the members of the management and the supervisory board; The DCGK has been amended to contribute to more transparency for a better assessment of corporate governance by stakeholders and ■ election of auditors; incorporate international best practice into the German Code for ■ dissolution of the Company (75% majority); listed companies. ■ “say on pay” resolutions; The Commission expanded the Code’s preamble that the principles ■ capital increase and capital decrease (75% majority); of the social market economy require not only legal but also ■ sale of all or most of the Company’s assets (75% majority);

Germany ethically founded, self-responsible behaviour and points out to ■ based on case law (Holzmüller, Gelatine), sale of substantial the leading image of the honourable merchant. Furthermore the assets required for the Company’s business activities as per Commission included that institutional investors are of particular the Company’s purpose set forth in the articles of association importance to Companies. They are expected to exercise their (satzungsmäßiger Zweck); ownership rights actively and responsibly on the basis of transparent ■ issuing of convertible or profit related bonds and sustainability-based principles. (Wandelschuldverschreibungen, Gewinnschuldverschreibung) The Commission continues to rely on the use of reasonable (75% majority); transparency as a solid basis for assessing Corporate Governance. ■ entering into domination or profit pooling agreements Among other things, Companies should therefore disclose the (Beherrschungs– oder Gewinnabführung) (75% majority); principles of the compliance management system so that investors, ■ amalgamation (Eingliederung) (75% majority); as well as the interested public, can gather their own impression ■ squeeze-out if 95% of the shares are held by one shareholder; of the Company’s compliance efforts. The Commission also and recommends greater transparency in the criteria for the composition ■ any transaction under the Transformation Act of the supervisory board. (Umwandlungsgesetz), such as a merger (Verschmelzung), Even though it is often already practised in Germany, the spin-off (Abspaltung), split-up (Aufspaltung), etc. Commission has also dealt with the question of whether the Shareholder resolutions generally require a simple majority, unless Chairman of the supervisory board should be available for dialogue a higher majority is required by law or by the articles of association. with investors in accordance with international best practice. The Commission now suggests, that the Chairman of the supervisory board should be willing to talk to investors about supervisory 2.2 What responsibilities, if any, do shareholders have as board-specific issues within reasonable limits. regards the corporate governance of their corporate entity/entities? The most recent Market Abuse Regulations replaced the essential parts of the Securities Trading Act for ad hoc publicity, directors’ dealings, Shareholders of Companies can exercise their rights as provided for and insider listings through their directly applicable regulations. under statutory law and the articles of association, subject to the The Market Abuse Regulations extends traditional information observance of their general fiduciary duties vis-à-vis the Company requirements of the regulated market to include multilateral trading and the other shareholders. systems, including free circulation and the entry standard, provided that the securities of the issuer have been incorporated into the multilateral trading system. As a result, not only listed stock corporations are 2.3 What shareholder meetings are commonly held and required to keep an insider list, but smaller companies are also covered what rights do shareholders have as regards them? by this obligation. The Market Abuse Regulations also require smaller emitters to report certain transactions to the BaFin and to publish them a) The AGM for Companies must be held within eight months of on an ad hoc basis. Thus, the duty to publish insider information on the end of the financial year. In such AGM the shareholders an ad hoc basis, including self-exemption from the ad hoc obligation, usually adopt resolutions on the: now applies to all stock corporations, regardless of how and where ■ use of the balance sheet profit; their shares are traded. In addition, it is the responsibility of all parties ■ discharge of the members of the management board and to disclose and publicise directors’ dealings. the supervisory board; ■ election of members of the supervisory board; and 2 Shareholders ■ election of auditors. In addition hereto, the AGM may vote on any of the issues set forth under question 2.1 above. 2.1 What rights and powers do shareholders have in the b) If a certain resolution is urgent and the Company cannot wait operation and management of the corporate entity/ until the next AGM, the management board of the Company entities? may convene an extraordinary general meeting (“EGM”) by observing the same formalities and time periods as provided Generally speaking, the shareholders have no influence on for the AGM. EGMs may be held at any time if needed. the management of a Company. However, for certain actions c) In addition to the voting rights of the shareholders stated and transactions which are of major importance and which above, the shareholders have further rights not directly affect the rights of the shareholders, a shareholder resolution related to their voting rights: (Hauptversammlungsbeschluss) has to be adopted in order to allow ■ Shareholders who together hold at least 5% of the the management to carry out such actions or transactions. These Company’s registered share capital may request the include: convening of a general meeting by indicating the purpose ■ amendments of the articles of association (75% majority); of and the reasons for such general meeting. ■ acquisition of own shares by the Company;

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■ Shareholders whose shares constitute 5% of the Company’s registered share capital or the equivalent of 2.4 Can shareholders be liable for acts or omissions of the amount of EUR 500,000 may request that certain the corporate entity/entities? topics are put on the agenda of the AGM. ■ Shareholders who together hold at least 10% of the Generally Shareholders cannot be held liable for acts or omissions Company’s registered share capital or the equivalent of a Company; only in extreme exceptional cases (e.g., abusing the of the amount of EUR 1,000,000 may claim individual legal form to harm creditors) shareholders can be held liable. instead of collective discharge for each member of the management and/or the supervisory board. 2.5 Can shareholders be disenfranchised? ■ The AGM may resolve with a simple majority on the appointment of special auditors (Sonderprüfer) to review certain actions relating to the Company’s incorporation Firstly, shareholders can lose their voting rights if they are forced to Germany or its management, in particular with regards to measures transfer all of their shares to a majority shareholder. Such transfer, of capital increase or decrease. If such resolution is not against consideration of all minority shares to a majority shareholder, adopted by the AGM the competent court has to appoint can be enforced by means of so-called squeeze out proceedings special auditors (i) upon the request of shareholders who which include a squeeze out resolution of the AGM. Such squeeze together hold 1% of the Company’s registered share out proceedings are admissible if the respective majority shareholder capital or the equivalent of the amount of EUR 100,000, owns at least 95% of the stated capital (reduced to 90% in case of a and (ii) if there are facts and circumstances that justify merger – Verschmelzung – under the Transformation Act). reasonable suspicion that substantial infringements of the law or the articles of association have occurred. Secondly, shareholders have to comply with express voting ■ Shareholders who together hold 1% of the Company’s restrictions under sec. 136 of the German Stock Corporation Act. registered share capital or the equivalent of the amount of These voting restrictions inter alia prevent a shareholder from EUR 100,000 may request the competent court to appoint resolving on his own formal discharge (Entlastung) as a member special auditors if there is cause for the assumption that of the management board or as a member of the supervisory board. certain positions in the Company’s approved annual Sec. 136 also prohibits a shareholder from voting on release from financial statements are substantially undervalued or if his own liability, or on the question of whether the Company should the notes (Anhang) thereto do not or not contain all of the invoke claims against him. required statements and the management board has not provided these statements in the AGM in spite of requests from shareholders to that respect. 2.6 Can shareholders seek enforcement action against ■ Any shareholder may file an opposition against a voting members of the management body? proposal of the management with respect to certain topics on the agenda. The Company has to communicate such While members of the management board are liable for damages opposition prior to the AGM to financial institutions and vis-à-vis their Company if they breached any of their duties shareholder associations. The same applies to proposals and obligations, this does not create a direct liability vis-à-vis of shareholders for the election of members of the the shareholders. Consequently, only the Company and not the supervisory board. shareholders may raise damage claims against members of the ■ Any shareholder has the right to speak in the AGM and to management board. request information on matters concerning the Company to the extent that such information is required for the However, by means of a shareholders’ resolution, the general proper evaluation of a topic on the agenda. As the exercise meeting can request that the Company initiates an action against of these rights has been abused by shareholder activists in the members of the management bodies and nominates a special the past, recent case law has reduced the exercise of these representative to represent the Company in this respect (see question rights by granting the chairman of the AGM under certain 2.3 above lit. c). circumstances the possibility to limit the speaking time In case of criminal actions by members of the management board, (Redezeitverkürzung) and, in extreme cases, to terminate the discussions (Schluss der Debatte). Nevertheless, damage claims may be raised by shareholders under general statutory it is important that all questions by shareholders are provisions of the German Civil Code (Bürgerliches Gesetzbuch). properly answered as otherwise resolutions relating to such unanswered questions may be declared void by 2.7 Are there any limitations on, and disclosures the competent court in case of subsequent court actions required, in relation to interests in securities held by initiated by the shareholders. shareholders in the corporate entity/entities? ■ Any shareholder who disapproves of an adopted resolution may give notice of opposition to the notary who takes the Notwithstanding merger control requirements the only additional minutes of the general meeting of listed Companies. Such limitation for the acquisition of shares (securities) in a Company filing usually is the pre-condition for any subsequent court is set forth in the Foreign Trade Act (Außenwirtschaftsgesetz). The action by a shareholder against such resolution. German Federal Ministry of Economic Affairs (Bundeswirtschafts- d) Voting rights may be exercised by proxy. Such proxy is usually ministerium) has the right to restrict or prohibit an acquisition by provided to banks and financial institutions. Proxies may a non-EU/EFTA investor of 25% or more of the voting rights in be submitted electronically to the Company. Furthermore, voting rights can be exercised in writing (Briefwahl) or enterprises registered in Germany based on public order or security by electronic communication if the Company’s articles of grounds. association allow for such possibilities. General electronic The German Federal Ministry of Economic Affairs carried out participation in the AGM is also possible if provided for in about 335 test procedures between 2008 and October 2016, but the the articles of association. proposed acquisition was prohibited in any event. This changed last e) Listed Companies have to publish an invitation to the AGM, year. It involved Grand Chip Investment GmbH, a 100% indirect as well as all documents and information relating thereto, on subsidiary Company to the Chinese Fujian Grand Chip Investment the Company’s website and on EU-wide media forum.

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Fund LP that made a voluntary public offer to take over all the female. Since the last amendment of the Stock Corporation Act the shares of the German Aixtron SE. The German Federal Ministry number of board members only has to be devisable by three if so of Economic Affairs suddenly withdrew the certificate of non- prescribed by law in co-determined supervisory boards. objection, although it had given permission for the acquisition at SEs may adopt either a dual board system as described above or a first. This was because the USA stated that the planned transaction monistic board system with one administrative board (Verwaltungsrat) could have an impact on the national security of the USA. After consisting of executive and non-executive directors. a veto by the US President regarding the sale of the US branch of Aixtron, the Chinese bidder withdrew from the transaction. Despite these developments, it is unlikely that there will be any significant 3.2 How are members of the management body appointed and removed? restrictions on the acquisition of German companies by non-EU

Germany investors in Germany. Rather, the discussion focuses on the ability of the state to intervene if national security interests are concerned. The members of the management board are appointed and can be In other cases, the existing possibility of the state to intervene will removed by the supervisory board if there is just cause. Just cause most likely be handled restrictively in the future. can be a gross breach of duties, inability to adequately manage the Company in an orderly manner or a vote of no-confidence by Otherwise, investors are free to acquire shares (securities) in the general meeting. The term of office can be up to five years. Germany. Such acquisitions, however, are subject to notification The supervisory board is also responsible for the negotiation and duties both vis-à-vis the Company and vis-à-vis the BaFin. Under the conclusion of their employment agreements. Stock Corporation Act, as soon as an enterprise has acquired more than 25% of the shares in a Company, this has to be immediately The shareholder representatives in the supervisory board are communicated to the Company in writing. The same applies if an appointed by the AGM. The employee representatives in co- enterprise has acquired a majority participation in a Company. determined Companies are elected by the employees. Under the Securities Trading Act anyone who reaches, surpasses or decreases 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% 3.3 What are the main legislative, regulatory and other of the (direct or indirect) voting rights in a listed Company has to sources impacting on contracts and remuneration of notify such listed Company, as well as the BaFin without undue members of the management body? delay, but at the latest within four trading days. The same (with the exception of the 3% threshold) applies to the acquisition of financial The remuneration of the members of the management board is dealt instruments which grant the holder the right to acquire issued shares with in the Stock Corporation Act and the DCGK. in a Company. The remuneration of the members of the management board must Furthermore, reaching the threshold of 30% of the voting rights be proportionate to their duties and the situation of the Company. triggers the obligation to launch a mandatory public offer to acquire The compensation for the supervisory board members must be set all shares. up in the articles of association or approved by the general meeting. Not fulfilling the aforementioned duties may lead to a suspension The total remuneration paid to members of the management board of the rights attached to the affected shares (e.g., voting and, under and the supervisory board is to be disclosed in the annual report certain circumstances, dividend rights). In cases of wilful misconduct (Geschäftsbericht). Further, the individual remuneration of the or gross negligence this suspension may continue for another six management board members must be disclosed, unless the general months after all notification obligations are complied with. meeting decided – with 75% of capital represented at the time of voting – to opt out of such disclosure. The DCGK recommends that the remuneration of the management 3 Management Body and Management board members shall comprise fixed and variable elements to incentivise a sustainable entrepreneurial management. The DCGK 3.1 Who manages the corporate entity/entities and how? further recommends determining limits for both the total amount of the remuneration and its variable elements. In service agreements with management board members severance payments inclusive of German Companies have a dual board system consisting of a ancillary services in the case of premature termination should not management board and a supervisory board. The Company is exceed the value of two years’ compensation and the remaining term managed by the management board. The management board is of the service agreement. controlled by the supervisory board. The AGM may vote on the remuneration system of the management The members of the management board manage the Company board. It may not, however, vote on the individual terms and collectively and they are jointly responsible. Usually, specific conditions of the employment agreements of the members of the functions are allocated to the individual members of the management management board. A statutory right of the AGM to vote on the board (CEO, CFO, COO, etc.). Nevertheless, the entire management remuneration system was discussed within the last amendment of board remains generally responsible and liable for any acts and the Stock Corporation Act but was ultimately rejected. European omissions of its individual members. legislators are planning modifications hereto. The delegation of functions to committees is not common for the management board but rather the supervisory board (personnel committee, audit committee, etc.). 3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by The supervisory board has to consist of at least three members. members of the management body in the corporate Subject to the co-determination rules, the maximum number varies entity/entities? between nine and 21, depending on the registered share capital of the Company and on the number of employees (for details see There is no limitation on the amount of shares that may be owned question 5.2 lit. a below). In co-determined supervisory boards of by members of the management bodies. However, the voting rights listed Companies at least 30% of the board members have to be attached to those shares cannot be exercised on certain agenda items

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(e.g., ratification of their own acts or the acts of the relevant member’s According to our perception, the risk of liability for board members board or waiver of such member’s liability vis-à-vis the Company). has increased in recent years. This is due to changes to statutory Members of the management board and the supervisory board have law in recent years and, as a consequence, more intense shareholder to report any transactions relating to shares or related financial activism which may result in special audits regarding management instruments of their Company to the Company and the BaFin within conduct (Sonderprüfungen) and the establishment of special five working days. The same applies to persons closely affiliated to external shareholder representatives who may have investigative members of the management board and the supervisory board. powers and may, on behalf of the Company and/or shareholders, prepare damage claims against managers. Any such information has to be published immediately by the Company and such publication has to be reported simultaneously Since January 2016 listed Companies with co-determined by the Company to the BaFin. supervisory boards are obliged to have a quota of female supervisory board members of at least 30%. Many German Companies Germany The use of insider information for any such transactions is strictly traditionally have management bodies with a technical educational prohibited and constitutes a criminal offence. background, in which women are currently still underrepresented. Nevertheless, the percentage of women in supervisory boards has 3.5 What is the process for meetings of members of the been continuously increasing in recent years and in 2016 for the first management body? time reached 30% among the DAX 30 Companies.

The process for meetings of members of the management board is 3.8 What public disclosures concerning management not stipulated by law but is usually set forth in the rules of procedure body practices are required? for the management board. In urgent cases, however, the members may convene informally or via telephone or video conferences. The business activities of the management board on behalf of the The supervisory board of a listed Company has to convene at least Company are usually described in and covered by the Company’s twice every six months. The meetings of the supervisory board annual report. The annual report contains information on the are convened by its chairman. Upon reasonable request of the remuneration of the management board (see question 3.3 above) management board or any member of the supervisory board, the and any specific activities beyond the ordinary course of business chairman must convene a meeting. The rules of procedure may transactions of the Company. stipulate further requirements. An annual declaration (Entsprechenserklärung) has to be issued and such declaration has to include disclosure as to whether the listed 3.6 What are the principal general legal duties and Company has complied with the rules of the DCGK, and if not, liabilities of members of the management body? which recommendations have not been applied and why. In the case of listed Companies it is the obligation of the management The members of the management board are responsible for any and board to publish any insider information (i.e. non-public information all business activities of the Company. In this capacity they have to that may have an influence on the stock exchange valuation of the apply the due diligence of a proper and diligent manager. Members shares of such listed Company). of the management board are deemed to act in compliance with their obligations if, in case of an entrepreneurial decision, they can reasonably be assumed to be acting on the basis of adequate information and in the 3.9 Are indemnities, or insurance, permitted in relation to best interest of the Company (business judgment rule). members of the management body and others? Members of the management board who violate their obligations If board members are held liable by third parties, the Company may are jointly and severally (gesamtschuldnerisch) liable vis-à-vis the only indemnify them if they are not liable to the Company for the Company for any damages resulting therefrom. same reason. D&O insurance policies are common both for members of the 3.7 What are the main specific corporate governance management board and the supervisory board. D&O insurance responsibilities/functions of members of the policies taken out by the Company for members of the management management body and what are perceived to be the key, current challenges for the management body? board have to provide for a minimum deductible (Selbstbehalt) of 10% of the potential damage up to at least 150% of the annual fixed remuneration of the respective member of the management The management board is responsible for the introduction, board. Management board members are able, however, to take out implementation and supervision of a risk management system additional D&O insurance coverage to cover such potential damage, within the Company in order to make sure that any material adverse deductible at their own expense. changes to the economic and financial positions of the Company are identified at an early stage so that appropriate measures to avoid or On the basis of a general meeting’s resolution the Company can mitigate the consequences of such material adverse changes can be waive claims against the board members after a period of three years adopted as quickly as possible. has lapsed since the breach of duty occurred, unless a minority of 10% of the share capital objects to such resolution. The importance of compliance of the Company with regulatory provisions, in particular avoidance of any criminal offences of its managers and employees has dramatically increased in the light 4 Other Stakeholders of recent corrupt practices and unauthorised use of personnel data detected and investigated in major German Companies. Therefore, it is now widely acknowledged that, also with respect to corporate 4.1 What, if any, is the role of employees in corporate compliance, sufficient and adequate measures have to be adopted governance? or existing measures have to be improved and enhanced by the management board of Companies. Employee co-determination plays a substantial role in corporate

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governance. Employees can exercise their rights in corporate a wide range of areas such as culture, sports, healthcare, scientific governance in three bodies: the supervisory board; the economic research and development, handicapped persons, etc. committee (Wirtschaftsausschuss); and the works council (Betriebsrat). In addition to the above-mentioned laws and regulations, there a) Supervisory board is no specific mandatory law on corporate social responsibility In Companies with at least 500 employees, one third of (“CSR”). In practice, however, Companies align with national and the members of the supervisory board has to consist of international initiatives that are dedicated to corporate responsibility representatives elected by the Company’s employees. If and sustainability. Usually, reports on the Company’s activities in the Company has 2,000 or more employees, 50% of the the area of CSR are published on the Company’s website. members of the supervisory board are elected by the Company’s employees, i.e. a co-determined supervisory

Germany board (mitbestimmter Aufsichtsrat). 5 Transparency and Reporting Resolutions in a co-determined supervisory board are adopted by simple majority of the votes cast. In case of a deadlock, the chairman of the supervisory board has two votes, i.e. a 5.1 Who is responsible for disclosure and transparency? casting vote. b) Economic Committee The management board has a general obligation for due and The role of the economic committee is to regularly discuss timely disclosure and transparency. It may, however, delegate this economic matters relating to the Company with the obligation to specific departments within the Company which report management and to inform the works council on any such to the management board. matters. The management board has the obligation to regularly inform the economic committee on such matters. The members of the economic committee are elected by the 5.2 What corporate governance related disclosures are employees. required? c) Works Council Companies have to publish their annual financial statements The works council oversees the compliance of general together with the reports of the management board (Lagebericht) provisions on health, safety, working conditions, etc. with and the supervisory board (Bericht des Aufsichtsrats). Furthermore, respect to employees. Furthermore, the works council has co-determination and information rights on various issues half-yearly and quarterly financial reports have to be published. regarding the Company’s workforce, its working conditions The annual financial statements as well as substantial additional and any activities of the Company’s management that might information on the Company or the group of Companies is contained lead to mass dismissals. in the annual report published by all listed Companies. The members of the works council are elected by the As for further information duties, reference is made to questions 2.3, employees. 2.7, 3.4 and 3.8 above.

4.2 What, if any, is the role of other stakeholders in 5.3 What is the role of audit and auditors in such corporate governance? disclosures?

Nowadays the whole stakeholder-concept (the identification, the The annual report, as described in question 4.2 above, also contains analysis and the handling of stakeholders) has a huge impact on the certificate of the auditors. Auditors are appointed by resolution corporate governance. of the AGM (see question 2.1 above). The details and conditions Companies show great interest in potential opportunities on the one of their instruction are dealt with by the supervisory board (usually hand and risks on the other hand as stakeholders have an influence the audit committee). Thus, the supervisory board is the contractual on the company, the market and the general conditions. partner of the auditors with respect to their engagement. This applies not only to the stakeholders already mentioned above, As regards the independence of the auditors, the Commercial Code but, for example, also to suppliers, clients, competing companies, provides that an audit cannot be carried out by auditors who: society in general and the state. All individual groups of stakeholders ■ hold shares or other financial interests in the Company; pursue their own interests and approach the company accordingly. ■ are members of the management board or the supervisory On the basis of a stakeholder-concept, every company must practise board or employees of the Company or any of its affiliates; or stakeholder-management in order to minimise risks. It might be ■ have assisted the Company in its accounting or preparation useful for companies in order to focus their purpose, their objectives of the annual financial statements to be audited, responsibly and strategy on meeting the interests, expectations and demands carried out internal control measures within the Company, of key and influential stakeholders. Therefore it is important for provided management or financial services assistance or a company to know the relevant stakeholders and to analyse their actuarial or valuation services which have a substantial effect on the annual financial statements to be audited; these expectations, interests and requirements. restrictions do not apply if these activities are only of minor importance. 4.3 What, if any, is the law, regulation and practice Auditors are also barred if more than 30% of their professional concerning corporate social responsibility? revenue during the last five years was generated from the Company or companies in which the Company holds more than 20% of the Germany is a highly regulated country, in particular concerning shares or if this percentage is expected in the relevant business year. environmental protection, labour law and social security issues, Further restrictions apply to listed Companies. and Companies have to operate within this tight legal framework. Nonetheless, many Companies voluntarily sponsor and assist The auditors must comment in their auditor’s report on the way various charity organisations and charitable purposes which fit into in which the accounts have been prepared and state whether the the Company’s specific profile. Such sponsoring activities cover financial accounts have been prepared in line with the applicable

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rules and regulations, and whether the annual accounts give a “true a corporate action timetable; and (iii) the annual declaration of the and fair” view of the state of affairs of the Company. management board and supervisory board regarding the compliance with the recommendations of the DCGK, have to be published by listed Companies. There are no further statutory publication 5.4 What corporate governance information should be published on websites? requirements with regards to the Company’s website. Most listed Companies, however, voluntarily report corporate governance issues that need to be published in the Electronic Federal Gazette As regards a Company’s obligation to publish corporate governance (Elektronischer Bundesanzeiger) and on their website. information on its website, reference is made to the last paragraph of question 2.3 lit. e above. Furthermore: (i) ad hoc disclosures; (ii) Germany

Moritz Kopp, LL.M. Dr. Markus Ley BEITEN BURKHARDT BEITEN BURKHARDT Ganghoferstrasse 33 Ganghoferstrasse 33 80339 Munich 80339 Munich Germany Germany

Tel: +49 89 35065 1303 Tel: +49 89 35065 1288 Email: [email protected] Email: [email protected] URL: www.bblaw.com URL: www.bblaw.com

Moritz Kopp is Associate at BEITEN BURKHARDT’s Munich office and Dr. Markus Ley is Associate at BEITEN BURKHARDT’s Munich member of the Corporate/M&A practice group. His area of activity office and member of the Corporate/M&A practice group. His area comprises advising clients on M&A-transactions, reorganisation, of expertise comprises M&A, reorganisations as well as commercial commercial law matters as well as related litigation, arbitration and law. He particularly advises his national and international clients on all mediation. He particularly advises his national and international areas of corporate and commercial law matters. clients on issues relating to limited liability companies and joint-stock Markus Ley studied law at the University of Bonn and was admitted companies, general contract law and private international law. to the German Bar in 2012. Before joining BEITEN BURKHARDT he Moritz Kopp studied law at the Ludwig-Maximilians-University of worked for another international law firm. While writing his doctoral Munich, the East China University of Political Science and Law thesis on accounting and tax law, he worked for two international law (ECUPL, China, Shanghai) and the National University of Singapore firms in Dusseldorf. Prior to his law studies, Markus Ley completed (NUS, Singapore). In 2014 he earned a master of laws degree from his apprenticeship as a banker at Commerzbank AG. He has been the NUS (LL.M., International Business Law). Before joining BEITEN working with BEITEN BURKHARDT since 2015. BURKHARDT, Moritz Kopp worked for an international law firm in Singapore. He has been working with BEITEN BURKHARDT since 2014.

BEITEN BURKHARDT is an independent international law firm with offices in Germany, Russia, China and Belgium. We advise medium-sized companies and large international groups, as well as foundations and public sector clients on all legal aspects of their business activities. For our success we rely on the quality of our people and the long-term relationships with our clients, which is the result of our deep understanding of their businesses. We add value by developing tailor-made and innovative solutions for legal problems and cooperate closely with our clients to implement them. As an independent law firm we maintain an informal network of first-class business law firms all over the world. This network is based on years of joint working experience as well as shared common values and high quality standards. It enables us to provide our clients with a seamless high quality service wherever they do business. A number of high-profile clients have appointed us along with our international network for their international panels and retain us to advise on complex international transactions.

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Hong Kong

Ashurst Hong Kong Joshua Cole

1 Setting the Scene – Sources and 2 Shareholders Overview 2.1 What rights and powers do shareholders have in the 1.1 What are the main corporate entities to be discussed? operation and management of the corporate entity/ entities?

This chapter focuses on limited liability companies which are Generally shareholders entrust and delegate the day-to-day incorporated in Hong Kong and corporations which are listed on operation and management of their companies to the Board of the Main Board of the Hong Kong Stock Exchange (irrespective of Directors, thereby limiting the shareholder’s own day-to-day role. whether they are incorporated in Hong Kong). This is governed by the Articles of Association of the relevant company, but subject to certain key rights and powers given to 1.2 What are the main legislative, regulatory and other shareholders under the Companies Ordinance (for Hong Kong corporate governance sources? Companies) and the Listing Rules (for companies listed on the Hong Kong Stock Exchange). For example, the Model Articles (which are The new Companies Ordinance (Cap 622) came into effect in 2014 frequently adopted by Hong Kong companies, or used as the basis and replaced most of the provisions of the previous Companies for their modified Articles of Association) provide that a company’s Ordinance (Cap 32) (often referred to as the “Old Companies shareholders may direct the Board by special resolution. Even Ordinance”). However, certain provisions of the Old Companies where the Articles of Association do not give the shareholders such Ordinance remain and that ordinance was renamed the “Winding-up power, under Common Law the Company will be bound by matters and Miscellaneous Provisions Ordinance” (Cap 32). The Securities which are the subject of the unanimous consent or approval of the and Futures Ordinance (Cap 571) also imposes certain disclosure shareholders. obligations in respect of holdings of securities. In addition, for companies listed on the Hong Kong Stock In addition, governance for all Hong Kong companies is subject to Exchange, under the Listing Rules shareholders must approve various Common Law rules. certain transactions before they can proceed, such as acquisitions Listed companies in Hong Kong are also subject to the Hong Kong and disposals of a certain size by reference to pre-set calculation Listing Rules, the Corporate Governance Code and the Takeovers methods and transactions with related parties including directors Code. and their associates.

1.3 What are the current topical issues, developments, 2.2 What responsibilities, if any, do shareholders have as trends and challenges in corporate governance? regards the corporate governance of their corporate entity/entities? There is currently debate in Hong Kong as to whether companies listed on the Hong Kong exchange should be permitted to list There are no positive obligations imposed on shareholders in different classes of shares which would enable founding shareholders respect of governance matters. Instead, shareholders have powers to exercise a higher degree of control than their shareholding would in respect of certain matters (see question 2.1 above) and certain otherwise permit. This is permitted on a number of other exchanges remedies in the event that directors are not exercising their duties outside of Hong Kong and is understood to be the reason that a and powers properly. The most common means for a shareholder to number of PRC companies (especially in the tech sector) have exercise power in respect of governance is by exercising its vote for chosen to list on other exchanges (such as the NYSE). the appointment (or removal) of directors to the company’s Board. There is also concern from some areas that many companies in Hong Kong are run more as “family businesses” with directors not 2.3 What shareholder meetings are commonly held and fully appreciating their duties and limitations as directors or their what rights do shareholders have as regards them? obligations to the company. Unless exempted, a company must hold its Annual General Meeting (“AGM”) at least once a year. The time period in which the AGM must be held differs for private companies and public companies

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(which for this purpose is deemed to include subsidiaries of public In addition, a shareholder must disclose when it becomes interested companies). A private company must hold its AGM within nine in 5% or more of the shares in a listed company, when they cease to months of the end of its financial year, whereas a public company hold a 5% interest or when a party who holds at least a 5% interest must hold its AGM within six months. increases or decreases their percentage interest. Shareholders meetings for public companies must be held to approve certain transactions under the Listing Rules (such as 3 Management Body and Management material acquisitions and disposals or related party transactions). This occurs frequently in Hong Kong. Shareholders representing at least 5% of voting rights may request 3.1 Who manages the corporate entity/entities and how? an extraordinary general meeting. If the Board fails to call such

a meeting within certain timeframes, then at least 50% of those Management of a company vests in the Board of Directors. Hong Kong requesting the meeting (measured by voting rights) may themselves For listed companies the Corporate Governance Code requires that, call a general meeting. in addition to any executive directors or directors with controlling The company must provide at least 21 days’ notice of the AGM and equity interests, a company must have independent non-executive at least 14 days’ notice of other general meetings. directors. The Listing Rules provide that independent non-executive directors comprise at least one-third of the Board.

2.4 Can shareholders be liable for acts or omissions of Generally, companies are headed by a chairman who is responsible the corporate entity/entities? for leadership of the Board and ensuring the Board’s effectiveness, together with a chief executive who is responsible for day-to-day The liability of shareholders is limited to their equity commitment business operations of the company. The Corporate Governance to the company. A court would only seek to “pierce the corporate Code provides that the roles of chairman and chief executive should veil in” exceptional circumstances. For example where the relevant not be combined, other than in exceptional cases. shareholders were, in fact, controlling the company and utilising The Board will typically delegate certain deliberative activities to that control for fraudulent purposes. Committees of the Board (although it is the Board that remains A shareholder may also have the same liability as a director if the responsible for ultimate decisions). The Corporate Governance shareholder is in fact a “shadow director” (which occurs where it Code requires that (for a listed company) there to be at least: can be shown that the directors of the company are in fact acting in ■ a nomination committee, to lead the process for Board accordance with, or are accustomed to be acting in accordance with, appointments; that shareholder’s directions). ■ a remuneration committee, to make recommendations to the Chairman as to the appropriate remuneration of directors; and 2.5 Can shareholders be disenfranchised? ■ an audit committee, with wide responsibilities including monitoring the integrity of the company’s financial statements, reviewing internal financial controls and broader A shareholder can only be disenfranchised in very limited internal controls and risk management systems (unless this is circumstances such as pursuant to a scheme of company arrangement expressly addressed by a separate risk committee), as well as which has been approved by the requisite number of shareholders or the company’s relationship with its auditors. where a bidder has acquired at least 90% of voting rights under a In addition to the delegation of certain deliberative activities to mandatory takeover offer. committees, a Board will delegate certain authority to the managers Shareholder rights can be varied by a special resolution of the of the company (such as the Chief Executive Officer) within which relevant class of shareholders. they may manage the day-to-day affairs of the company. Such managers report to, and are subject to direction by, the Board. 2.6 Can shareholders seek enforcement action against members of the management body? 3.2 How are members of the management body appointed and removed? The directors’ duties are to the company, rather than to individual shareholders. However, in some limited circumstances a shareholder Shareholders ultimately control Board appointments (through of a Hong Kong company may bring a “derivative action” under voting at the AGM). Common Law against a director where the company has failed to do However, for listed companies (and depending on the company’s so. Whether a shareholder is able to do this in respect of a non-Hong Articles of Association, certain private companies) Board Kong company which is listed on the Hong Kong Stock Exchange is appointments during the year may be made by the Board itself (upon a question of the law of incorporation of that company. the recommendation of the nomination committee). The Corporate Shareholders also have a statutory right to seek the leave of the court Governance Code provides that shareholders of listed companies to bring a derivative action against the company. must then have the opportunity at the next AGM, by way of ordinary resolution, to vote for, or against, the election of any director newly 2.7 Are there any limitations on, and disclosures appointed by the Board during the course of the preceding year. required, in relation to interests in securities held by Each non-executive director of a listed company must be re-elected shareholders in the corporate entity/entities? at regular intervals (typically of no more than three years). The Corporate Governance Code also contains general provisions Subject to certain exceptions (such as creeping acquisitions), under designed to ensure formal, rigorous and transparent procedures for the Takeovers Code, a shareholder cannot acquire voting interests elections and re-elections of directors. These include requirements of 30% or more (including the interests of any concert party) in for a nomination committee, whose role it is to lead the process for a public company without being required to make a Mandatory Board appointments and make recommendations to the Board. Takeover Offer.

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The Articles of Association commonly provide for situations when fiduciary duties that they owe to the companies. These duties are the the office of director must be vacated. This may include where same for, and apply to both, executive and non-executive directors a director’s resignation is requested by all other directors. The and derive from longstanding common law principles. Some of power to remove directors lies generally with shareholders who these duties were codified in the new Companies Ordinance, but may, subject to giving the requisite notice, by ordinary resolution this codification not intended to affect the nature of the duties owed at a general meeting remove a director of a company. In practice, by directors. if enough shareholders come together expressing dissatisfaction Directors are required to conduct themselves as a reasonably diligent with a director and request his removal, any company will have to person who has (1) the general knowledge, skill and experience consider this, and it is a distinct possibility that a Board decision reasonably expected of a person holding their position within the will be taken to ask the director to resign, so that a formal and public company, and (2) the general knowledge and skills that the particular shareholder vote on a resolution is avoided. director actually has. In addition, directors are required: Hong Kong ■ to act in good faith for the benefit of the company as a whole; 3.3 What are the main legislative, regulatory and other ■ to use their powers for a proper purpose for the benefit of sources impacting on contracts and remuneration of members (or shareholders) as a whole; members of the management body? ■ not to delegate powers except with proper authorisation; Remuneration of executive and non-executive directors of private ■ to exercise independent judgment; companies will typically be regulated by the Articles of Association ■ to exercise care, skill and diligence; of the company. ■ to avoid conflicts between personal interests and interests of For listed companies, the Corporate Governance Code provides that the company; remuneration of directors should be determined by a process under ■ not to enter into transactions in which they have a conflict of which the Remuneration Committee consults with the chairman interest, except in accordance with the requirements of the law; and/or chief executive of the company. The Remuneration ■ not to use their position as director to gain advantage; Committee should make recommendations to the Board and review ■ not to make unauthorised use of the company’s property or and either approve the remuneration packages of executive directors information; (acting under authority delegated to it by the Board) or make ■ not to accept personal benefit from third parties because of recommendations to the Board as to such packages. their position as director; ■ to comply with the company’s Articles of Association and 3.4 What are the limitations on, and what disclosure is resolutions; and required in relation to, interests in securities held by ■ to keep accounting records. members of the management body in the corporate entity/entities? Directors may be liable to the company for breaches of these duties and may be exposed to personal liability for debts incurred by the company incurred when the company is unable to pay its debts. Directors are required to disclose any conflicts of interest. If expressly permitted by the Articles of Association, directors of private companies may participate in the relevant decisions once 3.7 What are the main specific corporate governance they have made such disclosure. responsibilities/functions of members of the management body and what are perceived to be the For listed companies, the Corporate Governance Code requires key, current challenges for the management body? directors to comply with, and for the company to make disclosures in its annual report in accordance with, the Model Corporate The Board of Directors is responsible for: Governance Report, which is set out in the Listing Rules. The ■ determining the long-term strategic objectives and priorities Corporate Governance Code recommends that companies disclose of the company; in their annual report the number of shares held by directors and senior management. In addition, it is required to include information ■ appointing senior management; about its policies on securities transactions by its directors and ■ monitoring the company’s progress towards its objectives; each director’s compliance with those policies. The annual report ■ monitoring the company’s compliance with the policies set should also include certain details relating to the Chairman, Chief by the Board; and Executive and any non-executive directors. Information about a ■ providing an account of the company’s activities to range of other matters must also be included. shareholders. Directors’ powers and responsibilities are collective. They act as 3.5 What is the process for meetings of members of the a Board, rather than as individuals. It is the Board, not individual management body? directors, that determines what may be done in the name of the company, however in order to do this effectively the Board will Board meetings are called whenever required, by giving notice to delegate certain matters to committees and senior executives. all directors as required by the company’s Articles of Association. The Articles of Association will also specify the quorum and notice 3.8 What public disclosures concerning management requirements for meetings. body practices are required? There is no statutory minimum number of Board meetings. In addition to the routine filings regarding various changes to the company (such as changes to share capital or registered office) the 3.6 What are the principal general legal duties and liabilities of members of the management body? company must make relevant information available to the public registers of shareholders, directors and secretaries, debenture holders (if any), charges and (for listed companies) directors’ interests. Directors of Hong Kong companies are subject to overarching

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The Board must also ensure that the company files its Annual Accounts, which includes a Directors’ Report with respect to the 4.3 What, if any, is the law, regulation and practice profits or loss of the company for the financial years and sets out concerning corporate social responsibility? the state of the company’s affairs. In addition, listed companies are required to include in the accounts: There is no law or regulation imposing corporate social responsibility ■ details of the directors and senior management; obligations on companies in Hong Kong. ■ directors’ emoluments on a named basis and senior management compensation; 5 Transparency and Reporting ■ details of the company’s pension scheme and costs; ■ details of major customers and suppliers; 5.1 Who is responsible for disclosure and transparency? ■ management discussion and analysis; and Hong Kong details of reserves available for distribution to shareholders. ■ The Board as a whole has collective responsibility for disclosure and transparency, although they may choose to discharge the 3.9 Are indemnities, or insurance, permitted in relation to responsibility by delegating particular tasks to specific members of members of the management body and others? the Board, committees or senior management. Some Boards have established “disclosure committees” with delegated responsibility Indemnities are permitted, however there is a prohibition on for disclosure related matters. the company providing indemnities for directors against claims arising from negligence, default, breach of duty or breach of trust. 5.2 What corporate governance related disclosures are Indemnities against claims by third parties which do not arise from required? such acts are permitted, as are indemnities against the costs of defending proceedings. All companies are required to provide the company’s financial A court may grant relief from a prohibition on indemnities where statements, annual report and auditors report at the AGM. it is satisfied that the director has acted honestly and reasonably For public companies, in addition to the financial matters contained and “ought fairly be excused” having regard to the relevant the annual report, directors are required to give an account of the state circumstances. of affairs of the company and disclose certain information about the A company may purchase Directors and Officer Insurance (and this directors, their interests and their participation in the management is a recommendation in the Corporate Governance Code). of the company and their compliance with the company’s securities trading policy. 4 Other Stakeholders 5.3 What is the role of audit and auditors in such disclosures? 4.1 What, if any, is the role of employees in corporate governance? All companies are required to appoint auditors and to have their financial statements audited by the company’s auditors. The auditor Employees that are not officers of a company do not generally have is required to state whether the financial statements were prepared in any formal corporate governance responsibilities. compliance with the Companies Ordinance and give a true and fair Under employment law principles, general duties owed by view of the state of the company’s affairs. employees to the company (as their employer) will generally include Auditors have a right to access the accounting records of the compliance with the company’s corporate governance policies and company at all times and to require explanation from the company’s systems. officers. They are also entitled to notice of, and a right to attend, all general meetings of the company. They are entitled to speak at 4.2 What, if any, is the role of other stakeholders in any general meeting in relation to matters which relate to them as corporate governance? auditors.

The company’s Company Secretary is not usually involved in 5.4 What corporate governance information should be commercial decisions in respect of the company but provides published on websites? administrative support to enable the decisions of the Board or of the shareholders to be carried out. Any announcement or notice which a listed companies is required All companies are required to appoint an auditor (see question 5.3 to make or publish must also be submitted in electronic form for below). publication on the Hong Kong Stock Exchange’s website.

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Joshua Cole Ashurst Hong Kong 11/F Jardine House 1 Connaught Place Hong Kong

Tel: +852 2846 8989 Email: [email protected] URL: www.ashurst.com

Joshua is a partner based in Hong Kong who specialises in mergers Hong Kong and acquisitions, joint ventures and private equity transactions throughout Asia. Joshua has advised on a number of high-profile international acquisitions, disposals and joint ventures throughout the region and across a range of industry sectors, including financial services, telecommunications, pharmaceuticals, energy and resources and retail. He advises both public and private companies on Hong Kong corporate governance matters and also speaks on the subject regularly at seminars and training workshops for directors.

Ashurst is a leading global law firm with a rich history spanning almost 200 years. Our in-depth understanding of our clients and commitment to providing exceptional standards of service have seen us become a trusted adviser to local and global corporates, financial institutions and governments on all areas of commercial law. Our people are our greatest asset. We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need. We currently have 25 offices in 15 countries and a number of referral relationships that enable us to offer the reach and insight of a global network, combined with the knowledge and understanding of local markets. With over 400 partners and a further 1,450 lawyers working across 10 different time zones, we are able to respond to our clients wherever and whenever they need us. Our clients value us for being approachable, astute and commercially minded. As a global team, we have a reputation for successfully managing large and complex multi-jurisdictional transactions, disputes and projects, and delivering outstanding outcomes for clients.

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India Kosturi Ghosh

Trilegal Wiseroy Damodaran

the minority shareholders. This issue is present in three main 1 Setting the Scene – Sources and types of Indian companies: (i) public sector undertakings, which Overview have the government as a majority shareholder; (ii) trans-national corporations with a foreign parent as the majority shareholder; and (iii) family-owned business conglomerates with large promoter 1.1 What are the main corporate entities to be discussed? holdings. The regulatory response to this problem has largely favoured moving towards a regime of greater disclosure and This chapter focuses on Indian public companies listed on the mandating an independent board structure. Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). All references to ‘companies’ in this chapter are to BSE and The issue of excessive executive compensation and enormous NSE listed Indian companies. The information in this chapter is up severance payments in Indian companies has also arisen. Certain to date as of March 2016. shareholders have been quite vigilant in questioning the board of directors (Board) on such issues as such decisions are being taken by the Board without maintaining transparency and making adequate 1.2 What are the main legislative, regulatory and other disclosures to the shareholders. This was recently experienced by corporate governance sources? Infosys where the shareholders questioned the steep increase in the salary of the chief executive officer and generous severance pay- The Companies Act 2013 (Companies Act) is the principal outs to the former chief financial officer and legal counsel of the legislation governing companies in India. company. The severance payments were allegedly a clear departure In addition to the Companies Act, companies are governed by from past practice and provisions of the employment contracts the Securities and Exchange Board of India Act 1992 (SEBI Act) which envisaged a three month severance pay-out. and various regulations notified under the SEBI Act, particularly While corporate governance issues have been on the rise, regulators the SEBI (Listing Obligations and Disclosure Requirements) like the Securities and Exchange Board of India (SEBI) have played Regulations 2015. Companies are also bound by the standard listing a more active role recently to ensure compliance with corporate agreement of BSE/NSE. governance norms. This was observed when SEBI suo motto sought Companies are required to comply with accounting standards issued explanations from listed entities of the TATA Group based on the by the Institute of Chartered Accountants of India, the national letters sent by Cyrus Mistry (former chairman of Tata Sons Limited) professional accounting body of India. The Companies Act requires and Nusli Wadia (an independent director of Tata Sons Limited), the financial statements of a company to be prepared in accordance alleging mismanagement and breach of insider trading regulations. with the prescribed accounting standards to provide a true and fair view of its state of affairs. 2 Shareholders Companies are also required to comply with the secretarial standards issued by the Institute of Company Secretaries of India, an organisation for the regulation and development of the profession 2.1 What rights and powers do shareholders have in the of company secretary in India. operation and management of the corporate entity/ The Ministry of Corporate Affairs of the Government of India has entities? also prescribed the Corporate Governance Voluntary Guidelines 2009 in the wake of the global financial crisis and large format While shareholders are not entitled directly to participate in the corporate failures in India. These Guidelines are voluntary in operation and management of companies, they have the right to: nature and intend to develop a transparent, ethical and responsible ■ appoint and remove directors from the Board; corporate governance framework in India. ■ attend and vote at general meetings of the company; ■ receive copies of the company’s financial statements; 1.3 What are the current topical issues, developments, ■ inspect statutory registers and minutes books maintained by trends and challenges in corporate governance? the company; and ■ initiate winding-up of the company. A key problem regarding corporate governance in India revolves Shareholders’ resolutions are generally of the following types: (i) around the conflicting interests of the dominant shareholdersversus ordinary resolution, for which the number of votes supporting the

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resolution must exceed the number of votes opposing the resolution; At meetings, shareholders have the right to do the following: and (ii) special resolution, where the number of votes supporting the ■ ask questions; resolution must be at least three times the number of votes opposing ■ appoint a proxy, i.e. an agent to attend and vote at meetings the resolution. on their behalf; Companies are required to obtain prior approval of the shareholders ■ seek appointment as a director of shareholders or elect a for certain matters such as appointment of directors, alteration small shareholder director by nominating a representative; of constitutional documents, issue of securities by the company, ■ inspect company documents such as the register of shareholders/ declaration of final dividend, winding-up of the company, etc. directors, annual returns, constitutional documents, etc.; and ■ meet the stakeholders’ relationship committee for resolution India 2.2 What responsibilities, if any, do shareholders have as of grievances. regards the corporate governance of their corporate entity/entities? 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? Shareholding is typically not associated with statutory duties regarding the corporate governance of a company. For instance, Indian law considers a company to be a distinct legal entity from while shares enable their holders to vote at a shareholders’ meeting, its shareholders and separates liability for the acts or omissions of there is no obligation to exercise that right. a company from that of its shareholders. Shareholder liability is However, in the event that (i) a company’s affairs are being conducted capped to the face value of the shares held by them in the company. in a manner which is prejudicial to the interests of the company There may be extraordinary instances where the ‘corporate veil’ is itself or any shareholder, or (ii) if there is any material change in the lifted by courts to impose liability on shareholders. However, such management or control of a company which is likely to result in the cases would typically arise in the context of fraudulent conduct by company’s affairs being conducted in a manner prejudicial to any a shareholder. shareholder, then affected shareholders (constituting at least 100 in number or one-tenth of the total number of shareholders or holding 2.5 Can shareholders be disenfranchised? at least 10% of the issued capital of the company) have the right to approach the National Company Law Tribunal (NCLT) for relief. This right may be seen in the context of the majority shareholders The disenfranchisement of shareholders is possible in certain typically being in management of companies in India, and therefore restricted cases. For instance, in the event that a transaction for having the responsibility of conducting the affairs of the company transferring shares of a company has been approved by more than without oppression of minority shareholders or mismanagement of 90% of its shareholders by value, the acquiring company has the the affairs of the company. option to acquire the shares of the dissenting shareholders (as per the terms offered to the approving shareholders).

2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them? 2.6 Can shareholders seek enforcement action against members of the management body? Shareholder meetings in India can be classified as: (i) annual general meetings (AGMs); (ii) extraordinary general meetings (EGMs); and The Companies Act provides for a class action mechanism, (iii) meetings convened by the NCLT. These shareholder meetings permitting a representative group of shareholders, constituting a vary in their frequency and hold different points of discussion. minimum of 100 shareholders in number or one-tenth of the total number of shareholders or holding at least 10% of the issued Companies are required to hold an AGM every year for conducting capital of the company, to bring an action on behalf of all affected ‘ordinary business’ such as disclosing the financial performance of parties, including claims for compensation from directors for any the company and management initiatives or the (re-) appointment fraudulent, unlawful or wrongful act or omission or conduct on their of directors. The duration between two AGMs cannot exceed 15 part before the NCLT. months. As discussed above, specified shareholders also have the ability to A meeting of shareholders held between two AGMs is designated approach the NCLT in cases of oppression or mismanagement of the as an EGM. EGMs are typically conducted for the consideration company by the management body. of urgent issues which arise prior to holding of the next AGM. The Board usually convene an EGM, although it can be initiated at the request of the shareholders as well. Shareholders holding more than 2.7 Are there any limitations on, and disclosures 10% of the paid-up share capital of the company may call an EGM required, in relation to interests in securities held by and also seek additional agenda items to be discussed at the meeting. shareholders in the corporate entity/entities? Meetings may be convened by the NCLT for the consideration of Shareholders of listed companies are required to make events-based all schemes of arrangement, and the resolutions proposed in such and continuous disclosures to the relevant stock exchange for the meetings need to be approved by a majority representing three- purpose of discharging obligations under the SEBI (Substantial quarters of the value held by the shareholders (either in person or Acquisition of Shares and Takeovers) Regulations 2011. through proxy voting). Such schemes also require an in-principle approval from the SEBI prior to their filing in the NCLT. Any shareholder acquiring or holding more than 5% shares or voting rights in a company, together with any person acting in concert, The Companies Act also provides for certain business items (such is required to make a disclosure of such acquisition or change in as alteration of the object clause of the company’s memorandum of shareholding beyond 2%. Every shareholder holding 25% or more association) to be necessarily approved by postal ballot instead of of the shares or voting rights in a company is required to disclose a physical meeting, with a view to encouraging wider shareholder shareholding on an annual basis. participation in such matters.

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As part of the SEBI (Prohibition of Insider Trading) Regulations office upon providing such a director a reasonable opportunity to 2015, promoters, directors and ‘key managerial personnel’ (KMP) be heard, followed by passing an ordinary resolution removing the of a company are required to disclose their holding of securities in director from office. the company within seven days of acquiring such a status. Such persons are also required to disclose any transactions in securities 3.3 What are the main legislative, regulatory and other within two trading days, if the value of the securities traded in a sources impacting on contracts and remuneration of calendar quarter is greater than INR 1 million cumulatively. This members of the management body? requirement is also applicable to any person who takes trading decisions for the promoters, directors or KMPs. Companies are required to constitute a nomination and remuneration Additionally, a company’s promoters are required to disclose any committee for the purposes of recommending a policy to the India creation, invocation or release of an encumbrance of their shares to Board concerning the remuneration of directors, KMPs and other the relevant stock exchange and the company within seven working employees. days of such activity. The total managerial remuneration payable by a company to its directors, including the managing director, whole-time directors and 3 Management Body and Management managers, in respect of any financial year must not exceed 11% of the net profits of the company for that financial year. Stock options granted to directors are calculated as perquisites for the purposes of 3.1 Who manages the corporate entity/entities and how? income tax laws and must be included in the remuneration. Stock options however cannot be granted to a director who either himself Except for those matters which require the consent and approval of or through his relatives holds more than 10% of the outstanding the shareholders, the Board is entitled to exercise all the powers of equity shares of the company granting the stock options. the company, and to do all such acts and things which the company The remuneration is approved by the Board at a meeting, which is authorised to do, in accordance with the Companies Act and the is subject to approval by a resolution at the next company general constitutional documents of the company. meeting. Approval of the central government and the shareholders Companies follow a unitary board structure and do not have the is required for payment of remuneration exceeding prescribed concept of a supervisory board. The Board is authorised to delegate thresholds. certain specified powers to (i) a committee of directors, (ii) the Shareholders of a company have time and again questioned managing director, and (iii) the manager or any other principal managerial remuneration of KMPs when the same is proposed by officer of the company. Companies are required to have at least the Board without making adequate disclosures or justifications. A one Indian resident director, one female director, and either one-half recent example of this was seen in Infosys where the shareholders or one-third of independent directors on their Board, depending on questioned the severance pay-outs made to the KMPs of the company whether the chairperson of the Board is an executive director or a as the same was done without making adequate disclosures to the non-executive director. shareholders and contrary to the past practices of the company. Companies are required to appoint the following as KMP by way of a board resolution detailing their terms of their appointment: 3.4 What are the limitations on, and what disclosure is (i) a Chief Executive Officer, the managing director or the required in relation to, interests in securities held by manager; members of the management body in the corporate (ii) a company secretary; and entity/entities? (iii) a Chief Financial Officer. Directors of public listed companies must disclose their shareholding The KMPs, along with executive directors of a company, are details and voting rights above a prescribed threshold, in accordance generally deemed to be responsible for any defaults under the with the SEBI (Prohibition of Insider Trading) Regulations 2015 Companies Act by virtue of being classified as an ‘officer who is and the SEBI (Substantial Acquisition of Shares and Takeovers) in default’. Regulations 2011. Directors are also required to disclose their concern or interest, 3.2 How are members of the management body appointed including shareholding, in any company or companies or other and removed? forms of legal entities at the time of joining the Board and after the next Board meeting upon the occurrence of any change in such Directors of a company are typically appointed through a disclosure. shareholders’ approval at the AGM. A company must intimate the In the event that a company provides any share-based employee candidature of a person applying for the office of director to the benefits, the directors are required to disclose the details ofsuch shareholders. A director is required to agree to act as a director of schemes in the Board report, including the beneficiaries of the a company. The Board may be permitted to appoint a person as schemes. an additional director, alternate director or nominee director under the constitutional documents. However, the additional director Directors are also restricted from entering into agreements, by appointed by the Board is entitled to hold office only until the themselves or through other persons, with any shareholder or any ensuing AGM of the company. other third party for sharing any compensation or profit in connection with dealings in the securities of the company without obtaining the The appointment of an independent director is required to be prior approval from the Board and the public shareholders of the approved by the company in an AGM. The appointment should take company. place via a letter of appointment, indicating the terms and conditions of the appointment. Companies are also required to make continuous and event-based disclosures to the stock exchange where the shares of the company A company can remove a director (except a director, if any, that has are listed, as well as to the SEBI. not been appointed by the NCLT) before the expiry of the period of

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India-specific issues. The weak enforcement of corporate governance 3.5 What is the process for meetings of members of the regulations in the Indian corporate setting is also an area of concern. management body? For instance, Satyam Computer Services and its former auditor PricewaterhouseCoopers have settled securities class action suits in Companies are required to conduct a minimum of four board New York in 2011, but the SEBI order imposing penalties against meetings in a year, with a gap of no more than 120 days between the company management, passed in 2014, is currently under appeal. them. Notice of conducting a board meeting must be provided in writing to every director of the company, and an agenda must be attached along with such a notice. The quorum for a board 3.8 What public disclosures concerning management body practices are required?

India meeting is one-third of the total number of directors or two directors (whichever is higher). The Board’s report, as discussed above, is required to be circulated to all shareholders at least 21 days prior to an AGM and includes 3.6 What are the principal general legal duties and details of: liabilities of members of the management body? ■ the number of board meetings held in the year; ■ compliance of the financial statements with applicable laws; The Companies Act has codified the duties of directors which require them to: ■ systems to ensure the company’s compliance with the provisions of all applicable laws; ■ act with care, skill and diligence and to exercise independent particulars of loans, guarantees and investments made by the judgment; ■ company; ■ act in good faith in accordance with the constitutional ■ qualifications and adverse remarks in the auditor’s report and documents of the company; the secretarial audit report; ■ not obtain any undue gain or advantage and/or to assign their ■ explanation or comments of the Board on every qualification, office; and reservation or adverse remark or disclaimers made in the ■ not be involved in any situation which conflicts with the auditor’s report; and interests of the company. ■ contracts with related parties, details of the risk management Directors also have a fiduciary duty to the company and the policy of the company, and dividends recommended to be shareholders of the company as a whole. Directors are required paid to the shareholders. to make full and adequate disclosures in the event of any conflict of interest, including perceived conflicts, and to abstain from 3.9 Are indemnities, or insurance, permitted in relation to participation in discussions or voting on such matters. members of the management body and others? A director in breach of these duties is liable for both civil and criminal sanctions, which are determined on the basis of the type of Directors are permitted to obtain indemnities from the company in breach and the statutory provision violated by him/her. the event that they are liable but no fault can be attached to their conduct. Companies also typically obtain directors’ and officers’ 3.7 What are the main specific corporate governance insurance for their director and key management personnel. responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body? 4 Other Stakeholders

It is mandatory for the Board of every company to present a 4.1 What, if any, is the role of employees in corporate financial statement to the shareholders along with its report, known governance? as the Board’s Report, at every annual general meeting. Apart from giving a complete review of the performance of the company for Employees of a company, especially KMPs play an essential role the year under report and material changes until the date of the in ensuring corporate governance of a company. Under the SEBI report, the report highlights the significance of various national (Listing Obligations and Disclosure Requirements) Regulations and international developments which can have an impact on the 2015, employees are restricted from entering into agreements, by business and indicates the future strategy of the company. themselves or through other persons, with any shareholder or any The Board’s report is a wide-ranging document covering both other third party for sharing any compensation or profit in connection financial and non-financial information, with a view to informing the with dealings in the securities of the company without obtaining the stakeholders about the performance and prospects of the company, prior approval from the Board and the public shareholders of the capital structure, management changes, significant policies and company. Further, KMPs are required to make disclosures to the recommendations for the distribution of profits, etc. Board relating to all material, financial and commercial transactions, The top 500 listed companies (based on market capitalisation at where they have personal interests that may have a potential conflict BSE/NSE) are also required to circulate a business responsibility with the interest of company. report, which is a standardised format for companies to report the In addition to this, employees are also required to comply with the actions undertaken by them towards adoption of responsible business company’s corporate governance and risk management policies, practices. This reporting is intended to provide basic information about including any whistle-blower policy. the company and information related to its performance and processes. Some of the key challenges concerning the management body 4.2 What, if any, is the role of other stakeholders in pertain to safeguarding the interests of the minority shareholders by corporate governance? preventing oppression from majority shareholders. Further, while the corporate governance regime has been prepared with reference The SEBI requires companies to recognise the rights of its to global benchmarks, there remains a need to develop solutions for stakeholders and encourage cooperation between the company

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and the stakeholders. It ensures this by requiring companies to: the expectations of operational transparency to stakeholders and (i) respect the rights of stakeholders that are established by law or imposes a general obligation of compliance on KMPs, directors, through mutual agreements; (ii) devise a whistle-blower mechanism promoters or any person dealing with the company. so that the stakeholders can freely communicate their concerns The Board is also required to authorise one or more KMPs for about illegal and unethical practices of a company; and (iii) the purpose of determining materiality of an event or information constitute a stakeholder relationship committee to specifically look and for the purpose of making disclosures to the relevant stock into the mechanism of redressal of grievances of debenture holders exchange(s). The contact details of such personnel are also required and other security holders of the company. to be disclosed to the stock exchange(s) and provided on the The Companies Act also empowers certain stakeholders to make an company’s website. India application to the NCLT for freezing the accounts of a company Every company is required to appoint a qualified company secretary for a period not exceeding 3 years. Such application may be made as the compliance officer who is responsible for: by: (i) a creditor who has extended a debt exceeding Rs. 100,000; ■ ensuring conformity with the regulatory provisions applicable or (ii) any other person who has reasonable grounds to believe that to the company; the removal, transfer or disposal of funds, assets or properties of a ■ co-ordination with and reporting to the Board, recognised company is likely to take place in a manner that is prejudicial to the stock exchange(s) and depositories with respect to compliance interests of the company or its shareholders or its creditors. requirements; and India has also seen a growing trend of proxy advisory firms who ■ ensuring the correctness, authenticity and comprehensiveness are hired by institutional investors to obtain research and vote of the information, statements and reports filed by the recommendations on issues that are addressed at shareholder company. meetings. These proxy advisory firms have played an active role in highlighting corporate governance issues in companies and helping 5.2 What corporate governance related disclosures are public shareholders exercise their voting right by making informed required? decisions. Recently, Ingovern, a reputed proxy advisory firm in India, recommended that home buyers, who are unsecured creditors, vote The financial statement of a company must be approved bythe against the scheme of compromise and arrangement proposed by a Board for submission to the auditor for his report. small group of 11 home buyers of Unitech Limited, as in their view the scheme was more favourable to the company than the home buyers. The managing director, the whole-time director in charge of finance, the Chief Financial Officer (or any other person of a company empowered by the Board) are required to prepare the books of 4.3 What, if any, is the law, regulation and practice account and other relevant books and papers and the financial concerning corporate social responsibility? statement for every financial year which provide a true and fair view of the state of the affairs of the company (including that of its branch India has codified its corporate social responsibility (CSR) office, if any). obligations in the Companies Act which requires specified At every AGM, the Board must present the financial statements companies to spend at least 2% of the average net profits made for the financial year. The Board must issue a Board report, which during the three immediately preceding financial years on prescribed must be annexed to the financial statements and presented before the CSR activities. This provision operates on a ‘comply or explain’ company in the general meeting. basis, and the Board must provide an explanation in the directors’ report if the company does not spend the requisite amount on CSR. The Board report must also have a directors’ statement of This requirement is applicable to companies which have: responsibility which requires directors to endorse that they have ■ a net worth of at least INR 5 billion during any financial year; devised proper systems to ensure the company’s compliance with all applicable laws, that these systems are adequate and are operating ■ a turnover of at least INR 10 billion during any financial year; effectively, and that the applicable accounting standards have been or followed in the preparation of the company’s financial statements. ■ a net profit of at least INR 50 million during any financial year. The board report is also required to respond to qualifications made Every company which fulfils the above threshold requirements must in the audit report of the company. constitute a corporate social responsibility committee, formulate a CSR policy and make recommendations on CSR to the Board. 5.3 What is the role of audit and auditors in such There is a mandatory requirement to report the details of the CSR disclosures? policy and the implementation of the CSR initiatives taken by a company during a financial year. The auditor of a company is required to make a report for the A company can engage in a broad category of CSR activities, including shareholders on examination of the company’s accounts. The eradication of poverty, promotion of education, promotion of gender auditor report also states whether it gives a true and fair view of the equality and environmental sustainability. The CSR activities must be company’s accounts in accordance with the Companies Act, in the performed within India and are not permitted to be for the exclusive opinion and to the best knowledge of the auditor. benefit of the company’s employees or their family members. The primary objects of an audit are to disclose: ■ the company’s compliance with statutory requirements; 5 Transparency and Reporting ■ adequacy of information required to be provided in the financial statements; ■ truth and fairness of the financial position, as reflected in the 5.1 Who is responsible for disclosure and transparency? balance sheet; ■ truth and fairness of the company’s operations as reflected in The SEBI prescribes that the Board and senior management of the profit and loss account; and a company should conduct themselves in a manner that meets

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■ accuracy and reliability of accounts books and underlying ■ the code of conduct of the Board and senior management documents from which the financial statements have been personnel; prepared. ■ the dividend distribution policy of the company; Companies should appoint an auditor on the date of every AGM after ■ policies on dealing with related party transactions and obtaining the auditor’s written consent for such an appointment. determining ‘material’ subsidiaries; Companies are permitted to appoint an individual as an auditor for ■ details of agreements entered into with the media companies a maximum period of five consecutive years or an audit firm as an or their associates; auditor for a maximum of two terms of five consecutive years. ■ details of familiarisation programmes imparted to independent directors; India 5.4 What corporate governance information should be ■ contact information for resolution of investor grievances; published on websites? ■ financial information including financial results and copies of the annual report including the balance sheet, profit and loss Every company is required to maintain a functional and accurate account, directors’ report and corporate governance report; website containing its basic information. Any change in the content ■ a schedule of analyst or institutional investor meetings and of a company’s information is required to be updated on its website presentations made by the company to analysts or institutional within two working days from the date of such change. The website investors; is required to contain: ■ the new name and the old name of the listed entity for a ■ details of the company’s business; continuous period of one year, from the date of the last change of name; and ■ the company’s shareholding pattern; ■ all such events or information which has been disclosed to ■ criteria of making payments to non-executive directors; the stock exchange under the SEBI (Listing Obligations and ■ name and contact details of the KMP authorised to determine Disclosure Requirements) Regulations, 2015. the materiality of an event or information; ■ the composition of various committees of the Board; Acknowledgment ■ the terms and conditions of appointment of independent directors; The authors would like to acknowledge the assistance of their ■ details of the establishment of a vigil mechanism or whistle- colleague Adhunika Premkumar in the preparation of this chapter. blower policy; Adhunika Premkumar is an Associate with the corporate practice group at Trilegal.

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Kosturi Ghosh Wiseroy Damodaran Trilegal Trilegal The Residency, 7th Floor The Residency, 7th Floor 133/1, Residency Road 133/1, Residency Road Bangalore 560 025 Bangalore 560 025 India India

Tel: +91 80 4343 4603 Tel: +91 80 4343 4682 Email: [email protected] Email: [email protected] URL: www.trilegal.com URL: www.trilegal.com India

Kosturi Ghosh is a Partner at Trilegal and the Deputy Head of the Wiseroy Damodaran is a Counsel at Trilegal. Roy has assisted several corporate practice group of the firm. Her primary areas of practice Indian and overseas clients including W.L. Ross, Sanofi Aventis, are general corporate advisory, M&A and Private Equity, and TMT. Shinsei Bank, ABG Group, Ashima Group and Standard Chartered Kosturi has been actively involved in several high-profile inbound and Private Equity on various M&A and corporate matters. outbound acquisitions and joint ventures. Wiseroy focuses specifically on M&A/private equity and venture capital Kosturi specialises in advising multinational clients on their entry into (PE/VC) related work and regularly advises private equity and venture India, advising on commercial, regulatory and strategic matters. She capital fund houses on investments in the information technology (IT) has assisted various companies, including several highly-regulated space, start-ups and promoters on receiving investments from PE/ entities, in setting up processes and procedures to ensure compliance VCs, as well as share and asset acquisition related transactions in the in India. She has also conducted FCPA and UKBA trainings in manufacturing sector as well as the IT/BPO sectors. conjunction with global compliance teams for Indian employees and participated in investigations and audits for non-compliance. Kosturi regularly advises on multinational and domestic clients on M&A and joint ventures. She has also advised various companies and investment funds on structuring investments and exit options, conducting due diligence and drafting transaction documentation.

Trilegal is one of India’s top-tier law firms with offices in five of India’s major cities: Mumbai; New Delhi; Gurgaon; Bangalore; and Hyderabad. We represent clients on a large number of the most complex and high-value transactions in India, leading to our key practices winning top industry awards and accolades. We believe that the combination of our firm’s culture, depth of sectoral and transactional experience, wide range of expertise and the quality and energy of our lawyers, allows us to offer a level of client service that is unique to the Indian legal market. Our lawyers are trained to take a commercial perspective of the issues which our clients face with a solution-oriented approach. They are also trained to give high-quality, practical advice. Our areas of expertise include: mergers and acquisitions; strategic alliances and joint ventures; private equity and venture capital; defence and aviation; energy and infrastructure; banking and finance; taxation; restructuring; capital markets; telecoms, media and technology; dispute resolution; regulatory; competition law; labour and employment; real estate; hospitality; pharmaceuticals; and manufacturing, among others.

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Indonesia Mark Innis

Hadiputranto, Hadinoto & Partners (HHP Law Firm) Denny Ngadimin

guidance on detailed governance processes and procedures. 1 Setting the Scene – Sources and Consequently, the company’s articles of association (“AOA”) is Overview usually the definitive document in determining a company’s general governance requirements. 1.1 What are the main corporate entities to be discussed? However, public companies must also comply with regulations issued by the Financial Services Authority or Otoritas Jasa Keuangan The main corporate entity relevant for foreign investment is a (“OJK”) and also the listing rules of the IDX. These regulations and limited liability company, whether a private company or a public rules are fortunately more detailed and require audit committees, a company (i.e., a company with at least 300 shareholders or which is non-affiliated director, and independent commissioners (constituting listed on the Indonesia Stock Exchange (“IDX”)). a third of the commissioners), as well as dealing with conflict- of-interest transactions, material transactions and conservative Foreign investment in Indonesia, except for foreign banks and for processes for major corporate actions. production shareholding contracts in the oil & gas sector, must be in the form of a company (which has received approval from the The National Committee on Governance from time to time issues Capital Investment Coordination Board (BKPM) or for certain a Code on Good Corporate Governance, which is non-binding in sectors other governmental agencies). nature. The Committee does not currently have much visibility. The International Finance Corporation has issued “The Indonesia Corporate Governance Manual” in conjunction with the OJK, which 1.2 What are the main legislative, regulatory and other consists of 531 pages and is a welcomed addition to the area. corporate governance sources? In addition to the general legislation, other laws and regulations for certain specific sectors (such as banking, insurance, and multi- The primary law that governs companies is Law No. 40 of 2007 on finance) provide detailed compliance requirements for those sectors, Limited Liability Companies (“Company Law”). The Company or guidance on good corporate governance. Law covers matters relating to the establishment of a company, capital issues, the management and governance of a company, shareholder rights and meetings, major corporate actions (such 1.3 What are the current topical issues, developments, as mergers, consolidations, spin offs and acquisitions) and the trends and challenges in corporate governance? dissolution and liquidation of companies. In addition to the Company Law, public companies are governed Indonesia is not known for making substantial corporate governance by Law No. 8 of 1995 on the Capital Markets (“Capital Market law reforms. However, the following should be noted: Law”). Under the Capital Market Law, public companies are defined (a) the Government is moving towards greater enforcement as companies whose shares are owned by at least 300 shareholders of laws and regulations (including the Anti-Corruption/ and have a minimum paid-up capital of Rp. 3,000,000,000, or such Anti-Bribery laws and regulations), and there is a move by other thresholds as may be stipulated in government regulations. government agencies to assist each other in ensuring there is compliance (e.g., evidence of compliance is required in order The Capital Market Law – in addition to covering the governance to obtain certain licences); of professional advisers and offerings – also covers issues such as minority protection issues, insider trading, market manipulation, (b) the Supervisory Committee for Business Competition, which oversees trade practices and anti-trust matters, is more fraud and conflict of interest transactions. active, and is lobbying Parliament for substantial sanctions Indonesia is a civil law jurisdiction and as such its laws are generally to be included in an amendment to Law No. 5 of 1999 on principle-based, without comprehensive provisions as in common Prohibitions of Monopolistic Practices and Unfair Business law countries. Further, as a civil law jurisdiction, precedent/stare Competition; and decisis does not play a role. In addition, there are no law reports (c) the OJK, as the regulator in charge of supervising all financial in Indonesia. sectors, is issuing new regulations to strengthen financial While the Company Law covers broadly corporate governance sector compliance. (primarily on the duties of the boards), in the absence of government The main challenge is that enforcement is lax, sporadic and uneven, regulations to supplement the Company Law, there is minimal creating somewhat of an uneven playing field.

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2 Shareholders 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them?

2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ General: Under the Company Law shareholder meetings consist of entities? AGMS and EGMS (collectively, “GMS”). Nature of meetings/Agenda: An AGMS must be held within six Under the Company Law, generally the Board of Directors (“BOD”) months of the end of the financial year. The BOD must present is responsible for the company’s operations and management, under the annual report (including audited financial statements) on the the supervision of the Board of Commissioners (“BOC”). company’s operations – a report which must have already been

However, certain decisions may not be taken by the BOD without approved by the BOC – to the shareholders at the AGMS. Other than Indonesia shareholders’ approval. These matters under the Company Law the approval of the annual report, other matters that are commonly include: resolved at an AGMS are dividend distributions, changes to the board, the appointment of auditors, BOC and BOD compensation ■ any amendment to the company’s AOA, including increasing or reducing authorised capital; reducing subscribed and paid- and statutory reserve allocations. up capital or buying back the capital of the company (which An EGMS may be held at any time the BOD determines and must requires a 66 2/3% vote); be held if requested by shareholder(s) holding at least 10% of the ■ undertaking any acquisitions, consolidations, mergers or spin- issued voting shares or requested by the BOC (or as ordered by offs or placing the company into bankruptcy or liquidation the District Court where the BOD/BOC has failed to convene a (which require a 75% vote); and required meeting). The Company Law does not provide a specific ■ transferring or placing security over the entire or a substantial shareholder’s right to raise agenda items for a GMS. part of the company’s assets (which requires a 75% vote). Notice: The BOD must provide shareholders with at least 14 clear In addition, other matters reserved for shareholders, generally by a days’ prior notice of the GMS. For public companies, 30 clear days’ simple majority vote, include: prior notice must be given. Curiously, GMS notices are deemed ■ approving the compensation payable to the BOD and the BOC served if done by registered post or a newspaper announcement at the annual general meeting of shareholders (“AGMS”); (consequently for foreigners, notice may be inadequate). ■ approving an annual work plan and budget before the Quorum/Voting: Generally, GMS quorum and voting percentages commencement of a financial year; are more than 50%. For specific matters (see question 2.1), GMS ■ other than interim dividends, approving dividend distributions quorums and voting levels depend on the matters being resolved and allocations to a statutory reserve fund; (at the first GMS the required percentages for the quorum and ■ approving the annual financial statements at the AGMS, and voting threshold are the same). For certain matters (such as general acquitting and discharging management (which generally matters, mergers, consolidations, liquidation/bankruptcy and capital occurs annually); and changes), the Company Law prescribes lower quorums if the first ■ appointing members to the BOC and the BOD (including GMS is non-quorate. filling any vacancies). Form of Meetings: As a matter of practice for an AGMS and Shareholders in private companies can insert into the AOA additional generally for GMS, attendance at a GMS does not require the restrictions on the BOD (whether requiring approval from the BOC shareholders’ presence. Shareholders can attend a GMS through or otherwise the shareholders). For public companies, the BOD teleconference media, conference video or other electronic media must comply with OJK regulations requiring shareholders’ approval facilities that enable all other meeting participants to see and hear for certain transactions (including conflict-of-interest transactions one another and to participate in the meeting (telephone calls would and material transactions). not fulfil these requirements). Further, shareholders may also adopt valid resolutions without a GMS, if all shareholders have been informed about relevant matters and all shareholders sign circular 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate shareholders’ resolutions. entity/entities? Proxies: Shareholders with voting shares may appoint a representative/ proxy to attend a GMS by granting a power of attorney. If the Shareholders are not responsible for corporate governance per se. shareholder turns up at the GMS, the proxy holder is not recognised Shareholders are not required to exercise a wider stewardship role by the company. Members of the BOC/BOD and employees of the as owners. However: company cannot cast a vote as the shareholder’s proxy. ■ In the banking sector, a bank’s governance status can Indonesian law does not have a concept of beneficial interest and determine the level of shareholding a party can have. therefore will only recognise registered shareholders. Persons ■ In the insurance sector, Law No. 40 of 2014 regarding using nominees to hold shares have no recognised rights (Law No insurance introduces a concept of a “controller”, which 25 of 2007 on Investment (“Investment Law”) deems null and defines the ultimate party having responsibility for the void all agreements stating that a party holds shares on behalf of insurance company. another party). However, OJK regulations provide for custodian While there is no right under the Company Law for shareholders arrangements for a public company’s scripless shares. to be involved in a company, for these sectors such measures help shareholders to ensure that management is more accountable for 2.4 Can shareholders be liable for acts or omissions of their actions. the corporate entity/entities?

After the Minister of Law and Human Rights (“MOLHR”) issues an incorporation approval, a shareholder’s liability is limited to the value of his shares. Prior to this time a company-in-formation’s

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directors, commissioners and shareholders have personal liability providing restrictions, in whole or in part, on capital (foreign) if transactions are conducted (all going well for a period of around investment into Indonesian companies and/or imposes requirements six-eight weeks). All actions that the shareholders have taken prior for specific licensing. Other laws and regulations also provide to MOLHR approval will become the liability of the company only investment restrictions, depending on the industry sector (including if the first extraordinary general shareholders’ meeting (“EGMS”) the banking, insurance, broadcasting, postal and mining sectors). of the company accepts these actions. The Investment Law, under which the Negative List is issued, The Company Law provides that the corporate veil can be pierced, provides that portfolio or indirect investment is excluded from the and imposes shareholders’ liability, if: capital investment restrictions (however majority or controlling ■ the requirements for limited liability status have not been interests are covered by the Negative List). met; Shareholders in private companies are not required to make specific Indonesia ■ the shareholders directly or indirectly misuse the company disclosures on their shareholdings. Shareholder information is for their own personal interests; now generally publicly available from the MOLHR, the Company ■ the shareholders are implicated in unlawful acts committed Registry, etc. by the company; or OJK regulations provide that any person who acquires 5% or more ■ the shareholders directly or indirectly use the company’s of a public company’s shares, is required to report such ownership assets unlawfully in a manner which renders the company’s to the OJK (or any change of 0.5% in that ownership) within 10 days assets inadequate to settle the company’s debts. of the transaction(s) taking place. Further, according to regulations, the Indonesian Tax Office can pursue shareholders for unpaid taxes and approval for a company’s liquidation will be withheld until the tax is paid. 3 Management Body and Management As a general proposition, under other laws and regulations, liability is restricted to the company, and shareholders do not have liability 3.1 Who manages the corporate entity/entities and how? for a company’s acts. Indonesian companies have a two-tier management structure, 2.5 Can shareholders be disenfranchised? namely the BOC and the BOD. The BOD is executive management, and is supervised by the BOC Under the Company Law, a company has no right to disenfranchise (the BOC has no executive authority, except in the absence of all shareholders. BOD members or if all BOD members have a conflict of interest). However, a shareholder can only exercise rights attaching to his No commissioner may act as a proxy for a director (and vice versa) shares, including voting and dividend rights, if he is registered in and one person cannot be concurrently on the BOC and the BOD. In the company’s shareholders’ register (maintained by the BOD). line with the BOC’s supervision obligations, the BOC may suspend the BOD (or certain members thereof) by giving the reasons for the Shareholders have pre-emptive rights over new shares. All shares suspension and then a GMS must be called to decide whether to lift in Indonesia must be fully paid up (this requirement is vetted by the the suspension or remove the BOD (or relevant BOD members). MOLHR). Consequently, on a share subscription, the subscription price must be fully paid, however the shares will only be issued Private companies must have at least one director and one after MOLHR issues a notification receipt on that matter and commissioner (except for companies that engage in mobilising only then will the shareholder be registered in the company’s public funds or issuing debt instruments, in which case there shareholders’ register. Consequently, there will be a period when a must be two members on each board (as is the case with public new shareholder may not be able to exercise share rights. companies)). Under OJK/IDX regulations, public companies must Unlike many jurisdictions, in a public company takeover the bidder also have a non-affiliated director and 1/3 of the commissioners does not have a right to squeeze out or acquire compulsorily shares must be independent. from minority shareholders. OJK and IDX regulations favour There are also specific criteria for companies in regulated sectors companies remaining listed. such as multi-finance, insurance and banking. Although all directors have ostensible authority under the Company 2.6 Can shareholders seek enforcement action against Law, usually the AOA provides that the President Director members of the management body? represents, and binds, the company. Different requirements on representing and binding the company can be set out in the AOA. Under the Company Law, each director and commissioner must fulfil A company’s AOA may require that certain matters be approved by his tasks in good faith and with full responsibility to the company. the BOC. The BOC must collectively decide matters as a board. Shareholder(s) that hold at least 10% of the issued voting shares Further, under the Company Law, shareholders may delegate to can lodge a petition on behalf of the company for redress with or the BOC authority on certain matters (including share repurchases, otherwise request an examination of a company to the District Court authorised capital increases and BOD remuneration determinations). if the company suffers losses as a result of any illegal or negligent Public companies must have an internal audit unit and an independent act by the director(s) and commissioner(s). audit committee (consisting of independent persons). An independent commissioner must chair the audit committee. The OJK/IDX has detailed regulations on audit committees which include: 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by ■ public companies which have an audit charter; shareholders in the corporate entity/entities? ■ the independence criteria for audit committee members; ■ the audit committee’s authority, tasks and responsibilities; Presidential Regulation No. 44 of 2016 on the List of Business and Sectors Closed and Business Sectors Open with Conditions for ■ the audit committee’s reporting requirements. Capital Investment (“Negative List”) is the primary regulation

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The audit committee has a wide mandate (including providing There are no safe harbours for BOC/BOD members to trade in a advice to the BOC on reports and matters presented by the BOD company’s securities and an assessment needs to be made as to the to the BOC, and identifying matters that (i) need the BOC’s further appropriate timing of any trade. The OJK further takes the view attention, and (ii) relate to the BOC’s supervisory role of the BOD). that if the insider information constitutes material information, the The board may delegate authority to sub-committees (although this public company, under regulation, should disclose the information is not common, except in large public companies). to the public. Except in public companies, a company is not required to appoint a company secretary. 3.5 What is the process for meetings of members of the management body?

3.2 How are members of the management body appointed Indonesia The Company Law does not govern in detail BOD/BOC meetings and removed? as it does with shareholders’ meetings. The Company Law merely requires the BOD/BOC to prepare and retain minutes of meetings. BOD/BOC members must be appointed and removed through a GMS (including any vacancies that arise) and not by the board itself. Generally, the BOD/BOC meetings process is regulated under the company’s AOA. For private companies, the AOA generally contain The Company Law regulates BOC/BOD appointments, however detailed provisions on process (especially where the company is the Company Law’s coverage is limited to eligibility requirements a joint venture) and the shareholders have, given the absence of (including legal capacity, no personal or corporate bankruptcy in the regulation under the Company Law, greater flexibility to determine preceding five years, etc.). process and the provisions in the AOA. OJK/IDX regulations also set out the criteria for non-affiliated directors and independent commissioners (including independence from major shareholders and other board members, no recent 3.6 What are the principal general legal duties and liabilities of members of the management body? affiliations with the company, etc.). For the financial institutions sector (including banks, insurance The Company Law only sets out basic principles and does not cover companies, pension funds, financing and credit guarantees), before directors/commissioners’ duties and liabilities as extensively as may BOD/BOC members can be appointed, the OJK requires a fit and be the case in other jurisdictions. proper test. The BOD has the authority as, and is fully responsible for, the company’s management. The BOD must act in the company’s 3.3 What are the main legislative, regulatory and other best interests, in accordance with the company’s purposes and sources impacting on contracts and remuneration of objectives. The BOD represents the company in its dealings with members of the management body? all third parties. If there is more than one director, the company’s AOA usually delineates who is authorised to act for and on behalf of Under the Company Law, shareholders determine the BOD/BOC the company (e.g., the President Director). members’ remuneration and the BOC/BOD members’ term of office The BOC must undertake, in good faith, prudently and responsibly, (as prescribed in the AOA). the tasks of supervising and advising the BOD in the company’s Companies should avoid having directors who are also considered best interests (e.g., on management policy and plans). As regards employees under Law No. 13 of 2003 regarding Labour (given the liability, penalties abound in various laws and may be imposed generous termination/retirement entitlements under that law). on directors and commissioners (although, in the absence of enforcement, this may not be frequent. Each BOD/BOC member 3.4 What are the limitations on, and what disclosure is may be held personally liable to the company for the company’s required in relation to, interests in securities held by losses if that member has, through fault or illegal acts, caused the members of the management body in the corporate losses or if the losses are caused by his negligence). entity/entities? If a company is bankrupt through the fault or negligence of the directors and/or commissioners, and the proceeds of the bankrupt estate are not There are no limitations on the number of securities that can be sufficient to cover the company’s obligations, each member ofthe held by BOD/BOC members. The Company Law only provides BOD and each member of the BOC, as the case may be, is jointly and for full disclosure in a special register (maintained by the BOD) of severally liable for all unpaid obligations of the company. securities owned by each member of the BOD/BOC and his family in the company and all other companies. Many companies do not Generally, the Company Law imposes joint and several liability on maintain a special register. a board unless a director/commissioner can prove: However, OJK regulations provide that an independent commissioner (i) he was not at fault or negligent (directors only); must not hold any shares in the relevant public company. (ii) he had undertaken his duties in good faith and with For 0.5% changes in 5% or more shareholdings, disclosure prudence in the company’s interests and in accordance with the company’s purposes and objectives (directors and requirements are relevant for public companies (see question 2.7). commissioners); Indonesian insider trading restrictions are contained in Articles 95 (iii) he had no conflict of interest (directly or indirectly in respect to 99 of the Capital Market Law and are quite restrictive. Insiders of the act that caused loss) (directors and commissioners); are generally considered to remain as insiders for a period of (iv) he had taken measures to prevent the loss occurring or from six months after the relationship with the company has ceased. continuing (directors only); or Insiders are prohibited from influencing other parties to trade securities or provide insider information to another party which (v) he has given advice to the board of directors to prevent the would reasonably be expected to use it in the trading of securities. loss occurring (commissioners only). Penalties include prison terms of up to 10 years and maximum fines Although court cases are not publicly available, there are few cases of Rp. 15,000,000,000. against directors/commissioners.

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3.7 What are the main specific corporate governance 3.9 Are indemnities, or insurance, permitted in relation to responsibilities/functions of members of the members of the management body and others? management body and what are perceived to be the key, current challenges for the management body? The Company Law does not prohibit a company from providing insurance coverage or indemnities to its BOC/BOD members. In addition to the general requirement that the company complies However, it is not clear if the Indonesian courts may rule that it is not with all relevant laws and matters are conducted in the company’s in a company’s best interests to provide indemnities and insurance best interest, under the Company Law, amongst other things, the cover (as this removes BOC/BOD members’ personal liability under BOD must: the Company Law). ■ maintain minutes of the GMS and the BOD meetings; Indonesia ■ prepare the company’s annual report and financial statements (and have the financial statements audited); 4 Other Stakeholders ■ approve the annual report/financial statements or otherwise state his reasons for not doing so; 4.1 What, if any, is the role of employees in corporate ■ hold an AGMS; governance? ■ obtain prior approval from the company’s shareholders of the company’s annual plan and budget for the next financial year; The BOD, under the BOC’s supervision, oversees a company’s ■ maintain the shareholders’ register and the special register, corporate governance. Employees are not required to be involved and issue share certificates, if requested; in corporate governance. ■ call a GMS if requested by shareholder(s) that hold at least While not specifically regulated, employees may expose dishonest 10% of the issued voting shares; or illegal activities occurring in a company. Increasingly, companies ■ provide all information on a GMS agenda; are adopting their own whistle-blowing policies. ■ disclose any conflict of interests (and must not represent the company in a conflicted situation); and 4.2 What, if any, is the role of other stakeholders in ■ maintain the company’s other registers, minutes, and corporate governance? documents. All of these corporate documents must be kept at the domicile of the company. Generally there is no role for other stakeholders, unless specifically The BOC must, amongst other things: prescribed by regulation. Currently there is limited regulation ■ prepare a report on its supervision of the BOD. Such report and most regulations are issued by the OJK for the financial is presented at the AGMS; sector. For insurance companies, although recent regulation ■ disclose any conflict of interests at a BOC meeting; prohibits shareholders interfering with insurance companies, given ■ approve the annual report/financial statements or otherwise the concept of a “controller” discussed in question 2.2 above, state its reasons for not doing so; and shareholders are likely to focus on stricter governance standards. ■ review the company’s annual plan and budget for the next For financial conglomerates one entity is required under OJK financial year. regulations to ensure that certain standards are met across the conglomerate. In 2014 the IFC sponsored an OJK 533 page manual From a corporate compliance perspective, the key current challenges on corporate governance, which is currently the gold standard guide for the management body are compliance issues, and a changing to corporate governance. There are also Indonesian forums like the enforcement regime as Indonesia develops. Forum for Corporate Governance in Indonesia which disseminates information and pursues initiatives. However, none of the foregoing 3.8 What public disclosures concerning management has any mandatory legal effect. body practices are required?

4.3 What, if any, is the law, regulation and practice Private companies are not required to disclose publicly any concerning corporate social responsibility? information on the BOC/BOD management policies. Under the Company Law, shareholders have the following The Company Law requires companies that engage in natural information access rights: resources activities, or whose business activities relate to ■ access to the annual report/financial statements, but generally natural resources, to implement a fair and appropriate social and not to other information throughout the year; environmental plan. Under Government Regulation No. 47 of 2012 ■ information from the BOD and/or the BOC information on Corporate Social Responsibility, the BOD must implement a related to the agenda of a GMS (provided such disclosure corporate social responsibility programme, based on the company’s does not conflict with the company’s interests); and annual work plan that has been approved by the BOC or the GMS. ■ access to the BOC’s (mandatory) report on its supervision of the BOD, which may shed some light on the BOC’s practices. The BOC report, annual reports and agenda material may not 5 Transparency and Reporting contain specific details on management policies. Shareholders can request from the BOD access to inspect the 5.1 Who is responsible for disclosure and transparency? shareholders’ register, the special register, shareholder meeting minutes and the annual reports and are entitled to take copies of the The BOD is responsible for disclosure and transparency. shareholder meeting minutes and annual reports.

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5.2 What corporate governance related disclosures are 5.3 What is the role of audit and auditors in such required? disclosures?

Financial statements should be filed with the Ministry of Trade. External auditors must audit a public company’s financial statements Compliance is better now than in previous years, despite many and companies whose business turnover is over Rp. 50,000,000,000 companies being concerned about confidentiality. (and such financial statements must be attached to a company’s For public companies, OJK regulations provide for all material annual report). information to be disclosed within two working days. Further, For public companies, OJK regulations have strict criteria on an there are extensive reporting and disclosure requirements (whether external auditor’s independence, and regulations require whistle-

general in nature, financial information, etc.) that are made public blowing by auditors on certain matters (including if conflict-of- Indonesia at certain times of the year or on specific corporate matters/actions. interest transactions have occurred without shareholders’ approval). These matters include, among others, disclosure on:

■ annual and half-yearly results; 5.4 What corporate governance information should be ■ certain material transactions not meeting shareholders’ published on websites? approval thresholds; ■ certain affiliated transactions (namely the BOD, BOC and Except for regulated sectors (such as insurance), there is no general principal shareholders, and their affiliates); regulation requiring a company’s website or the form of disclosures ■ a GMS agenda and the results of a GMS; on a company’s website. Many laws provide that newspaper ■ any private placement of the company (permitted only in announcements are sufficient disclosure (and for public companies, limited circumstances); that relevant information for shareholders is available at the ■ any conversion of convertible securities into shares, any company’s domicile (there is no requirement to post shareholders’ dividend declaration, any change to the company’s capital; circulars)). and ■ any material information that could affect the value of the public company’s listed securities or that could affect an investor’s decision to invest. The extent of disclosure and to whom disclosure is made depends on the relevant criteria under OJK regulations.

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Mark Innis Denny Ngadimin Hadiputranto, Hadinoto & Partners Hadiputranto, Hadinoto & Partners Indonesia Stock Exchange Building Indonesia Stock Exchange Building Tower II, 21st – 22nd Floor Tower II, 21st – 22nd Floor Sudirman Central Business District, Jl. Sudirman Central Business District, Jl. Jendral Sudirman, Kav. 52-53 Jendral Sudirman, Kav. 52-53 Jakarta 12190 Jakarta 12190 Indonesia Indonesia

Tel: +62 21 2960 8618 Tel: +62 21 2960 8641 Email: [email protected] Email: [email protected] URL: www.hhp.co.id URL: www.hhp.co.id Indonesia Mark is a Foreign Legal Consultant in the Mergers & Acquisitions Denny Ngadimin is an Associate in the Mergers & Acquisitions Practice Group of HHP Law Firm, a member firm of Baker McKenzie Practice Group of HHP Law Firm, a member firm of Baker McKenzie International in Indonesia. Mark specialises in mergers and acquisitions International in Indonesia. Denny has been involved in handling various as well as advising on international joint ventures, competitive bids legal corporate/commercial issues, varying from general corporate and private sales, disposals of private and publicly listed companies, advisory work to acquisitions of companies; focusing on information and major mergers and corporate restructurings. Mark also has a long technology, privacy and telecommunication related matters. standing interest in corporate governance and compliance issues. Denny holds a Bachelor of Laws from the University of Tarumanagara, Mark’s industry focuses are media/telecoms, plantations, insurance and has been admitted to practise in Indonesia. and real estate. Mark holds Bachelor of Arts, Bachelor of Laws and Master of Laws degrees from the University of Sydney. He is admitted to practise in England and Wales.

Hadiputranto, Hadinoto & Partners (HHP Law Firm), a member firm of Baker McKenzie International in Indonesia, is widely recognised as one of the leading law firms in Indonesia, providing sophisticated advice on corporate and commercial transactions across a broad range of industries. With more than two decades of local experience, we have built an excellent and longstanding working relationship with Indonesian government agencies, regulators and key industry players, and bringing the benefit of those relationships to our clients is a value proposition that sets us apart from our competitors. With our deep understanding of Indonesia’s unique business and legal culture and our capacity for innovation and problem solving, we can help clients execute even the most challenging deals in the market. Our legal consultants have worked with many of the largest domestic and international corporations, creating effective, industry-focused solutions for their transactions and investments in Indonesia.

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Ireland David Byers

McCann FitzGerald Paul Heffernan

Companies listed on the Official List of the Irish Stock Exchange 1 Setting the Scene – Sources and must adhere, on a comply or explain basis, to the corporate Overview governance principles set out in the UK Corporate Governance Code as supplemented by the Irish Corporate Governance Annex published by the Irish Stock Exchange (together, the “Corporate 1.1 What are the main corporate entities to be discussed? Governance Code”). Irish companies listed on the ESM will generally seek voluntarily This chapter deals primarily with Irish incorporated companies with to comply insofar as possible, or disclose non-compliance, with shares admitted to trading on the Main Market of the Irish Stock the Corporate Governance Code or the Corporate Governance Exchange (the “Main Market”, which is a regulated market) or listed Guidelines for small quoted companies (a non-mandatory Code). on the Enterprise Securities Market (“ESM”) of the Irish Stock Exchange. Credit institutions and insurance undertakings are also Financial institutions are also required to comply with the Corporate referenced, given the focus in recent years of the Central Bank of Governance Requirements published by the Central Bank of Ireland in improving corporate governance standards in such entities. Ireland in 2015 (relating, inter alia, to credit institutions, insurance undertakings, captive and non-captive insurance undertakings). In the private sector, there is a significant number of companies which 1.2 What are the main legislative, regulatory and other are State-owned, and all of these must comply with the Code of corporate governance sources? Practice for the Governance of State Bodies (an updated version of which was published by the Department of Public Expenditure and The law is stated as of 28 April 2017. The primary corporate Reform in August 2016). governance legislation for companies is contained in the Companies Guidelines and pronouncements of shareholder representative Act 2014, as amended (the “Companies Act”). Irish incorporated organisations (such as the Irish Association of Investment Managers) companies with securities admitted to trading on a regulated on corporate governance practices, while not having the force of market are subject to additional EU-based regulations, primarily law, are usually observed. the Shareholders’ Rights (Directive 2007/36/EC) Regulations 2009 (“Shareholder Rights Regulations”), the Transparency (Directive 2004/109/EC) Regulations 2007 and the EU Market Abuse 1.3 What are the current topical issues, developments, trends and challenges in corporate governance? Regulation (596/2014) (“MAR”). MAR took effect on 3 July 2016 in Member States across the EU, The Central Bank of Ireland has stringent corporate governance including Ireland, and extended the application of the existing requirements for all Irish credit institutions, insurance undertakings market abuse and inside information regime beyond issuers with and captive insurance/reinsurance undertakings. The Requirements shares admitted to trading on EU regulated markets, such as the were updated in 2015. Fitness and probity requirements (involving Main Market, to include issuers of securities traded on multilateral the completion of detailed questionnaires by individuals) apply trading facilities, including the ESM. in respect of the appointment of directors and senior managers An Irish incorporated company is also subject to its memorandum in such organisations. Central Bank approval is required prior to and articles of association (forming a contract between the company appointment to key roles. and its shareholders). The memorandum of association sets out the Irish companies are increasingly acknowledging the recent principal objects of the company, whilst the articles of association set recommendations in respect of diversity on boards. out the internal regulations of the company regarding matters such as The Companies Act requires: shareholder meetings, voting rights, powers and duties of directors, the composition of the board of directors and communications ■ “large companies” (balance sheet total >€25m and turnover >€50m) to have an audit committee (although many of those between the company and its shareholders. Under the Companies companies have an audit committee, in any event, under the Act, a new type of private limited company has a one-document codes referred to above or to comply with best practice); and “constitution”, whereas other companies continue to have a ■ PLCs and certain other limited companies (balance sheet constitution comprising a memorandum and articles of association. total >€12.5m and turnover >€25m) to include a directors’ Court decisions under the former companies acts, under the compliance statement in their annual report to confirm that Companies Act and common law (especially regarding the duties the company has certain arrangements or structures in place and responsibilities of directors) are also relevant. to ensure compliance with tax law and significant company law obligations.

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and seeks to encourage a more meaningful relationship between 2 Shareholders institutional investors and investee companies. Various shareholder advisory services review corporate governance 2.1 What rights and powers do shareholders have in the practices in companies prior to their AGMs each year. Increasingly, operation and management of the corporate entity/ Irish listed companies consult on a private basis with one or more entities? key shareholder advisory services with a view to ensuring that their corporate governance standards meet the relevant requirements. The day-to-day operation and management of an Irish company is usually entrusted to its board of directors by shareholders under the memorandum and articles of association. The ability of 2.3 What shareholder meetings are commonly held and Ireland what rights do shareholders have as regards them? shareholders to remove and appoint directors is the principal power of shareholders to influence the operation and management of the company. Company law and various requirements in the Listing All Irish companies must hold an AGM within 18 months of their Rules of the Irish Stock Exchange (the “Listing Rules”), as well as incorporation, and thereafter, the gap between AGMs may not exceed the Corporate Governance Code, require certain rights and powers to 15 months. Additional meetings, known as extraordinary general be reserved to shareholders. For instance, under the Companies Act, meetings (“EGMs”), are held as required, for example, to consider directors require prior approval from shareholders to allot shares a matter requiring shareholder approval as mentioned at question and for the dis-application of pre-emption rights on allotments of 2.1 above. For companies traded on an EU regulated market, the shares for cash. Other examples of matters reserved to shareholders standard notice period for general meetings is 21 clear days, save that are the ability to control the buy-back and reissue of shares by a the company may convene a general meeting (other than an AGM or a company, the approval of substantial property transactions with meeting to consider a special resolution – a resolution which requires directors and the conversion of a company to another company type. a 75% majority vote) on 14 days’ clear notice if that flexibility has been granted by shareholders at a preceding general meeting. The Listing Rules impose various requirements for shareholder approval in respect of significant corporate transactions for The business of the AGM is typically the consideration of the companies on the Main Market. These requirements for shareholder annual report and financial statements, the declaration of dividends, approval are more relaxed in the case of the ESM. the re-election of directors, and the fixing of the remuneration of the auditors and of the ordinary remuneration of the directors. The Company law also regulates potential conflicts of interest by Companies Act introduced the requirement that the members at an requiring certain transactions between a company and its directors AGM review the company’s affairs. (and persons connected with them) to be approved by shareholders. Shareholders also have the right to convene shareholder meetings The notice of any meeting must describe the nature of the business for the purpose of proposing resolutions which seek to direct the and must be circulated to all shareholders at least 21 clear days board to undertake certain actions. For companies listed on the Main prior to the meeting (for an AGM or a resolution to pass a special Market, it is possible for a shareholder or a group of shareholders resolution). Shareholders in companies traded on a regulated market holding at least 5% of the issued share capital to convene such who hold 3% or more of the issued share capital of the company meetings. For other companies, the threshold is 10% of the issued have the right to put an item on the agenda of the AGM. Such a share capital. Importantly, the ability of shareholders to direct the request is to be received not less than 42 days before the meeting board to undertake certain actions is limited where that matter is to which it relates, in order to allow notice of the resolution to be already reserved for the exclusive determination of the board under sent to all shareholders before the meeting. For other companies, the articles of association. Where this is the case, the shareholders shareholders will not, generally speaking, have a right to propose cannot direct the board unless they first amend the relevant provision resolutions at an AGM, unless allowed by the articles of association. in the articles of association. Separately, any shareholder can ask any question at the AGM, and Shareholders may oppose management proposals (in the form of the company is expected to answer unless there are valid reasons, resolutions proposed at general meeting) by seeking to amend such as trade secrecy or confidentiality obligations, which would resolutions, as well as by speaking and voting against any particular preclude the company from responding to the question. resolution. Particular rules, to be found in the Companies Act, the Items of business at the AGM usually include resolutions to authorise articles of association and case law, regulate a shareholder’s ability the directors to allot shares, to disapply statutory pre-emption rights, to put amendments to resolutions at a meeting. to authorise the company to buy back its own shares and to authorise Under the Shareholder Rights Regulations, members of a company the company to re-issue treasury shares. All of these items (other traded on an EU regulated market, holding 3% of the voting share than the first one) require the passing of a special resolution (i.e. capital, are given a statutory right to put items on the agenda of the the approval of 75% of the shareholders voting on the resolution annual general meeting (“AGM”). whether in person or by proxy). An EGM of the company will also be convened by the directors where a company is undertaking a transaction which requires 2.2 What responsibilities, if any, do shareholders have as shareholder approval. Shareholders holding at least 5% of the issued regards the corporate governance of their corporate entity/entities? share capital of the company, in the case of companies traded on a regulated market, or 10% of the issued share capital of the company in all other cases, can also requisition the convening of an EGM. As corporate governance, at its simplest, is the system by which Under the Companies Act, unless the company’s constitution states companies are directed and controlled, shareholders have a key role. otherwise, 50% of shareholders can convene a general meeting (this However, there is no particular responsibility on any shareholder. right is separate to the ability to requisition the convening of such In recent years, EU and domestic legislative and non-legislative a meeting). initiatives have sought to encourage more active shareholder participation in corporate governance. The UK Stewardship Code Increasingly, Irish listed companies have arrangements whereby the for institutional investors is also applicable to Irish listed companies company may communicate with their shareholders electronically

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(via their website or by email). Regulations implementing Where a company holds shares in itself as treasury shares, no rights the EU Transparency Directive, applicable to companies with can be exercised by the company in respect of those shares. securities traded on an EU regulated market, facilitate electronic communication by providing that, unless a shareholder specifically 2.6 Can shareholders seek enforcement action against requests written documentation, shareholder information can be members of the management body? distributed electronically by email or notice on the company’s website. All Irish companies allow shareholders to attend their No direct shareholder suits are permitted. Shareholders can seek meetings by way of proxy (and in most cases, multiple proxies permission to launch derivative actions, but such actions are are allowed) and to instruct their proxy to vote for or against the difficult to bring, as stringent requirements for such proceedings resolution or instruct the proxy to withhold their votes.

are strictly enforced. The courts are reluctant to interfere in the Ireland To be passed, resolutions at general meeting either require approval internal management of a company and adhere to the principle that as an ordinary resolution (requiring a simple majority of those the proper claimant in an action in respect of a wrong done to the voting in person or by proxy) or as a special resolution (requiring a company is the company itself. Shareholders will more likely bring majority of not less than 75% of those voting in person or by proxy). a claim for minority oppression (that is, where the affairs of the Voting on a show of hands is permitted with members above a company are being conducted in a manner oppressive to members, threshold having the right to demand a poll. or in disregard of their interests). The Director of Corporate Enforcement has significant powers 2.4 Can shareholders be liable for acts or omissions of under the Companies Act to enforce compliance with company law the corporate entity/entities? by the directors of a company. Shareholders may make complaints to the Director of Corporate Enforcement where they believe Companies listed on the Irish Stock Exchange will invariably be that the board of the company is not complying with its statutory limited liability companies so that shareholders will usually have no obligations. It is then for the Director to decide whether or not to liability for the acts or omissions of the company. Shareholders who investigate the matter. are parties or beneficiaries in matters that constitute a breach of the Companies Act (for example, fraudulent trading by a company or 2.7 Are there any limitations on, and disclosures knowingly receiving an unlawful distribution) can be liable to make required, in relation to interests in securities held by good the company. Where a company has a significant shareholder shareholders in the corporate entity/entities? (perhaps, a parent company) which can be shown to have exercised significant influence over the board of the company, it is possible under In respect of a company traded on a regulated market, shareholders Irish law for the shareholder to be regarded as a shadow director. In or other persons are required by regulations implementing the EU those circumstances, the shareholder will have the same liability as a Transparency Directive to make a public disclosure where they director on certain issues including potential personal liability. acquire, directly or indirectly, control of voting rights equal to 3% or In the context of takeovers, there are also provisions which can more of the total voting rights. Additional disclosures are required result in liability for shareholders where they are shown to be acting if the holder increases or reduces his/her interests in the voting in concert with the company or its board in undertaking an activity rights by a further 1%. The Companies Act contains a separate in breach of the Rules of the Irish Takeover Panel. statutory regime for disclosure of interests in companies listed on non-regulated markets or unlisted public limited companies. The Liability can also arise under the Market Abuse Regulations where disclosure threshold under this regime is also 3% (and each 1% a shareholder deals in the company’s shares or related securities thereafter), but the category of interests that are required to be after receiving confidential price-sensitive information from the disclosed is wider. company – so-called inside information. Irish company law and the articles of association of a company may require shareholders to disclose details of beneficial interests 2.5 Can shareholders be disenfranchised? held in its shares. The European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 were Under Irish regulations implementing the EU Takeover Bids introduced on 15 November 2016 and require most Irish companies Directive, it is possible for shares of an Irish company traded on to gather and maintain information on individuals described as their a regulated market to be compulsorily acquired by an offeror for ultimate beneficial owners. Further Regulations are expected mid- the company where the offeror has received acceptances of a tender 2017 to create publicly accessible national beneficial ownership offer to shareholders from at least 90% of the shares to which the registers. offer relates. These rights are frequently exercised in takeovers. Under the Rules of the Irish Takeover Panel, there are detailed The Companies Act contains similar “squeeze-out” rights which restrictions and disclosure requirements regarding the acquisition of can apply to offers for listed companies, other than companies shares and interests in shares in a company while an offer for the on a regulated market, and for unquoted companies. Where the company is underway or in contemplation. Companies Act applies, the threshold is 80% acceptance, although additional thresholds can also apply to certain offerors. Failure by a shareholder, where required, to disclose its interest in 3 Management Body and Management the company in compliance with Irish company law can result in the shareholder losing the ability to enforce rights attaching to its shares. It is possible for these rights to be restored by a court order 3.1 Who manages the corporate entity/entities and how? or under the Companies Act (by resolution of the company). A similar loss of rights can arise under company law or the articles of All Irish companies are managed by a board of directors (two-tier association where a shareholder fails to respond to an enquiry from boards do not exist in Ireland). Typically, articles of association the company in respect of the beneficial ownership of the shares. state that the business of the company shall be managed by the directors who may exercise all powers of the company which are not

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by the Companies Act or the articles required to be exercised by the company in general meeting. Most types of companies must have 3.3 What are the main legislative, regulatory and other at least two directors (who must be individuals of at least 18 years sources impacting on contracts and remuneration of members of the management body? of age) but there is no limit on the number of directors that may be appointed unless this is specified in the articles of association. The Companies Act allows a new type of private limited company to The Companies Act provides, for all companies, that any director’s have one director (provided that a separate secretary is appointed). service contract with a fixed term of over five years must be approved by shareholders. In practice, most companies tend to follow the Irish law provides that companies traded on a regulated market, or recommendation in the Corporate Governance Code which suggests perhaps their parent, must have an audit committee, comprising that notice periods be set at one year or less. While the Companies

Ireland at least one independent director with competence in auditing or Act requires companies to disclose the aggregate remuneration and accounting (as mentioned above, the Companies Act requires benefits payable to all directors, companies tend to go further and certain large companies to have such a committee). The Corporate disclose, and the Listing Rules require disclosure by Main Market Governance Code provides that such companies have an audit Listed Companies of, remuneration and benefits on an individual committee composed solely of persons who are regarded by the basis in respect of each director. A company’s annual report will Code as independent non-executive directors and one of whom also frequently contain a report from the remuneration committee must have recent financial experience. Otherwise, there is no which will provide information on a historic basis in respect of the legal requirement for a board to be composed of persons with any company’s policy on directors’ remuneration including performance- particular background or skills. In practice, most listed companies related conditions and compensation received in the form of share will seek to have a majority of independent non-executive directors. options, share incentive schemes and pensions. It is now becoming These persons will in turn constitute the directors who are then increasingly common for Irish companies to ask shareholders to appointed to the audit, remuneration and nomination committees vote on an advisory non-binding ‘say-on-pay resolution’, although of the board. The Irish Corporate Governance Annex published there is no legal obligation to do so. by the Irish Stock Exchange places additional emphasis on the requirement for a board and its committees to have an appropriate balance of skills, experience, independence and knowledge of the 3.4 What are the limitations on, and what disclosure is company to enable the directors to discharge their respective duties required in relation to, interests in securities held by and responsibilities effectively. Similar requirements apply to the members of the management body in the corporate entity/entities? boards of banks and insurance institutions subject to the Irish Central Bank’s requirements of corporate governance. Indeed, the latter requirement goes further by limiting the number of directorships a Directors are permitted to own shares in their companies and director of such an entity may have. frequently do so in the case of listed companies. Subject to obtaining prior shareholder approval for the relevant option or incentive scheme, directors can be granted options or other forms of equity 3.2 How are members of the management body appointed based incentive awards. Directors may not, however, purchase and removed? or sell options over existing shares in their company. Under the Companies Act, directors are obliged to disclose to the company any The first directors will be appointed by the incorporators ofthe “interest” (a term widely defined) which he/she or certain connected company and thereafter appointments are, generally speaking, made persons hold in shares or debentures in the company and relevant by shareholders. Most boards will have a nomination committee group companies. Disclosure is not required where the aggregate which will have responsibility for identifying and recommending to interest held is less than 1%. the board suitable candidates for appointment to fill any vacancies Companies listed on the Main Market or ESM will adopt a share on the board from time to time. A board will usually have the power dealing code which is in accordance with the requirements of to fill vacancies; however, any director appointed by a board is MAR. Such share dealing codes impose restrictions on, as well as required, under conventional articles of association, to retire at the consent requirements for, share dealings which directors may wish next annual general meeting and, if willing, offer himself/herself to undertake in their company shares. for re-election by the shareholders. Shareholders can appoint directors to fill a vacancy by way of an ordinary resolution though MAR expressly prohibits trading by directors and other “persons this is, typically, subject to prescribed notice requirements in the discharging managerial responsibilities” (which includes directors articles of association (unless the person proposed for appointment and their connected persons and senior management, “PDMRs”) has been recommended by the board). The Companies Act in “closed periods”, save in limited and specified circumstances. allows shareholders to remove any director by way of an ordinary PDMRs may not conduct transactions on their own account or for resolution. the account of a third party during a closed period of 30 calendar days before the announcement of an interim financial report or end- Increasingly, companies listed on the Main Market are adopting the of-year report which the issuer is obliged to make public according practice of offering their entire boards for re-election at each annual to the rules of the trading venue on which the issuer’s shares are general meeting (by separate resolution for each director). For admitted to trading or national law. companies listed on other markets, their articles of association will normally provide that one-third of the board will retire by rotation Under MAR, PDMRs of companies traded on a regulated market or at each annual general meeting and will be eligible for re-election. ESM listed companies are required within three business days of any Under the Corporate Governance Code, boards are expected to share dealing to notify the company of the dealing. The company evaluate the performance of their directors on an annual basis and to must notify the market by way of a regulated announcement as soon confirm this to shareholders in their annual report. as possible and no later than the end of the business day following receipt of the information. If a director has a large shareholding which It is also common for the articles of association to provide that an is equal to or exceeds 3% of the issued share capital of the company, individual director may be required to resign by the unanimous this must be notified to the company as well as any 1% change in such decision of all of the other directors. interest. The company must in turn notify this to the market.

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director who deliberately or negligently fails to ensure compliance 3.5 What is the process for meetings of members of the with this requirement can be guilty of an offence. The Director management body? of Corporate Enforcement (mentioned at question 2.6 above) will investigate claims that proper accounting records have not been The articles of association of a company invariably provide that a maintained. For companies traded on a regulated market, directors board meeting can be convened by reasonable notice by any director. are also under a statutory obligation to describe in their annual report An agenda and relevant board papers are circulated (increasingly, the internal control and risk management systems which operate in by secure electronic means). In practice, boards will agree at the the company. Furthermore, they must review the effectiveness of start of each year the schedule for board meetings throughout the the company’s risk management and internal controls and report to rest of the year, and additional board meetings may be convened by shareholders that this has been done. the chairman where particular issues arise which need to be dealt Ireland Directors have a duty to ensure that the auditors have all information with at short notice. Listed companies will usually set out in their relevant for the audit. PLCs and other companies of a certain size annual report the number of board meetings held during the year have an obligation to put in place arrangements designed to ensure (and committee meetings) and indicate the attendance levels of compliance with company and tax law (see question 1.3 above). each director. Participation by phone and other electronic means is usually permitted for board meetings. The Corporate Governance Code, and equivalent codes applicable to such companies, expects all directors to be collectively responsible for the success of the company by providing entrepreneurial 3.6 What are the principal general legal duties and leadership within a framework of prudent and effective control. liabilities of members of the management body? The Corporate Governance Code requires the directors to maintain dialogue with shareholders based on the mutual understanding of There is a large number of statutory requirements which must be objectives. complied with by directors. These include obligations under health Government, regulators and investors all seek to ensure that and safety legislation, employment legislation, insolvency law and Irish companies are well-governed by competent, professional the Companies Act. Under the Companies Act, the principal duties and ethical boards in order that trust and confidence in the Irish of the directors include the obligation to maintain proper books and business community is maintained. Issues of cyber-security and records that accurately record the affairs of the company, as well the identification and monitoring by companies of risk (not least as the duty not to knowingly carry on the business of the company implications of Brexit) are topical challenges for many Irish entities. in a reckless manner in order that loss could be caused to creditors of the company. The Companies Act has codified certain duties of a director (which were previously common law fiduciary duties), 3.8 What public disclosures concerning management namely the duty: body practices are required? ■ to act in good faith; ■ to exercise powers in the interest of the company for a proper Companies traded on a regulated market are required to state in purpose; their annual report what governance code has been adopted by the company and how they have complied with the code. Most ■ to avoid conflicts of interests; companies comply with this obligation by setting out a lengthy not to misuse company property; ■ corporate governance report in their annual report. This report ■ to exercise reasonable care, skill and diligence; and will deal with the structure and role of the board and the division ■ not to restrict the director’s power to exercise an independent of responsibilities between the board and its committees. Certain judgment. companies of a particular size are required to publish details of a The Companies Act also codified the duty for a director to act directors’ compliance statement in their annual report – see question honestly and responsibly in the conduct of the company’s affairs 1.3 above. and a duty to have regard to the interests of employees. These duties are owed to the company, and ordinarily, a court 3.9 Are indemnities, or insurance, permitted in relation to will not seek to second-guess the exercise by a director of his/her members of the management body and others? power where it is shown that the director did so in a way that he/ she believed was in the best interests of the company. If it is shown Companies are permitted to maintain insurance for directors that the director did not exercise the skill and care expected of a and officers in respect of liability which they may incur asa person with the director’s qualifications, or where it is shown that consequence of being a director of the company. The cover usually the director failed to inform himself/herself about the affairs of the applies on a “claims made” basis. This insurance can cover defence company and did not seek to supervise and control those affairs costs but may not cover any criminal fines or regulatory penalties albeit in conjunction with other directors, the director can face which may be imposed on a director. The Companies Act prohibits liability. Directors can delegate, but not abdicate, responsibility. indemnities to directors where they seek to cover breach of duty Any delegation must be monitored by the directors. or default. Articles of association of Irish companies invariably provide an indemnity for directors of the company; however, this indemnity (provided that it forms part of the appointment terms for 3.7 What are the main specific corporate governance responsibilities/functions of members of the the director) may only be called upon where a judgment has been management body and what are perceived to be the given in favour of a director which either exonerates or relieves the key, current challenges for the management body? director from any liability in respect of his or her actions. Therefore, the indemnity does not, as a general principle, allow the company A company’s accounting records must correctly record its to pay defence costs while the director might still have potential transactions and enable the financial position of the company to liability. be determined at any time with reasonable accuracy. This is the primary statutory corporate governance duty of all directors and a

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The directors’ report must contain a fair review of the development 4 Other Stakeholders and performance of the company’s business and of its position during the financial year, together with a description of the principal 4.1 What, if any, is the role of employees in corporate risks and uncertainties that the company faces. This review governance? must provide a balanced and understandable assessment of the company’s position and prospects, as well as providing a balanced With the exception of some companies which are or have been and comprehensive analysis of the development and performance owned by the Irish Government, there is no requirement to have of the company’s business and of its position, consistent with employee representatives on the boards of Irish companies. Senior the size and complexity of the business. If required in order to executives and members of internal audit have a key role to play in assist understanding of the company’s development, performance Ireland the corporate governance of all Irish companies. or position, the review will include an analysis of financial and, where appropriate, non-financial key performance indicators Whistle-blowing legislation was enacted during 2014 and facilitates relevant to the particular business, including information relevant an employee making a (good faith) disclosure where he/she has to environmental and employee matters. certain concerns (such as concerns that a company is breaching the law). In the financial services sector, certain individuals (such The report must also contain references to, and additional explanations as a director of a regulated company) have a mandatory reporting of: amounts included in the company’s financial statements, where requirement to the Central Bank if he/she believes that their appropriate; particulars of any important events affecting the company company is breaching financial services law. or any of its subsidiaries, if any, which have occurred since the financial year-end; an indication of likely future developments in the business of the company; an indication of the activities, if any, of the 4.2 What, if any, is the role of other stakeholders in company, in the field of research and development; and an indication corporate governance? of the existence of branches of the company outside the State and the country in which each such branch is located. As mentioned The role of employees is dealt with at question 4.1, investor advisory above, the board should, at least annually, conduct a review of the groups at question 2.1. The role of Government as owner of state effectiveness of the company’s system of internal controls (i.e. all entities is reflected in the relevant legislation and the Code for State material controls, including financial, operational and compliance entities mentioned at question 1.2. At various earlier parts of this controls and risk management systems). The board should also report Chapter we have considered the role of various regulators (for to shareholders that they have acted accordingly. example, the Central Bank and Director of Corporate Enforcement). As described at question 3.8 above, companies traded on a regulated The influence of other stakeholders is less direct in that companies market must publish in their annual report a corporate governance with strong corporate governance enjoy a better reputation (and statement including disclosures regarding the main features of the trading opportunities) with customers and creditors. company’s internal control and risk management systems. Annual reports are required to contain details of directors’ interests 4.3 What, if any, is the law, regulation and practice in shares and of transactions between the director and the company concerning corporate social responsibility? during the financial year.

This is not a legal requirement; however, many Irish companies voluntarily report to their shareholders on an annual basis on CSR 5.3 What is the role of audit and auditors in such issues. disclosures?

Companies traded on a regulated market must ensure that their 5 Transparency and Reporting auditors state in the annual audit report whether, in their opinion, the description in the corporate governance statement, of the main features of the internal control and risk management systems of the 5.1 Who is responsible for disclosure and transparency? company, is consistent with the process for preparing the company’s consolidated financial statements. The board has a statutory obligation to ensure that the company complies with its transparency and disclosure obligations set out in Generally, an auditor is required by law to report to the audit the Companies Act, MAR and the Transparency Regulations. These committee (where relevant) on key matters arising from the statutory obligations are less onerous for companies which are not traded on a audit, and, in particular, on material weaknesses in internal control regulated market. Both the annual report and the half-yearly report in relation to the financial reporting process. to shareholders will contain a responsibility statement on behalf The Corporate Governance Code also requires the company to of all of the directors of the company, confirming the company’s ensure that the auditors review a number of issues before the compliance with its obligations under the Transparency Regulations. annual report is published. This review includes the statement by the directors that the business is a going concern, as well as the board’s corporate governance report insofar as it relates to the duty 5.2 What corporate governance related disclosures are of directors to explain in the annual report their responsibility for required? preparing the financial statements.

All companies must prepare and publish annual financial statements Auditors have specific duties under the Companies Act to check that in the Companies Registration Office in Dublin in accordance with directors comply with disclosure obligations concerning interests in the Companies Act. The annual report will also contain a detailed shares and other matters. Where an auditor has reason to believe that narrative which describes the business of the company and its a specified offence (for example, failure to maintain any of certain subsidiaries during the financial year. registers) has been committed, the auditor is obliged to report the matter to the Director of Corporate Enforcement; failure to do so can lead to prosecution of the auditor.

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New EU Statutory Audit Regulations, applicable to certain public- As required by the Corporate Governance Code, relevant companies interest entities, which first came into force and applied from 2010, also publish on their website the terms of reference of their came into effect on 17 June 2016 as did the more widely applicable nomination, remuneration and audit committees. provisions of the EU Statutory Audits Directive. After any shareholder meeting, it is a legal requirement for a company traded on a regulated market to publish on its website 5.4 What corporate governance information should be the results of any voting conducted at the meeting. Most listed published on websites? companies will voluntarily provide other information such as a copy of the articles of association of the company, as well as notices Under the Shareholder Rights Regulations, companies listed on a issued in respect of shareholder meetings on other websites. regulated market are required to provide a summary of the rights Non-listed companies tend to include some corporate-related Ireland of shareholders in respect of voting and attending shareholder information on their websites, but typically not information that is meetings, as well as their rights to propose resolutions and ask not otherwise publicly available or which is trade-sensitive. questions at the meeting. Companies must also maintain on their website, for a period of five years, regulated disclosures which they may make from time to time.

David Byers Paul Heffernan McCann FitzGerald McCann FitzGerald Riverside One Riverside One Sir John Rogerson’s Quay Sir John Rogerson’s Quay Dublin 2 Dublin 2 D02 X576 D02 X576 Ireland Ireland Tel: +353 1 607 1365 Tel: +353 1 607 1326 Fax: +353 1 829 0010 Fax: +353 1 829 0010 Email: [email protected] Email: [email protected] URL: www.mccannfitzgerald.com URL: www.mccannfitzgerald.com

David is a corporate lawyer, specialising in mergers and acquisitions, Paul’s work spans a broad range of corporate activity including public company takeovers, IPOs and equity issues by public companies, mergers and acquisitions, corporate reorganisations and corporate demergers and restructurings. David advises financial institutions matters relating to insurance undertakings. He advises a range of and other market participants on regulatory issues, including market State and public sector entities. He is experienced in advising on all abuse, corporate governance and compliance matters. aspects of corporate governance. David is a frequent contributor on matters of securities and corporate Paul is a member of the Institute of Directors in Ireland and is on the law to a number of industry and legal journals, as well as mainstream Institute’s legal panel for members. He speaks regularly within the media published in Ireland and internationally. firm and at external events on a range of company law and corporate governance topics. He has been a member of the expert groups established by the Irish Stock Exchange which advised on the implementation in Ireland of the EU Prospectus, Market Abuse and Transparency Directives. David is a member of the Irish Stock Exchange’s equity listing committee.

McCann FitzGerald is one of Ireland’s premier law firms, with 69 partners and almost 350 lawyers and professional staff. The firm is consistently recognised as being the market leader in many practice areas and its pre-eminence is endorsed by clients and market commentators alike. Our principal office is located in Dublin and we have overseas offices in London, Brussels and New York. We provide a full range of legal services, primarily to commercial, industrial and financial services companies. Our clients include international corporations, major domestic businesses and emerging Irish companies. We also have many clients in the State and semi-State sectors. Principal Office: Riverside One Sir John Rogerson’s Quay Dublin 2 D02 X576 Ireland (www.mccannfitzgerald.com) Dublin, London, New York, Brussels

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Italy Raffaele Cavani

Munari Cavani Paolo Preda

Gender diversity is seen as another key challenge: since 2012 the 1 Setting the Scene – Sources and number of women on boards has increased significantly and has Overview now have reached approximately 30%. The remuneration of executive directors and management, and in 1.1 What are the main corporate entities to be discussed? particular of the state-owned public companies, is also a topic that has been the subject of a political debate. Corporate governance applies to joint stock companies (Società per Azioni – SpA), companies limited by shares (Società in 2 Shareholders accomandita per Azioni – SapA), limited liability companies (Società a responsabilità limitata – Srl) and cooperatives. This chapter will mainly focus on SpAs, since this is widely the 2.1 What rights and powers do shareholders have in the most common form for listed companies; also Srls will be taken operation and management of the corporate entity/ into consideration since, even though such kind of company may entities? not be listed, it represents the most common company type adopted in Italy. Even though the management of a company is reserved for the management body, shareholders have certain rights which can influence and impact the operation and management of corporate 1.2 What are the main legislative, regulatory and other entities, such as: approval of the yearly financial statements; allocation corporate governance sources? of profits; resolutions on input into any extraordinary transactions (mergers, de-mergers, winding-up, reorganisation and dissolution The main corporate governance source for Italian companies is the of the company); and resolutions on increasing or decreasing of the Italian civil code (“ICC”). Furthermore, upon incorporation any corporate capital. company must adopt its by-laws, which set forth the main rules Furthermore, in SpAs, shareholders have the right to inspect regarding, inter alia, the management body, its composition, its role corporate books and make copies of them (art. 2422 ICC) and to and its functioning. challenge the resolutions of the management body that infringe and As per listed companies, in addition to the foregoing, the following cause damage to the shareholders’ rights (art. 2388, section 4, ICC). sources shall also apply: Legislative Decree no. 58/1998 (Testo As to Srls, quotaholders who do not manage the company are entitled to Unico della Finanza – “TUF”), regulatory provisions issued by receive information on the company’s business and consult corporate Commissione Nazionale per le Società e la Borsa – “Consob” (the books and documents relating to the management (art. 2476, section Italian authority which is responsible for the supervision of the 2, ICC). Moreover, by-laws can empower specific quotaholders with Italian securities market) or by Borsa Italiana S.p.A. (the company management powers (art. 2468, section 3, ICC). Finally, directors managing the Italian stock exchange), and related secondary can request that the quotaholders resolve on specific issues that are regulations. usually reserved to the management body (art. 2479 ICC). Moreover, listed companies may voluntarily adopt a self-regulation Corporate Governance Code (the “Code”), issued by the Corporate Governance Committee of Borsa Italiana S.p.A. The Code is based 2.2 What responsibilities, if any, do shareholders have as upon the “comply or explain” principle: companies are free to regards the corporate governance of their corporate entity/entities? decide whether to follow the recommendations or not; in case of any deviation, they are required to give an explanation for the benefit of shareholders, investors and the market. There is no specific responsibility for shareholders regarding corporate governance; consequently, they cannot be held responsible in terms of corporate governance. 1.3 What are the current topical issues, developments, Nevertheless, the Code recommends that the management body trends and challenges in corporate governance? takes initiatives aimed at promoting the broadest participation possible of the shareholders in the shareholders’ meetings and After the crisis of the recent years, one of the major challenges in makes the exercise of their rights as easy as possible in order to corporate governance is to place priority on creating value for the develop a continuing dialogue with the shareholders. shareholders over a medium-long term period.

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voted or approved activities which damaged other quotaholders, 2.3 What shareholder meetings are commonly held and third parties or the company itself. what rights do shareholders have as regards them?

In SpAs, a shareholders’ meeting may be ordinary or extraordinary. 2.5 Can shareholders be disenfranchised? Meetings are called by the directors; shareholders representing 10% Shareholders may be disenfranchised in case of a pledge or usufruct: of the capital (5% for listed companies) also have the right to request unless otherwise agreed by the parties, the right to vote is exercised that directors call a meeting or add specific items to the agenda. by the pledgee or the usufructuary creditor. In case of seizure of the Ordinary shareholders’ meetings shares, the voting right is exercised by the keeper. Italy Ordinary meetings must be held at least once a year and no later In case of capital increase, the disenfranchisement is extended also than 120 days after the end of the previous fiscal year. By-laws may to the new shares due to the shareholder. extend this term to 180 days in case of specific needs based on the Furthermore, shareholders that have not made their capital structure or the activity of the company. contribution in time cannot attend the shareholders’ meetings (and Among others, the following resolutions are reserved for the consequently they cannot vote). ordinary meeting: In addition, as to listed companies, should a bidder buy at least 95% ■ approving the yearly financial statements and distribution of of the shares in the framework of a takeover bid, the remaining 5% profits; may be compulsorily purchased by that bidder within three months ■ appointing and revoking directors and auditors and, if of the expiry of the deadline for bid acceptance (so-called “squeeze- appointed, the external auditors; and out”: art. 111 TUF). ■ determining directors’ and auditors’ remuneration. Ordinary meetings are duly constituted with the presence of as many 2.6 Can shareholders seek enforcement action against shareholders as representing at least half of the corporate capital; members of the management body? resolutions are taken with as many votes as those representing the absolute majority of those in attendance (unless otherwise indicated The ICC provides specific enforcement actions against members in the by-laws). of the management body; such actions can also be started by the Extraordinary shareholders’ meetings shareholders (see the answer to question 3.6). Among others, the following resolutions are reserved for the extraordinary meeting: 2.7 Are there any limitations on, and disclosures ■ amending the by-laws; required, in relation to interests in securities held by ■ appointing, replacing and defining the powers of the shareholders in the corporate entity/entities? liquidators; ■ issuing debentures convertible into shares; and There is no limitation in relation to securities that shareholders may own in a company. ■ carrying out mergers, de-mergers, winding-up and reorganisation. In case of listed companies, shareholders that hold, either indirectly, Extraordinary meetings are duly constituted and lawfully adopt more than 3% of the capital (5% in case of small-medium sized resolutions with the presence and the favourable vote of as many company) shall notify the company and the Consob (art. 120 TUF). shareholders representing more than half of the corporate capital. In A notification shall also be made when the thresholds of 5%, 10%, case of listed companies, resolutions are taken with as many votes as 15%, 20%, 25%, 30%, 50%, 66.6% and 90% are reached, and when those representing 2/3 of the corporate capital. the investment falls below such thresholds. In Srls, among others, the following resolutions are reserved for the In case of cross-participations exceeding the above thresholds, the shareholders: company that has exceeded the limit successively cannot exercise its right to vote related to the surplus shares and it must dispose of ■ approving the annual financial statements and distribution of profits; them within 12 months of the date on which it exceeded the limit. In the event of failure to make the disposal within such time limit, ■ appointing directors; the suspension of voting rights shall apply to the entire shareholding ■ appointing auditors, if any; (art. 121 TUF). ■ amending the by-laws; and ■ entering into transactions which cause a substantial change to the corporate object or to the rights of the quotaholders. 3 Management Body and Management Resolutions are taken with the favourable vote of as many quotaholders representing more than half of the corporate capital 3.1 Who manages the corporate entity/entities and how? (unless otherwise indicated in the by-laws). Italian companies are managed by the management body, which 2.4 Can shareholders be liable for acts or omissions of may have a number of different structures. the corporate entity/entities? The management body of a listed company is comprised of several directors, which may operate in different ways: As a general rule, shareholders cannot be liable for acts or omissions i) Traditional system of the company: only directors have general and specific duties and The company is managed by a board of directors, while the responsibilities with respect to corporate governance activities. control is carried out by the board of statutory auditors. As a partial derogation as to Srls, quotaholders may be held liable jointly with directors, should these quotaholders have intentionally

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ii) Dual board system The supervisory board in turn appoints the management board, The company is managed by the management board, which is which must be comprised of at least two members. At least one of controlled by the supervisory board. the members of the supervisory board must be an auditor (revisore iii) Monistic board system legale dei conti); by-laws may subordinate the appointment to further requirements of honourableness, professionalism and independence. The company is managed by a board of directors (executive directors), within which a supervisory committee is appointed Members of one board may not be members of the other. (non-executive directors). iii) Monistic board system Among the listed companies, the traditional system is largely The board of directors is appointed by the shareholders’ meeting. At prevalent; in 2015 only two adopted the monistic board system and

Italy least 1/3 of the members must be independent. four the dualistic system. The board appoints the supervisory committee from its members. Non-listed SpAs, in addition to the systems described above, may Such committee, in the case of listed companies, must be comprised also opt for a sole director. of at least three members. Members of the committee must be Srls may be managed by a board of directors or by a sole director. independent and must meet the requirements of honourableness and The system to be adopted is decided by the shareholders’ meeting. professionalism, as provided for by the by-laws. Furthermore, they cannot be empowered with any delegated authorities by the board, There is no limit on the number of directors that may be appointed, nor in general carry out any management activity of the company. unless this is specified in the by-laws. If the by-laws do not specify the number of directors, but only provide for a maximum and At least one member of the committee must be an auditor (revisore minimum number, then the shareholders’ meeting shall determine legale dei conti). such number (art. 2380-bis ICC). The appointment will be effective only upon acceptance by the Either an individual (of at least 18 years of age) or a company can be relevant director. appointed as a member of the management body. In case of Srls, directors are appointed by the shareholders’ meeting. The board may delegate part of its management and representation The term of the office in SpAs shall not exceed three fiscal years. In powers to one or more directors (managing directors) and/or to Srls there is no limit for the term of the office; the appointment may executive committees. be also for an indefinite term. In general, there is no legal requirement for a board to be composed In case of listed companies, by-laws must provide that directors of persons with any particular background or skills. In case of are appointed on the basis of the list of candidates and define the specific business sectors (e.g. banks and insurance institutions), and minimum participation share required for their presentation (which in case of listed companies, additional emphasis is placed on the must not be higher than 1/40 of the share capital). At least one of the requirement for a board and its committees to have an appropriate directors shall be chosen from the minority list. balance of skills, experience, independence and knowledge to enable Furthermore, at least 1 of the directors must satisfy the independence the directors to discharge their respective duties and responsibilities requirements. effectively. The board, at least on a yearly basis, shall perform an evaluation The Chairman is entrusted with duties of organisation of the board’s of its performance, as well as its size and composition, taking works and of liaison between executive and non-executive directors. into account the professional competence, experience (including Even though there are no mandatory rules as to the separation of the managerial experience) gender of its members and number of years functions of the Chairman and CEO, due to their different roles, best as director. Based on this evaluation, it shall report its view to practice tends to separate them. shareholders on the managerial and professional profiles, deemed With regard to listed companies, the Code expressly recommends appropriate for the composition of the board, prior to its nomination. avoiding the concentration of corporate offices in one single Additionally, the board shall appoint a nomination committee individual. In the event that the Chairman is also the CEO, the Code whose majority will be represented by independent directors. Said suggests that the board designates an independent lead director, committee will perform a consultative and advisory role in the who coordinates the requests and contributions of non-executive identification of the best composition of the board, indicating the directors and, in particular, of those who are independent. professional figures whose presence may favour its correct and For listed companies, the board must be comprised of executive effective functioning. and non-executive directors. Among the non-executive directors, In listed companies, by-laws must provide for mechanisms which an adequate number (in any case, not less than two) must be assure that the less-represented gender obtains at least 1/3 of the independent, i.e. they must not maintain, nor have recently appointed directors. maintained, directly or indirectly, any business relationships with Co-optation the company, or persons linked to it, of such a significance as to i) Traditional system influence their autonomous judgment. Should during a fiscal year one or more directors cease their office, the others provide for a replacement by resolution approved by the 3.2 How are members of the management body appointed board of statutory auditors, provided that the majority is always and removed? represented by directors appointed by the shareholders’ meeting (art. 2386 ICC). The directors so appointed remain in office until Appointment the next shareholders’ meeting. Should the majority of the directors i) Traditional system cease their office, those who remain in office shall call a meeting to The board of directors is appointed by the shareholders’ meeting. appoint the new directors. ii) Dual board system By-laws may provide that in case of cessation of certain directors The shareholders’ meeting appoints the supervisory board, which the entire board ceases to operate (so-called simul stabunt simul must be comprised of least three members. cadent).

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ii) Dual board system 3.4 What are the limitations on, and what disclosure is Should during a fiscal year one or more members of the supervisory required in relation to, interests in securities held by board cease their office, the shareholders’ meeting shall immediately members of the management body in the corporate provide for their replacement; should one or more members of the entity/entities? management board cease their office, the supervisory board shall immediately provide for their replacement. Directors are permitted to own shares in the companies they manage; iii) Monistic board system there is no limitation of shares that may be owned by them. Should during a fiscal year one or more members of the supervisory Directors of a listed company (as well as any other persons

committee cease their office, the board shall immediately provide performing management and supervisory functions) must inform Italy for their replacement by choosing any of the directors; should this Consob and the public of transactions involving the company’s not be possible, the same rules as for the traditional system shall shares carried out by them, also indirectly, or by certain connected apply. persons. Removal The shareholders’ meeting may approve compensation plans The members of the management body can be removed at any based on financial instruments in favour of directors (and other time from their office by resolution of the shareholders’ meeting. managers), provided that the company makes available to the public Should the removal be without cause, the directors shall be entitled a report specifying, inter alia, the procedures and clauses for the to receive an indemnification in principle equal to the remuneration implementation of the plan and the restrictions on the availability of that he/she would have received until the term of his/her office. the shares or options allocated. The use of insider information for any such transactions is strictly 3.3 What are the main legislative, regulatory and other prohibited and constitutes a criminal offence. sources impacting on contracts and remuneration of members of the management body? 3.5 What is the process for meetings of members of the management body? The remuneration of the directors is established by the shareholders’ meeting upon their appointment. In case of a dualistic board A board’s meeting is called by means of a notice of call to be sent system, the remuneration of members of the management board is to all the members of the management and control bodies. By-laws established by the supervisory board. may provide that a meeting is also validly held without a formal Generally, a fixed amount or a variable remuneration with general notice, provided that all the members are in attendance or a majority indicators or benchmarks is provided for. Remuneration may be is in attendance and those absent have been previously informed of represented in whole or in part by profit sharing or by the attribution the meeting. of the rights to subscribe shares to be issued at a predetermined In general, ICC requires at least one board meeting per year, for price. the annual approval of draft financial statements. Nevertheless, The remuneration of directors having special authorities (in since the managing director(s) must report on the management (i.e. particular, the CEO) is determined by the board of directors, having business) of the company to the board and to the auditors at least on heard the opinion of the board of statutory auditors. Such opinion is a bi-annual basis, at least two meetings will be held. non-binding; should the board want to deviate from it, it must justify In listed companies meetings must be held at least on a quarterly such deviation. basis. In any case, according to common practice, their frequency is If provided for by the by-laws, the shareholders’ meeting can significantly higher (approx. 8–10 meetings per year). determine an aggregate remuneration for all directors, including the In any case, the chairman has the faculty to call a meeting whenever ones which have special authorities. he/she deems it to be necessary. Furthermore, the chairman must As to listed companies, the Code provides that the remuneration call a meeting upon request of any director which specifies the of directors and key management personnel shall be of sufficient issues to be dealt with. Additionally, in case of urgency any director amount to attract, retain and motivate people with the professional is entitled to call a meeting of the board. skills necessary to successfully manage the company. The chairman shall determine the agenda of the meeting and shall Additionally, a material part of the remuneration of directors with cause the relevant board papers to be circulated before the meeting. managerial powers should be linked to the achievement of specific In order to hold a valid meeting, at least the majority of the directors performance objectives; the remuneration of non-executive directors (or the higher percentage as provided for by the by-laws) must shall be proportional to the commitment required from each of them, be in attendance. For passing resolutions, the favourable vote of also taking into account their participation in any committees. the majority of directors in attendance (or the higher majority as The board of directors shall prepare on a yearly basis a report on provided for by the by-laws) is required. remuneration, which must contain at least: By-laws may allow directors to participate in the meetings by phone 1. the policy on the remuneration of directors and key or by other tele- or video-communication means. management personnel with reference to at least the following year and the procedures used to adopt and implement this policy; and 3.6 What are the principal general legal duties and liabilities of members of the management body? 2. with reference to any directors and key management persons, a suitable representation of each of the items comprising his/her remuneration, illustrating any amount received, in The management body is responsible for the business activities any form, by the company and by subsidiaries or affiliated of the company. In this capacity, directors must apply the due companies. diligence of a proper and diligent businessman and must act in the best interests of the company and in compliance with the corporate purpose and with the duties provided by the law or by-laws.

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In addition to the general duty of care, the ICC provides certain material adverse changes to the economic and financial positions specific duties such as: duty to be informed about the running of of the company at an early stage. To this end, a major role will be the business and, in turn, duty of the managing director(s) to inform reserved for the management body. other directors; duty to keep the corporate books in a correct way; duty not to compete with the company, unless in case of express 3.8 What public disclosures concerning management authorisation from the shareholders’ meeting; and duty to notify any body practices are required? conflict of interests. In addition, directors are required to ensure the company complies with obligations under health and safety Italian companies are required to prepare a management report, attached legislation, employment legislation and insolvency law. to the yearly financial statements, whereby the directors describe the Italy Directors are personally liable for breaches of duty. Even though, situation of the company and the trend of the operations. No specific in principle, any director shall be liable only for his/her acts or information is required as to the management body practices. omissions, Italian practice (in particular in case of insolvency Additionally, listed companies are required to insert in such procedures) try to extend a liability to the whole board. management report a section named: “Report on corporate The business judgment rule shall apply: directors shall not be held governance and ownership structures”, which shall provide, inter liable for the bad results of the management, provided that they act alia, detailed information on: on the basis of adequate and accurate information. ■ the board’s composition, indicating for each member their A claim against the directors may be brought upon a resolution of qualification (executive, non-executive, independent), their the shareholders’ meeting, within five years from the termination of relevant role and their main professional characteristics, as their office. In order to safeguard the minorities, the claim may be well as the duration of his/her office since their appointment; exercised also by shareholders representing at least 1/5 of the capital ■ the percentage of each director’s attendance at board (1/40 in the case of listed companies). meetings; In the case of a dual board system, a claim may be brought either by ■ agreements between the company and directors, members of the control body or supervisory board, which envisage the shareholders or by the supervisory board. indemnities in the event of resignation or dismissal without As a consequence of the corporate liability action, directors will be just cause, or if their employment should be terminated as the removed from their offices. result of a takeover bid; The company may waive this action and settle the claim against ■ rules applying to the appointment and replacement of directors the directors, provided that the relevant resolution is not opposed and members of the control body or supervisory board; by more than 1/5 of the capital (1/20 in case of listed companies). ■ the adoption of a corporate governance code of conduct issued by a regulated stock exchange, together with the corporate Creditors may also bring an action against the directors, should they governance practices actually applied by the company; prove that the company’s assets are insufficient for the satisfaction ■ the composition and duties of the management and control of their claims. Also in such a case the indemnification, if any, shall bodies and their committees; and be paid to the company (and not to the creditors). ■ a description of the diversity policies applied regarding the Finally, individual shareholders and third parties are entitled to be structure of the management and auditing bodies in relation to indemnified of damages directly caused to them by the directors aspects such as age, gender and training/professional courses (e.g.: an investor which subscribes a capital increase based upon taken, with a description of the objectives, implementation financial statements which afterwards turn out to be false). methods and results of said policies.

3.7 What are the main specific corporate governance 3.9 Are indemnities, or insurance, permitted in relation to responsibilities/functions of members of the members of the management body and others? management body and what are perceived to be the key, current challenges for the management body? Whilst a prior, general undertaking to indemnify the directors would not be valid since it would be undetermined and undefined, it is The management body is responsible for executing any ordinary common that in cases where transactions involve a change of control, and extraordinary management powers. the company undertakes to waive any actions against the directors A number of specific corporate governance duties are imposed upon (which usually involve dismissal) and to keep them harmless and it, including: indemnified against any actions which any third parties might start against them in connection with their offices. ■ setting the strategic aims, values and standards of the company; It is common practice in Italy that companies maintain insurance ■ preparing the financial statements of the company; policies (so called “D&O”) for directors and officers in respect of civil liabilities, which they may incur in relation to the performance ■ monitoring and reviewing the effectiveness of the board’s committees; of their duties in office. Usually the company pays the insurance premium, which is considered to be a fringe benefit. ■ providing strategic guidance and evaluation on the overall adequacy of the internal control and risk management system; ■ instigating initiatives aimed at promoting the broadest 4 Other Stakeholders participation of the shareholders in the shareholders’ meetings and make easier the exercise of the shareholders’ rights; and ■ developing an effective dialogue with the shareholders based 4.1 What, if any, is the role of employees in corporate on the understanding of their reciprocal roles. governance? As to the challenges, a particular focus is put upon risk management: the recent projects of reformation of the insolvency law (still in Under Italian law, unlike other European laws and regulations, there discussion) tend to provide for mechanisms aimed at identifying any are no rules or provisions providing for employee representation in corporate governance.

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For SpAs, by-laws can provide the allocation of specific shares ■ details of management delegated powers; or financial instruments to employees (art. 2349 ICC), but they ■ details of the adoption of a corporate governance code of do not automatically include any role for employees in corporate conduct; governance. ■ agreements between the company and directors, internal or external auditors that envisage indemnities in the event of resignation or dismissal without just cause or termination of 4.2 What, if any, is the role of other stakeholders in their agreements upon a takeover bid; corporate governance? ■ any agreement resulting in a change of control or the termination of a change of control situation; There are no rules or provisions providing a role, even minor, for ■ details of the holders of securities with special control rights; Italy other stakeholders in corporate governance. ■ compensation agreements detailing financial instruments in favour of directors, managers, employees or external 4.3 What, if any, is the law, regulation and practice collaborators linked to the company, parent company or concerning corporate social responsibility? subsidiaries; and ■ shareholdings exceeding the thresholds fixed by Consob (see Very recently the EU Directive on non-financial information and the answer to question 2.7). diversity information by large companies and groups (2014/95/EU) has been implemented in Italy (Legislative decree 254/2016). Large 5.3 What is the role of audit and auditors in such companies (and in particular: listed companies, banks, insurance disclosures? companies) are required to make disclosures on non-financial matters such as environmental, social and employee-related matters, Whilst in an SpA shareholders’ meeting a board of statutory auditors anti-corruption and bribery issues, respect for human rights and must be appointed, in Srls the appointment shall be mandatory only diversity. when certain requirements are met (in terms of assets, turnover and In any case, in recent years many Italian companies have been number of employees). actively engaged in corporate social responsibility, in particular Auditors must act with autonomy and independence also vis-à- in the fields of environment, energy consumption, sustainable vis the shareholders that appointed them. Furthermore, they must development and social and employee-related matters. devote the necessary time to the diligent performance of their duties. The role of the auditors is that of ensuring that the management body 5 Transparency and Reporting complies with law, by-laws and standards of good management. In order to do that, auditors are entitled to request information to the directors or call general meetings on specific resolutions regarding 5.1 Who is responsible for disclosure and transparency? management activities. With reference to disclosure duties, auditors must examine and Italian companies are subject to disclosure and transparency duties, verify the accuracy of the financial statements, and draft a report and are obliged to report certain information (see the answer to assessing, amongst others, their reliability. question 5.2) to the companies’ register. Such information may be accessed by the public. Listed companies must also disclose information to Consob and to Borsa Italiana S.p.A. 5.4 What corporate governance information should be published on websites? Directors are responsible for the fulfilment of such obligations of disclosure. Non-listed companies are not obliged to maintain a website. Should Listed companies must also appoint a manager in charge of they have one, it must provide information on (art. 2250 ICC): preparing the financial reports, which will certify that the disclosed ■ the company’s registered office; information complies with the applicable laws and regulations. ■ the companies’ register and number of registration; ■ the existence of a sole shareholder; 5.2 What corporate governance related disclosures are ■ the company’s VAT number and certified e-mail address; required? ■ corporate capital paid-in; The following information, related to the corporate governance, ■ the status of liquidation (should this be the case); and must be disclosed: ■ the status of being subject to the management and coordination of another company (should this be the case). ■ financial statements and minutes of any related shareholders’ meetings, management reports and statutory auditors reports; A listed company must maintain a website in order to disclose ■ shareholders’ agreements; relevant information and comply with the shareholders’ right to information. In addition to the information above, with reference ■ direct and indirect holdings; to any shareholders’ meetings, the company must publish on its ■ securities and restrictions on the transfer of holdings website a notice regarding the calling of the meeting, a report on (including those held by directors); each of the items on the agenda, and the relevant minutes. ■ details of the company’s capital structure; ■ details of the composition and duties of the management and control bodies; Acknowledgment The authors would like to acknowledge the collaboration of Alessandra Bellani, trainee of the firm, in the preparation of this chapter. Alessandra works mainly on litigation and non-contentious matters. Email: [email protected].

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Raffaele Cavani Paolo Preda Munari Cavani Munari Cavani Piazza Armando Diaz, 7 Piazza Armando Diaz, 7 Milan Milan Italy Italy

Tel: +39 02 3664 2500 Tel: +39 02 3664 2500 Email: [email protected] Email: [email protected] URL: www.munaricavani.it URL: www.munaricavani.it Italy

Raffaele Cavani is a founding partner of the firm. Paolo Preda is a junior partner of the firm. Qualified to plead before the Supreme Court, his practice includes He works mainly in the fields of commercial and corporate law, both litigation and non-contentious work. mergers, acquisitions and private equity, business transactions and contract law, both domestic and international. He deals mainly with corporate and commercial law matters, mergers, acquisitions and private equity, international contract issues, antitrust and competition law.

Studio Legale Munari Cavani provides consultancy and litigation services in all the principal branches of civil and business law. With offices in Milan, Rome and Paris, Munari Cavani boasts a dynamic, agile and efficient structure which operates with a carefully balanced number of highly-selected team members in a working environment based on the triple pillars of commitment, culture and reciprocal co-operation. Reliability and creativity are key to the firm’s approach. The firm has a strong international orientation which has been nurtured through the setting up of a vast network of local lawyers in various countries, thereby enabling us to offer global solutions to address the specific needs of our clients in a range of jurisdictions.

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Japan Nobuya Matsunami

Nishimura & Asahi Kaoru Tatsumi

Non-regulatory sources 1 Setting the Scene – Sources and (a) Articles of incorporation and other internal regulations of Overview each company. All stock companies are required under the Companies Act to establish articles of incorporation that regulate their corporate governance, including organs and 1.1 What are the main corporate entities to be discussed? the number of directors. In addition, many listed companies have other internal regulations regarding board meetings or The corporate entities discussed in this chapter are stock companies other material meetings. (kabushiki-gaisha) listed on the Tokyo Stock Exchange (the “TSE”). (b) Japan’s Corporate Governance Code. Japan’s Corporate Stock companies are the most common form of corporate entity used Governance Code, published by the Council of Experts for business enterprises in Japan. Generally, only securities issued Concerning the Corporate Governance Code established by by stock companies can be listed on a securities exchange in Japan. the TSE and the Financial Services Agency (“FSA”) offers The TSE is one of the largest equity markets in the world, listing fundamental principles for effective corporate governance of listed companies in Japan. A brief overview is provided in approximately 3,558 companies (as of March 31, 2017), including question 1.3. major Japanese companies. The TSE imposes corporate governance requirements on its listed companies. (c) Proxy voting criteria provided by investor groups. Some investor groups, including the Pension Fund Association, under the influence of the Principles for Responsible 1.2 What are the main legislative, regulatory and other Institutional Investors (Japan’s Stewardship Code) (see corporate governance sources? question 2.2), provide criteria for proxy voting that influence the corporate governance of listed companies. In Japan, the main sources of corporate governance rules are as follows: 1.3 What are the current topical issues, developments, Regulatory sources trends and challenges in corporate governance? (a) Companies Act (Act No. 86 of 2005) (the “Companies Act”). The Companies Act, along with its subordinate regulations, Amendments to the Companies Act sets forth the basic principles that a company needs to abide Amendments to the Companies Act (the “Amendments”) were by regarding the rights and obligations of management promulgated in 2014, and became effective on May 1, 2015. members, organs, the disclosure of information, etc. This Act The push towards reform arose primarily from domestic and also requires “Large Companies” (companies with capital of foreign investors’ concerns over the quality of Japanese corporate JPY500 million or more or with total debts of JPY20 billion or more) with a board of directors to establish a basic policy governance. A brief overview of the Amendments is provided regarding the internal control system. The Companies Act below: applies whether or not the companies are listed. ■ A new internal governance model – Companies with an (b) Financial Instruments and Exchange Act (Act No. 25 of 1948) Audit and Supervisory Committee (the “FIEA”). This Act, along with its subordinate regulations, Companies may opt into a new corporate governance model requires that listed companies disclose issues relating to that coexists with the traditional Japanese models. The corporate governance by way of filing annual securities new model is a “Company with an Audit and Supervisory reports or quarterly reports, disclosing material information Committee” within the board of directors. This new model in a timely manner by way of extraordinary reports, and is the intermediate model between the traditional “Company submitting internal control reports to the authorities, etc. with Statutory Auditor(s)” and “Company with Three (c) The securities listing regulations published by the TSE Committees” models. Unlike a “Company with Statutory (the “TSE Regulations”). The main corporate governance Auditor(s)” model in which the statutory auditors are not requirements for listed companies that these regulations directors, members of the Audit and Supervisory Committee set forth are as follows: (i) to submit corporate governance in a “Company with an Audit and Supervisory Committee” reports; and (ii) to elect and disclose the name of at least one are directors. Further, unlike a “Company with Three “Independent Officer”, who is defined as an outside director Committees” model, there is no obligation in a “Company or outside statutory auditor who does not (even potentially) with an Audit and Supervisory Committee” to establish a have a conflict of interest with shareholders, and to submit a nominating committee or a compensation committee, or to written notice regarding the Independent Officer. appoint executive officers shikkoyaku( ).

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■ Amendment to the qualification of outside officers (f) issuance of shares or stock options at especially favourable Eligibility requirements for outside directors and statutory prices; and auditors have been amended. Directors, executive officers (g) determination of directors’ remuneration (see question 3.3) and employees of a parent company, executive directors, and discharging of directors’ liabilities (see question 3.9). executive officers and employees of a sister company, and close relatives of directors and executives of the company would no longer be eligible. 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate The Amendments do not mandate that listed companies have entity/entities? at least one outside director; instead, any listed company that is required to submit an annual securities report and Japan that has no outside directors on its board must disclose why Since the responsibility of shareholders is limited to the amount appointing an outside director would be inappropriate (the of their invested capital, general shareholders do not have any so-called “comply or explain” approach). responsibilities as regards corporate governance. Regarding institutional investors, the Principles for Responsible Institutional Japan’s Corporate Governance Code Investors (Japan’s Stewardship Code) published by the Council of The Council of Experts Concerning the Corporate Governance Experts Concerning the Japanese Version of the Stewardship Code Code, established by the TSE and FSA, released Japan’s Corporate established by the FSA offers the principles to be followed for a Governance Code on March 5, 2015, which became effective from wide range of institutional investors to appropriately discharge their June 1, 2015. This Code adopts a principles-based approach in stewardship responsibilities, with the aim of promoting sustainable order to achieve effective corporate governance in each company’s growth of investee companies. These principles include that particular situation. The general principles that the Code offers institutional investors should have a clear policy on how they fulfil are those regarding (i) protecting the rights and ensuring the their stewardship responsibilities, and should publicly disclose such equal treatment of shareholders, (ii) appropriate cooperation with a policy. stakeholders other than shareholders, (iii) ensuring appropriate information disclosure and transparency, (iv) responsibilities of the board, and (v) dialogue with shareholders for the purpose of 2.3 What shareholder meetings are commonly held and achieving effective corporate governance. For example, regarding what rights do shareholders have as regards them? responsibilities of boards of directors, the Code provides that listed companies should appoint two or more independent directors. In Japan, companies commonly hold an annual shareholders’ meeting within three months after the end of each fiscal year. In The Code also adopts a “comply or explain” (either comply with a this meeting, shareholders vote on items such as the appointment principle or, if not, explain why not) approach for implementation. of directors/statutory auditors and the distribution of dividends (see Therefore, if in its circumstances a company finds a certain principle question 2.1). Companies also hold extraordinary shareholders’ inappropriate, the company does not need to comply with the meetings in order to obtain shareholder approval of other corporate principle, provided that the company fully explains the reason why actions, such as mergers. it does not comply. Shareholders who have met certain requirements (level of shareholding or holding period) have the right to demand that 2 Shareholders directors convene a shareholders’ meeting. If directors do not convene within a specific period despite such demands, the shareholder may convene a meeting after obtaining court permission. A shareholder 2.1 What rights and powers do shareholders have in the who meets certain requirements may also require that the company operation and management of the corporate entity/ entities? include specific proposals as agenda items for a shareholders’ meeting by a request made eight weeks or more prior to the date of the shareholders’ meeting. Shareholders are entitled to ask questions In listed companies, the operation and management of the company relating to the agenda items at the shareholders’ meeting. is the responsibility of the directors (in the case of Companies with Three Committees and executive officers, see question 3.1) and only material issues, including the items set forth below, must be approved 2.4 Can shareholders be liable for acts or omissions of by a shareholders’ meeting under the Companies Act. Most items the corporate entity/entities? can be resolved by a majority of the voting rights of shareholders present at the meeting; however, some material issues must be Shareholders are not liable for acts or omissions of corporate entities resolved by a greater proportion of voting rights, such as no less than because the liability of shareholders is limited to the amount of two-thirds of the voting rights of shareholders present at the meeting their capital invested in the shares for which they have subscribed. (e.g. amendments to the articles of incorporation, mergers, etc.). Although shareholders can be theoretically liable for the company’s The rights and powers of the shareholders’ meeting include the acts or omissions under the doctrine of “piercing the corporate veil”, following items: the likelihood of a successful application of such a doctrine to the shareholders of a listed company is very low. (a) amendments to the articles of incorporation; (b) appointment and dismissal of directors, statutory auditors, or accounting auditors (see question 3.2); 2.5 Can shareholders be disenfranchised? (c) approval of financial statements (except for companies which satisfy certain requirements); The situations where shareholders of listed companies can be (d) approval of mergers, demergers, share exchanges/transfers, disenfranchised are limited. The minority shareholders of listed or business transfers (with de minimis exceptions); companies can be squeezed out by (i) share-for-share exchanges or (e) payment of dividends (unless otherwise provided for in the triangular share-for-share mergers or exchanges, (ii) cash-for-share articles of incorporation); mergers or exchanges, (iii) a method using consolidation of shares, or (iv) a demand for cash-out of shares.

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All of these procedures, other than (iv), require the approval of no The acquisition of securities by a shareholder is not limited unless less than two-thirds of the voting rights of shareholders present at otherwise provided for in relevant laws. Parties that intend to a shareholders’ meeting, and the minority shareholders who are acquire one-third or more of the voting rights of a listed company squeezed out have appraisal rights. Since capital gains tax is not outside the market should be aware of the tender offer regulations incurred at corporate level, the “consolidation of shares” scheme under the FIEA, which limit the method, timing and speed with (see (iii) above – this scheme employs a consolidation of shares which shareholders may purchase shares in listed companies. Some at the consolidation ratio where the minority shareholders would Japanese companies have adopted anti-takeover devices which be allocated only a fractional share (i.e. less than a whole share) are triggered when a bidder acquires a certain pre-determined and receive cash) is recently the most common procedure used to shareholding ratio (in many cases, 20% of the voting rights of

squeeze out minority shareholders, if a majority shareholder holds the company). The Act on Prohibition of Private Monopolisation Japan less than 90% of voting rights (please note that tax treatment in the and Maintenance of Fair Trade imposes a 30-day pre-notification squeeze out process is soon to be amended, and new treatment will requirement if (i) a purchaser’s voting rights exceed 20% or 50% apply after October 1, 2017). of all voting rights after the contemplated transaction, and (ii) the However, if a majority shareholder holds, directly or indirectly, 90% aggregate amount of domestic sales of the parties’ group companies or more of the voting rights in a company, such a shareholder (defined exceed certain thresholds. Foreign investors should be aware of as “Special Controlling Shareholder”) has the right to demand other FDI restrictions under the Foreign Exchange and Foreign Trade Act; shareholders to sell all their shares in the company to the Special if a foreign investor’s holding rate of a listed company that engages Controlling Shareholder under the Amendments (see (iv) above). This in weapons manufacturing, the airline industry, nuclear industry, oil procedure does not require the approval of a shareholders’ meeting; industry, or other specified industries relating to the national interest therefore, the Special Controlling Shareholder may accomplish the of Japan will be 10% or more, the investor must file a report with the squeeze-out process more quickly than with other procedures. relevant authorities 30 days prior to the closing of the transaction, which could be subject to investigation by the relevant authorities. A shareholder may not exercise his or her voting rights at a Furthermore, there are other special limitations on holding rates of shareholders’ meeting of a listed company if the listed company foreign investors in specified industries. For example, a company in owns 25% or more of the voting rights of such shareholders. the air transportation industry may, when foreign investors request to be registered in the shareholders’ list, refuse to do so, and, if the 2.6 Can shareholders seek enforcement action against company registers them to the effect that more than one-third of its members of the management body? shares are owned by foreign investors, it is not allowed to engage in the air transportation business. Shareholders may seek enforcement action against the members of the management body (i.e. directors, statutory auditors, and executive officers) mainly by two methods. One method isto 3 Management Body and Management initiate a lawsuit on behalf of the company (i.e. a derivative claim). The other method is to pursue board members directly as individuals 3.1 Who manages the corporate entity/entities and how? (i.e. a direct claim). Before filing a derivative claim, the shareholders need to request The management body of a company can be classified into three that the company sue such members of the management body, and types: a “Company with Statutory Auditor(s)”; a “Company with if the company does not sue the management members within 60 an Audit and Supervisory Committee”; and a “Company with days of such a request, the shareholders may sue the members on Three Committees”. While a Company with Statutory Auditor(s) behalf of the company. These claims are usually brought on the is the most commonly used corporate structure for Japanese listed basis of a breach of fiduciary duty by the directors, statutory auditors companies, the number of Companies with an Audit and Supervisory or executive officers. Committee, the corporate structure for which was introduced by the If a shareholder suffers damages due to the wilful misconduct or Amendments (see question 1.3), is gradually growing. As of March gross negligence of the directors, statutory auditors or executive 31, 2017, over 700 listed companies on the TSE had adopted this officers in the performance of their duties, the shareholder may new structure. directly claim damages against such members. ■ Company with Statutory Auditor(s) Shareholders elect both directors and statutory auditors, 2.7 Are there any limitations on, and disclosures and the directors constitute a board of directors. The board required, in relation to interests in securities held by of directors appoints representative director(s) among shareholders in the corporate entity/entities? the directors, who can bind the company and take general responsibility for the management and operation of the company on a daily basis. Directors must monitor the The main disclosure requirements are provided for in the Companies performance of duties of other directors, and statutory Act, the FIEA, and the TSE Regulations. The Companies Act auditors must audit the management of the company by the provides that a company must state in its business report the names, directors. Important decisions of the company provided by number, and shareholding ratio of its top 10 shareholders as of the law or the articles of incorporation must be resolved at a end of each fiscal year. The FIEA provides that a shareholder in a board meeting. Most listed companies fall under the category listed company must file a report with the authorities concerning of a “Large Company” (see question 1.2), and the statutory its shareholding ratio, the purpose of the holding, and other related auditors of a Large Company must form a board of statutory matters if the holding ratio exceeds 5%, and to file a report if the auditors. holding ratio increases or decreases by 1% or more. In addition, the ■ Company with an Audit and Supervisory Committee FIEA and the TSE Regulations provide that a listed company must Shareholders elect directors who are members of the Audit report or disclose in a timely manner when a main shareholder (i.e. and Supervisory Committee and other directors separately, a shareholder who holds 10% or more of the voting rights of the and the directors constitute the board of directors. The company) changes. majority of Audit and Supervisory Committee members must

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be outside directors. The board of directors appoint one In a Company with Three Committees, directors are appointed or more representative directors from among the directors, and removed by a shareholders’ resolution. Members of the audit who are given the authority to bind the company and take committee, the nominating committee, and the compensation general responsibility for the management and operation of committee are appointed and removed by the board of directors. the company on a daily basis. The Audit and Supervisory Executive officers, including representative executive officer(s), Committee is empowered with broader audit authority than are elected and removed by the board of directors. The tenure of a the statutory auditors in the traditional model. director or executive officer is one year, unless the term is reduced As with a Company with Statutory Auditor(s), important by the articles of incorporation. The board of directors may always decisions of the company as provided by law or the articles of remove executive officers. incorporation must be resolved at a board meeting. However, Japan if a majority of directors are outside directors or the articles of incorporation so provide, the board may delegate to a certain 3.3 What are the main legislative, regulatory and other director (typically a representative director) the authority to sources impacting on contracts and remuneration of make important decisions, including the issuance of shares to members of the management body? a third party, important disposals of company property, etc. ■ Company with Three Committees The Companies Act provides that, for a Company with Statutory Shareholders only elect the directors, and the directors form a Auditor(s), the remuneration of directors must be approved at board of directors and elect the members of three committees a shareholders’ meeting. Most companies approve a maximum from among these directors. No statutory auditor is appointed. aggregate amount of remuneration for all directors and delegate the The three committees are (i) the audit committee, which mainly board of directors to determine the amount for individual directors. audits the directors and executive officers, (ii) the nominating For a Company with an Audit and Supervisory Committee, the committee, which determines proposals to be submitted at the remuneration of directors who are members of the Audit and shareholders’ meeting regarding the appointment and dismissal of directors, and (iii) the compensation committee, which Supervisory Committee must be approved separately from that of determines compensation for each director and executive other directors. In the case of a Company with Three Committees, officer. Each committee must have three or more members who the compensation committee determines the remuneration of each concurrently serve as directors, and a majority of the members director and executive officer. The Companies Act provides that must be outside directors. The board of directors appoints a company’s business report must state the aggregate amount of executive officers who manage and operate the company on a compensation (including severance allowance) for directors (in a daily basis, and directors and the board of directors supervise Company with an Audit and Supervisory Committee, (i) directors the executive officers. If two or more executive officers are who are members of the Audit and Supervisory Committee, and elected, the board of directors must select representative (ii) other directors), statutory auditors, and executive officers, executive officer(s). Directors who are not outside directors respectively. In the case of a Company with Three Committees, may concurrently serve as executive officers. information regarding how the company determines the directors’ and executive officers’ remuneration, and an outline of the 3.2 How are members of the management body appointed company’s compensation policy must be included in the company’s and removed? business report. In addition, the FIEA requires that companies disclose in the In a Company with Statutory Auditor(s), directors are appointed securities report the type of compensation (cash, stock options, and removed by a shareholders’ resolution passed by a majority of bonuses), the total amounts of compensation for directors, statutory the voting rights of shareholders present at a shareholders’ meeting. auditors, and executive officers, respectively, and the number of The period of tenure of a director is two years, unless such a members of each group, and the amount of compensation for each term is reduced by the articles of incorporation or a resolution at individual director, statutory auditor, or executive officer whose a shareholders’ meeting. The representative director is appointed total compensation is JPY100 million or more. and removed among directors by the board of directors. Statutory auditors are appointed and removed by a shareholders’ resolution passed by a majority (in the case of removal, two-thirds or more) of 3.4 What are the limitations on, and what disclosure is the voting rights of shareholders present at a shareholders’ meeting. required in relation to, interests in securities held by members of the management body in the corporate The period of tenure of a statutory auditor is four years, and such entity/entities? a term cannot be reduced by the articles of incorporation or a resolution at a shareholders’ meeting. In addition to the disclosure requirement described in question 2.7, In a Company with an Audit and Supervisory Committee, directors directors, executive officers and statutory auditors are required to are appointed and removed by a shareholders’ resolution passed report sales and purchases of securities in order to ensure that they by a majority (in the case of removal of members of the Audit and do not violate insider trading regulations; if a director, executive Supervisory Committee, two-thirds or more) of the voting rights of officer or a statutory auditor of a listed company buys and sells shareholders present at a shareholders’ meeting, and directors who shares in his/her company within a six-month period and realises are members of the Audit and Supervisory Committee are appointed profits, the company may require the director, executive officer separately from other directors. The period of tenure of directors or statutory auditor, as the case may be, to disgorge the profits to who are members of the Audit and Supervisory Committee is two the company. Furthermore, under the FIEA, the number of shares years, which cannot be reduced by the articles of incorporation held by directors, executive officers and statutory auditors must be or a resolution at a shareholders’ meeting. On the other hand, disclosed in the company’s securities reports. Under the Companies the period of tenure of other directors is one year, unless reduced Act, the number of stock options held by directors, executive officers by the articles of incorporation or a resolution at a shareholders’ or statutory auditors must be stated in the company’s business meeting. Representative directors are appointed and removed from report, and the number of shares held by the nominees of directors among directors who are not members of the Audit and Supervisory or statutory auditors must be described in the reference materials Committee by the board of directors. provided at the shareholders’ meetings.

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bodies of such companies is the strong demand of introducing 3.5 What is the process for meetings of members of the outside directors to enhance corporate governance. As stated in management body? question 1.3, any listed company that is required to submit an annual securities report which has no outside directors on its board must Directors specified in the articles of incorporation of the company disclose why appointing an outside director would be inappropriate can convene a board meeting by giving one week’s prior notice (the so-called “comply or explain” rule). In addition, Japan’s (unless a shorter period is provided in the articles of incorporation) Corporate Governance Code includes the principle that listed to all directors (and statutory auditors in the case of a Company with companies should have two or more independent outside directors. Statutory Auditor(s)), and other directors may require that the board It is expected that some listed companies which are not able to find meeting be held whenever necessary. Resolutions are passed with a appropriate persons as outside directors will change their structure Japan simple majority of directors present at the meeting, and a quorum is to a Company with an Audit and Supervisory Committee by represented by a majority of all directors with voting rights (unless appointing previous outside auditors as directors who are members otherwise provided in the articles of incorporation). A director who of the Audit and Supervisory Committee. has a special interest in a resolution may not participate in the vote for such a resolution. A resolution may be passed by obtaining the written or electronic consent of all directors if so provided in the 3.8 What public disclosures concerning management body practices are required? articles of incorporation. The representative directors and the executive officers are required Under the Companies Act, a company is required to disclose, in to report to the board at least once every three months regarding the its business report to be submitted to the shareholders once every status of the execution of his/her duties, and these reports cannot be fiscal year, the directors’ names, positions at the company, positions made by way of notice. Therefore, a company must hold a board concurrently held at other companies, total amount of remuneration, meeting at least once every three months. the primary activities of outside directors, such as attending board of directors’ meetings, related remarks, the company’s efforts to avoid 3.6 What are the principal general legal duties and any inappropriate business operations, etc. liabilities of members of the management body?

3.9 Are indemnities, or insurance, permitted in relation to The principal duties of directors include the following: (i) duty of members of the management body and others? care (directors must manage the business with the care of a good manager); (ii) duty of loyalty (directors must perform their duties for If the articles of incorporation of a company so provide, some of the company in a loyal manner); (iii) duty to monitor (directors must the directors’ liabilities to the company may be discharged to a monitor the performance of other directors, including representative limited extent by board resolution. Further, some of the directors’ director(s)); and (iv) duty to establish a risk management system liabilities may be discharged by a shareholder resolution without (directors must establish internal control systems to manage risks the authorisation of the articles of incorporation, though approval associated with the business; see question 3.7). of all shareholders is required to discharge the directors’ liability If directors or executive officers neglect their duties, they will in full. Further, a company may also, if allowed by the articles of be liable to the company for damages arising as a result thereof. incorporation, enter into contracts with its directors who are not In addition, they are liable to third parties, such as creditors, for executive directors or employees, and statutory auditors, limiting damages incurred by such third parties arising as a result of wilful their liabilities to the company under the Amendments. misconduct or gross negligence in the performance of their duties. Directors, statutory auditors, and executive officers are permitted to take out liability insurance. The tax authority in Japan has announced 3.7 What are the main specific corporate governance and clarified that insurance premiums paid by a company covering responsibilities/functions of members of the the liability of a director shall be treated as insurance rather than as management body and what are perceived to be the part of the compensation paid to such a director, if (i) the insurance key, current challenges for the management body? premiums have been approved by a board of directors’ meeting, and (ii) there is approval of either (a) a voluntary committee, the majority The Companies Act requires Large Companies, Companies with of which is outside directors, or (b) all of the outside directors. an Audit and Supervisory Committee and Companies with Three Committees to have necessary internal control systems to ensure that (i) directors, executive officers and other employees perform 4 Other Stakeholders their duties in an efficient manner, (ii) the company properly manages the risks associated with its operations, (iii) directors, 4.1 What, if any, is the role of employees in corporate executive officers, and other employees perform their duties in governance? compliance with the laws, regulations, and articles of incorporation, and (iv) the performance of duties by directors, executive officers, No laws provide a specific role for employees in corporate and other employees are properly audited and monitored by governance. In practice, however, some listed companies negotiate statutory auditors, an Audit and Supervisory Committee or the audit with employees or labour unions with regard to management matters, committee, respectively. The systems which must be determined by such as company reorganisation. In addition, the misconduct the board of directors include a system to ensure that the business of of several companies has been brought to light by employee the company group, consisting of the company, the parent company, whistleblowers. In this regard, the Whistleblower Protection Act and the subsidiaries, is conducted properly. prohibits a company from treating employees unfavourably for Many listed companies in Japan have already introduced outside blowing the whistle on illicit behaviours within the company. directors. However, for the listed companies which have not already done so, one of the key challenges currently facing the management

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Furthermore, TSE Regulations require listed companies to submit 4.2 What, if any, is the role of other stakeholders in a corporate governance report setting forth issues including the corporate governance? outline of the corporate governance system, basic policy regarding internal control system, and the relationship of the directors, There are no legal or regulatory duties or voluntary codes providing statutory auditors, and executive officers with the company. a specific role for other stakeholders in corporate governance. Many listed companies, however, consider that customers, suppliers, local community or other stakeholders are important for them to increase 5.3 What is the role of audit and auditors in such disclosures? their corporate value in a sustainable manner.

Japan Statutory auditors (in the case of a Company with an Audit and 4.3 What, if any, is the law, regulation and practice Supervisory Committee or a Company with Three Committees, concerning corporate social responsibility? the Audit and Supervisory Committee or the audit committee assumes the same role respectively) audit the business operations No laws regulate corporate social responsibility (“CSR”). In of the company managed by directors including internal control practice, however, many listed companies consider CSR important systems (see question 3.7 for further details), as well as an annual and have tried to highlight their efforts by disclosing CSR reports. business report to ensure proper disclosure. The board of statutory auditors presents an auditor report to shareholders, which states (i) whether or not the business report describes the company’s situation 5 Transparency and Reporting properly, and (ii) any unlawful act or material fact that violates laws, regulations or the articles of incorporation in connection with the 5.1 Who is responsible for disclosure and transparency? performance of duties by directors and executive officers, if any. In addition, the accounting auditor, who must be a licensed accountant The representative director (or the representative executive officer or accounting firm, audits the financial statements of the company. in the case of a Company with Three Committees) is in charge of the operation and management of the company and, therefore, is 5.4 What corporate governance information should be primarily responsible for disclosure and transparency. published on websites?

5.2 What corporate governance related disclosures are Companies are not required to post corporate governance required? information on their websites, unless companies elect to do so under the Companies Act. Annual securities reports, quarterly reports, The FIEA requires listed companies to disclose (i) their corporate extraordinary reports, and other reports of listed companies are governance policies (e.g. an outline of their policies and the reasons publicly disclosed by the Ministry of Finance through the Electronic for adopting such policies, etc.), and (ii) information regarding Disclosure for Investors’ Network (“EDINET”). Further, certain the compensation of directors, statutory auditors and executive information relating to corporate governance of listed companies, officers (see question 3.3). In addition to these disclosures such as corporate governance reports, is publicly disclosed by TSE through securities reports and disclosure through business reports through the Timely Disclosure Network. as described in question 3.8, the FIEA requires listed companies to submit an internal control report once every fiscal year to the relevant local finance bureau, setting forth an assessment of their internal procedures designed for ensuring the credibility of their financial statements and information that might materially influence the financial statements.

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Nobuya Matsunami Kaoru Tatsumi Nishimura & Asahi Nishimura & Asahi Otemon Tower, 1-1-2 Otemachi Otemon Tower, 1-1-2 Otemachi Chiyoda-ku Chiyoda-ku Tokyo, 100-8124 Tokyo, 100-8124 Japan Japan

Tel: +81 3 6250 6200 Tel: +81 3 6250 6200 Email: [email protected] Email: [email protected] URL: www.jurists.co.jp/en/ URL: www.jurists.co.jp/en/ Japan

Nobuya Matsunami is a Partner of Nishimura & Asahi and a member Kaoru Tatsumi is a Counsel at Nishimura & Asahi. His practice of the corporate department. He has broad experience in international focuses on domestic and cross-border acquisitions, ongoing private and domestic M&A transactions, as well as general corporate matters. transactions, restructurings and spin-offs, joint ventures, and Mr. Matsunami engages in various kinds of transactions, including numerous other kinds of M&A. Mr. Tatsumi has recent experience of stock and asset acquisitions, tender offers, joint ventures and de- working at the Japanese Ministry of Justice, mainly for the amendment listings of publicly held companies. Mr. Matsunami is admitted to of the Companies Act, and using such experience, he provides a wide practise law in both Japan and New York. range of legal services in the areas of corporate law and corporate governance. Mr. Tatsumi is admitted to practise law in both Japan and New York.

Nishimura & Asahi is one of Japan’s premier full-service law firms, covering all aspects of domestic and international business and corporate activity. The firm currently has more than 500 Japanese and foreign lawyers and employs over 500 support staff, including tax accountants, and one of the largest teams of paralegals in Japan. Through the enhancement of professional and organisational synergies resulting from the firm’s expansion, an unprecedented level of client service is made possible in highly specialised and complex areas of commercial law. Nishimura & Asahi understands its clients’ growing needs, and its fully integrated team of lawyers and professional staff is proud to share the same fundamental philosophy: an uncompromising commitment to excellence.

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Morocco

UGGC Law Firm Ali Bougrine

■ the distribution of powers among the different corporate 1 Setting the Scene – Sources and players; and Overview ■ the accountability of the management body vis-à-vis shareholders. 1.1 What are the main corporate entities to be discussed? In this respect, the reform of the law related to Limited Companies is part of this current trend, as this reform has amended the provisions The main corporate entities to be discussed are: related to the regulated agreements, enhanced the shareholders’ rights, and improved the transparency in the event of a merger or ■ Limited Company with a Board of Directors (société anonyme, “SA”). de-merger. ■ Limited Company with an Executive Board and Supervisory Board (société anonyme à directoire et conseil de surveillance, 2 Shareholders “SA dualiste”). ■ Simplified Joint Stock Company (société par actions simplifiées, “SAS”). 2.1 What rights and powers do shareholders have in the ■ Limited Liability Company (société à responsabilité limitée, operation and management of the corporate entity/ “SARL”). entities? ■ Limited Liability Company with a sole shareholder (société à responsabilité à associé unique, “SARLAU”). The main shareholders’ rights are: the right to participate in collective decisions and subsequent Please note that this chapter relates to the aforementioned companies’ ■ voting rights proportional to the capital they represent; legal form, with the exception of Listed Companies. ■ the right to information; ■ the right to the company’s profits (and especially the right to 1.2 What are the main legislative, regulatory and other dividends of shares); corporate governance sources? ■ the right to reimbursement of the contribution and to the boni of liquidation; The main sources are: ■ the right to alienate their own shares; and ■ Law no. 17-95 relating to Limited Companies dated 30 August 1996 as amended and completed by the Dahir n°1- ■ the preferential right of subscription. 08-18 dated 23 May 2008 and the Law no. 78-12 dated 28 The main shareholders’ powers include: August 2015. ■ the power to amend the AoA; ■ Law no. 5-96 relating to the General Partnership Company, ■ the power to participate in any transaction affecting the share Limited Partnership Company, Private Company Limited by capital; Shared, Limited Liability Company and Joint Venture dated ■ the power to decide upon a merger, de-merger, dissolution or 1 May 1997 as amended and completed by Law no. 24-10. liquidation; ■ The Dahir on Obligations and Contracts. ■ the power to approve the annual accounts; ■ The Articles of Association of the company (the “AoA”). ■ the power to appoint the statutory auditors, as the case may Also, as the case may be, the shareholders’ agreement. be; ■ the power to appoint, as the case may be, the President 1.3 What are the current topical issues, developments, (for the SAS), the Manager (for the SARL and SARLAU), trends and challenges in corporate governance? Directors (for the SA) or Members of the Supervisory Board (for the SA dualiste); and In corporate governance, the main challenges nowadays in Morocco ■ general powers of supervision of the governing and management bodies (e.g. revocation, right to discharge are to ensure: certain management bodies from any liabilities with respect ■ transparency, especially vis-à-vis shareholders, who shall be to the performance of his duties, etc.). entitled to have access to clear and accurate information with respect to the company;

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2.2 What responsibilities, if any, do shareholders have as 2.5 Can shareholders be disenfranchised? regards the corporate governance of their corporate entity/entities? SA and SAS, unless otherwise provided for in the AoA: Shareholders can be disenfranchised from their voting right in the The main responsibilities of the shareholders with respect to event of non-fully paid shares. Within thirty (30) days of the letter corporate governance are: of formal notice sent by the company to request the payment due ■ the appointment of the governing and management bodies; and and in the absence of payment, the said shares cease to give right ■ the appointment of the statutory auditors. of admission to the shareholders’ meeting, voting right, right to dividends and preferential subscription right.

The company is entitled to sell the unpaid shares without the Morocco 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them? Commercial Court’s authorisation. SARL/SARLAU: In the event that one shareholder has been With respect to the main shareholders’ meetings invited by formal notice to pay up his contribution in cash, the other shareholders are entitled to have him excluded from the company. Two main kinds of meetings are commonly held: ordinary and extraordinary general meetings. Extraordinary general meeting (the “EGM”): The EGM is, in 2.6 Can shareholders seek enforcement action against principle, responsible for all decisions involving amendments to the members of the management body? AoA including, but not limited to, change of the corporate name, legal form, transfer of the registered office, and capital change, mergers, Misconduct in the management of the company dissolution, etc. The EGM is competent to approve the creation of The Members of the management body’s liability vis-à-vis preferred shares: shares with a double voting right (“actions à droit shareholders shall mainly be incurred for misconduct in the de vote double”); and preferred dividend shares without a voting company’s management. Moroccan law does not provide for general right (“actions à dividende prioritaire sans droit de vote”). The principles relating to the duty of care and diligence that Members EGM is also competent to approve the creation of bonds which can of the management body must take to the management of the be converted into shares (“obligations convertibles en actions”). company. Members of the Supervisory Board are not liable for their Ordinary general meeting (“OGM”): The decisions taken in the management and results. Members of the Supervisory Board are OGM cover all matters not involving a change of the AoA. An OGM liable for personal misconduct committed in the performance of their must be convened at least once a year – within six (6) months of the mandate. They may be civilly liable for offences committed by the end of the financial year – for the approval of the annual accounts. members of the Executive Board, if they have become aware of these offences and they do not report them to the shareholders’ meeting. With respect to the main rights of the shareholders regarding Therefore, it is up to the Commercial Court, on a case-by-case general meetings basis, to define the components of the misconduct in the company’s From the convening of shareholders’ meeting and at least within the management. Enforcement actions against directors, the General fifteen (15) days prior to the said meeting, the shareholders have a Manager, the Deputy Managing Director(s) and members of the right to information with regards to, notably, the agenda, the draft Executive Board have a five (5) year time limit. resolutions that will be submitted to the vote of the shareholders, the Breach of legal and regulatory provisions and stipulations of the list of regulated agreements, the management report, the statutory AoA auditor’s reports, the proposed allocation, inventory, and financial statements, etc. The shareholders have access to this information at The Members of the management body are liable for breach of legal the company’s registered office. and regulatory provisions, as well as breach of the stipulations of the AoA. During the shareholders’ meeting, shareholders have the right to participate in collective decisions and subsequent voting rights Individual liability of the Member of the management body proportional to the capital which they represent or, as the case may Any shareholder is entitled to claim for compensation due to the be, in accordance with the stipulations of the AoA. damage which he has personally suffered as a result of a Member of the management body.

2.4 Can shareholders be liable for acts or omissions of Action in the company’s interest the corporate entity/entities? Shareholders are entitled, individually or together, to bring an action in the company’s interest against, as the case may be, the This answer is applicable to the SA/SARL and SAS, unless President, Directors, General Manager, Deputy Managing Director, otherwise provided in the AoA: Members of the Executive Board, or Manager(s), in order to obtain ■ the founding shareholders may be liable (severally with the compensation for the entire damage suffered by the company. first governing bodies) for damages incurred by the lack of a mandatory mention in the AoA, or due to a specific omission 2.7 Are there any limitations on, and disclosures or improper performance of a legal formality related to the required, in relation to interests in securities held by company’s incorporation; shareholders in the corporate entity/entities? ■ the shareholders responsible for nullity of the company may be severally liable for the damage arising from this nullity in With respect to potential limitations on interests in securities the event of misconduct or fault of the governing bodies; and held by shareholders ■ it is specified that all the aforementioned actions may be : Transfer of shares to third parties is subject to the incurred by the person who manages de facto the company. SARL/SARLAU prior approval of the shareholders representing a three-quarters (¾) It is specified that the liability of the shareholders is limited to the majority vote. Such a limitation is not provided by the law for SAS amount of their contribution. and SA, unless otherwise provided by the AoA.

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In addition, shareholders, through the company’s AoA and/or However, the AoA may provide for any other management body the shareholders’ agreement, can provide for limitations such pursuant to the shareholders’ wishes. In such a case, it is specified as an inalienability clause, preferential right in favour of another that the AoA must set forth a minima the operating modalities and shareholder or a third party, pre-emptive right, and the possibility to the powers to be entrusted to this ad hoc management body. issue non-voting priority dividend shares. SARL/SARLAU: This is managed by one or several manager(s) Please note that if shareholders are entitled to limit the rights who shall be a natural person (shareholder or not). All the attached to the shares, they are not allowed in any circumstances to administrative and management functions and related powers are limit the right to information. vested in the Manager or Co-managers if any, who can act in the With respect to disclosures required in relation to interests in name of the company. securities held by shareholders Morocco SARL/SARLAU: The AoA must mention, under the penalty of 3.2 How are members of the management body appointed nullity of the company, the contribution of each shareholder as well and removed? as the distribution of the shares. SAS: Such a disclosure may be mentioned in the AoA, but there is SA with a Board of Directors: Directors are appointed by no legal provision which requires this. shareholders. The Board of Directors shall appoint, from among its Members, a President who shall be an individual. Also, upon the proposal of the President, the Board of Directors shall appoint a 3 Management Body and Management General Manager as well as Deputy Managing Directors. The discharge of the General Manager may be decided by the Board of Directors at any time. 3.1 Who manages the corporate entity/entities and how? The discharge of the Deputy Managing Directors may be decided by the Board of Directors based upon a proposal of the General The management depends upon the company’s legal form. Manager. The discharge without just cause may give rise to claims SA with a Board of Directors: This is managed by a Board of for damages, except where the General Manager is also the President Directors (composed of at least three (3) and no more than twelve of the Board of Directors. (12) Members who can be either natural or legal persons) which is The discharge of the President of the Board of Directors may be appointed by the shareholders. decided by the Board of Directors at any time. The Directors may The Board of Directors shall appoint, from among its Members, a be discharged by the general shareholders’ meeting. President who shall be a natural person. SA with an Executive Board and Supervisory Board: Members The general management of the company shall fall within the and the President of the Executive Board shall be appointed by the responsibility of either the President of the Board of Directors Supervisory Board. If the Executive is only composed of one single designated as the Chief Officer Executive (“PDG”), or another individual, its title shall be “Sole General Manager”. individual appointed by the Board of Directors, i.e. the General The Executive Board Members or the Sole General Manager may Manager. be discharged by the shareholders, or if provided so in the AoA, by The legal representative of the company vis-à-vis third parties is the Supervisory Board. The discharge without just cause may give the Chief Executive Officer (“PDG”), General Manager and Deputy rise to claims for damages. Managing Directors (“DGD”) if any, it being specified that any Members of the Supervisory Board shall be appointed by the limitations of legal powers shall be valid only in the company, in shareholders and may be discharged by the general shareholders’ order that they shall not be demurrable to third parties. meeting. SA with an Executive Board and Supervisory Board: This is The Members of Supervisory Board must appoint a President and managed by an Executive Board composed of a number of Members, may appoint a Vice President. as set forth in the AoA, which cannot exceed five (5). The Members SARL/SARLAU: Manager(s) is/are appointed by the shareholders. of the Executive Board must be natural persons and shall be appointed The discharge shall result from a shareholders’ decision representing by the Supervisory Board. A Member of the Executive Board can be at least three-quarters (¾) of the share capital. The discharge an employee of the company or a non-shareholder person. without just cause may give rise to claims for damages. The Supervisory Board is composed of at least three (3) Members SAS: A President must be initially appointed by the shareholders and no more than twelve (12) Members who can be either natural or in the AoA and afterwards as per the stipulations of the AoA. The legal persons and shall be appointed by the shareholders. President may be discharged in accordance with the stipulations of The Members of a Supervisory Board must appoint a President and the AoA. Any other ad hoc management body may be established if may appoint a Vice President. the AoA has provided so. The Executive Board is entrusted with the power to represent the company vis-à-vis third parties and shall carry out its functions 3.3 What are the main legislative, regulatory and other under the control of the Supervisory Board. sources impacting on contracts and remuneration of The Supervisory Board shall exercise permanent control of the members of the management body? management of the company by the Executive Board. The main sources are: SAS: As per Moroccan law, the company must be managed by a President appointed by the shareholders. The President can be a ■ Law no. 17-95 relating to Limited Companies dated 30 legal person. In such a case, the legal entity is required to appoint a August 1996 as amended and completed by the Dahir n°1- 08-18 dated 23 May 2008 and the Law no. 78-12 dated 28 permanent representative who is subject to the same conditions and August 2015. duties and is both civilly and criminally liable as if the latter was President of the SAS on his/her own. ■ Law no. 5-96 relating to the general partnership company, limited partnership company, private company limited by

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shares, limited liability company and joint venture dated 1 ■ they are subject to an obligation of information and May 1997 as amended and completed by Law no. 24-10. transparency. ■ The AoA of the company. The main liabilities of the Members of the management body (i) Civil Liability vis-à-vis the company, shareholders or 3.4 What are the limitations on, and what disclosure is third parties, especially in the case of misconduct in required in relation to, interests in securities held by the management of the company and breach of the legal members of the management body in the corporate provisions or AoA’s stipulations. The civil liability may be entity/entities? individual or several in the event of a common misconduct. (ii) Criminal Liability. Members of the management body may SA: Members of the Board of Directors and Members of the incur criminal liability for various infringements with respect

to the course of the company’s history, such as infringements Morocco Supervisory Board must hold a number of shares as provided in the related to the provisions regarding the incorporation of the AoA. These shares are inalienable. company, the shareholders’ meeting, the amendments of the SARL/SARLAU: Managers are not required to be the owner of a AoA, the supervision and control, securities, winding up, number of shares. and legal formalities, as well as in the event of misuse of the corporate asset, etc. The criminal penalties provided in Law No public disclosure in relation to the said shares is required. no. 17-95 and Law no. 5-96 are doubled in case of a repeated offence. 3.5 What is the process for meetings of members of the management body? 3.7 What are the main specific corporate governance responsibilities/functions of members of the SA with a Board of Directors: The course of the company’s business management body and what are perceived to be the must be determined, and its implementation must be supervised. key, current challenges for the management body? The Board of Directors is convened by the President as often as is required for the proper conduct of business. In the absence of any See questions 3.1 and 3.2. AoA provisions, the convening may be made by any means. Challenges for a management body include acting, in all The Board’s meeting may be held physically or by way of video circumstances, in the best interests of the company in compliance conference or any similar means which allow Directors to be with the laws in force in Morocco in a changing legal environment identified. Video conferencing cannot be used in the following cases: and whilst ensuring transparency vis-à-vis shareholders. ■ board meetings which decide the appointment, the discharge or the remuneration of the President, the Managing Director 3.8 What public disclosures concerning management or DGD; and body practices are required? ■ board meetings which decide to convene the shareholders’ general meeting and the setting of the agenda, as well as the The minutes of the management body or the decisions of the setting of the resolutions and the Board reports submitted to President or the Manager, as the case may be, shall be subject to the said shareholders’ general meeting. public disclosure (Tax Administration and Trade Register) when The Board of Directors can only validly deliberate if half of the they decide upon changes in the management body falling within Directors are present. Unless otherwise provided by the AoA, their power (appointment of a new Member, discharge, decision to decisions are adopted by a majority vote of the Directors present co-opt a new Member). Disclosure is also required in cases where or represented. shareholders delegate of some of their powers to the management SA with an Executive Board and Supervisory Board: The body, such as in a decision of transfer of the registered office in law refers to the company’s AoA to provide for the modalities of the same prefecture or in the same province as the current office, deliberation of the Executive Board. or a decision to acknowledge the completion of a capital increase. The modalities and delay of convening related to the meeting of the It is specified that a simple extract of the relevant decision can be Supervisory Board shall be provided in the AoA. The Supervisory submitted to the concerned administrations. Board can only validly deliberate if half of its Members are present. Decisions are adopted by a majority of votes of the Members present 3.9 Are indemnities, or insurance, permitted in relation to or represented, but the AoA may provide for a larger majority of vote. members of the management body and others? SAS: As the case may be, the process for the meeting of the ad hoc management body shall be set forth by the AoA of the company. Members of the management body are entitled to organise liability SARL: This is only applicable in the case of a “Board of Managers insurance in order to indemnify themselves against financial (“Conseil de la gérance”); in such a case, the process for meeting consequences incurred as a result of the company’s management. shall be governed by the AoA of the company. The management body may be entitled to be granted damages in the case of revocation without just cause. 3.6 What are the principal general legal duties and liabilities of members of the management body? 4 Other Stakeholders

The main general duties of the Members of the management body Members of the management body are subject to a duty of loyalty 4.1 What, if any, is the role of employees in corporate vis-à-vis the company and shareholders: governance? ■ they shall perform all acts of management in the company’s interest; Employees, through the employees’ representative bodies, have a very limited role in corporate governance matters; for instance, there ■ they are subject to a non-competition obligation vis-à-vis the is no prior consultation of an employee representative body in the company; and

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case of a company’s restructuring (merger, de-merger, relocation, ■ Disclosure to the statutory auditors: For the performance and transfer of the company, etc.). of their duty, statutory auditors have a right to information; in particular, they are to be provided with all documents/ In the event of redundancy for economic reasons, the employee information necessary for the performance of their mission, representative bodies must be informed prior to the redundancy, and such as all the contracts, books, account documents, the employer is required to engage in consultations and negotiations registers of minutes, etc. The statutory auditor’s powers of with the employees’ representative bodies in order to consider investigation may be validly performed within the company ways of preventing the redundancies or limiting the effects of the as well as within the parent company and/or the company’s considered redundancies. subsidiaries. The statutory auditors can be assisted or represented under their responsibility by any experts or collaborators of their choice, who shall have the same powers

Morocco 4.2 What, if any, is the role of other stakeholders in of investigation as those granted to the statutory auditors. For corporate governance? the performance of their duty, statutory auditors are entitled to be provided with any necessary information or documents Law no. 17-95 relating to Limited Companies allows the directors from third parties. of limited companies to establish technical committees. In this ■ Disclosure to the management body: The statutory auditor must respect, it is up to the board of directors to choose and appoint the inform the management body about any control and checks members of such committees, who can be directors or shareholders they carried out, the amendments to be made to the financial but can also be third parties. statement, the inaccuracies and irregularities identified, their conclusion related to the observations and amendments made, The board of directors sets forth the functions of the designated and any facts they may consider as criminal behaviour. committees. As per article 51 of Law no. 17-95 relating to Limited Companies, the functions are limited to the examination of specific ■ Disclosure to third parties: Disclosure to third parties occurs through the submission to the relevant Trade Register of a issues and questions that the directors or the president shall submit form, with a named statement of amendment in the event of for opinion only. changes to be indicated on the certificate of registration, such The technical committees have a predominantly advisory role in the as change of the legal representative or change in the Member management of the company but can lead indirectly to the reduction of the management body, or in the event of the adoption of of the powers granted to the Chief Executive Officer (“PDG”), any extraordinary decisions. General Manager or Deputy Managing Directors (“DGD”). 5.3 What is the role of audit and auditors in such 4.3 What, if any, is the law, regulation and practice disclosures? concerning corporate social responsibility? The statutory auditor must verify all the account documents of Concerning corporate social responsibility, the following is the company in order to control the compliance of the company’s applicable: accounting with the rules in force, to verify the compliance of the ■ Law no. 17-95 relating to limited companies dated 30 August annual accounts and the fairness of the provided information in the 1996, as amended and completed by Law no. 78-12 dated 28 management report drawn up by the relevant management body August 2015; and in any documents provided to the shareholders regarding the ■ Law no. 5-96 relating to general partnership companies, financial situation and the accounts of the company. limited partnership companies, private companies limited by During the audit, the statutory auditor is required to ensure that the shares, limited liability companies and joint ventures dated 1 principle of equality between shareholders has been observed. May 1997 as amended and completed by Law no. 24-10; Statutory auditors are required to ensure compliance with the legal ■ the AoA of the company; and provisions related to the shares owned by certain management body ■ the shareholders’ agreement. (i.e. Board of Directors, Supervisory Board). Statutory auditors have an important role regarding preventing 5 Transparency and Reporting businesses getting into difficulties. Should the management body fail to take the appropriate measures to correct the facts likely to compromise the operation of the company, the statutory auditor shall 5.1 Who is responsible for disclosure and transparency? warn the management body by registered letter about the identified facts which are likely to compromise the business’s continuity. The legal representative of the company is responsible for disclosure They must certify that the annual accounts are proper and sincere, and transparency, i.e. Managers in SARL/SARLAU, the General and they must give a faithful representation of the company’s assets. Manager in SA moniste, the President of the Executive Board in SA dualiste and the President in SAS. 5.4 What corporate governance information should be published on websites? 5.2 What corporate governance related disclosures are required? No specific provision related to corporate governance information to be published on websites is provided by Moroccan law. The following disclosures are required: However, in principle, deeds and documents originating from the ■ Disclosure to the shareholders: Shareholders have a right to company and intended for third parties, such as letters, invoices, information related to the company’s business, in addition to a announcements and publications, must indicate the corporate name, right to information prior to the general meeting (see question preceded or followed by the mention of the legal form, the share 2.3 above); shareholders have a right to permanent access to certain documents such as AoA and legal documentation capital and the registered office, as well as the registration number related to the last three fiscal years. according to the Trade Register.

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Ali Bougrine UGGC Law Firm 97 Boulevard Massira Al Khadra Casablanca Morocco

Tel: +212 522 99 76 00 Email: [email protected] URL: www.uggc.com

Managing Partner of the Casablanca Office Morocco ■■ 15 years’ experience as a practising lawyer within UGGC Avocats. ■■ French and Moroccan nationality. ■■ Member of the International Association of Lawyers (“UIA”). ■■ Member of the Moroccan Business Lawyers Association (“AJAM”). ■■ Member of the Moroccan Association of Capital Investors (“AMIC”). ■■ Member of the International Chamber of Commerce (“ICC”). ■■ Morocco Representative of the Interlaw worldwide network. ■■ Morocco Representative of the BNP Trade International. Professional experience ■■ Partner, UGGC Law Firm (since 2011), Casablanca – Paris. ■■ Of Counsel, UGGC Law Firm (2006–2010), Casablanca – Paris. ■■ Lecturer of training sessions for LexisNexis Maroc (since 2014 – Morocco). ■■ Lecturer for the International Union of Lawyers (since 2015 – Morocco). Professional references ■■ Cousel of international groups (especially Essilor, Axa, Colas, Bongrain, DTZ, Roca, Peri, Arcelor Mittal, Bodino, GCF) for external growth deals (mergers and acquisitions) and complex issues about corporate law in France and/or Africa. ■■ Counsel of Moroccan and international banks for structured finance deals (especially CIC International, BNP Trade, Crédit du Maroc, BMCE). ■■ Counsel of national and international investment funds within private equity deals (John Laing Investment, Entrepreur Venture, MTIC). Languages French (fluent), English (fluent), and Arabic (fluent).

Created over 20 years ago, UGGC Law Firm is one of the foremost independent law firms in France which comprises over 100 lawyers, including 27 partners. UGGC Law Firm is organised into structured departments (each comprising partners and associates who are experts in their discipline) covering all areas of business law: mergers and acquisitions; private equity; banking law; labour law; tax law; public law; real estate law; environment law; competition law; intellectual property law; health law; insolvency law; and private clients and litigation. The quality of the firm’s services has been acknowledged by the highly reputable guides and directories on the market (The Legal 500, Chambers & Partners, PLC Which Lawyer?, and IFLR). Thanks to the trust of its clients and the stability of its teams, UGGC Law Firm has enjoyed significant and steady growth in terms of turnover and staff for over 20 years, without any cycle effect. This growth results from the firm’s determination to cover all areas of the law and to be able to draw on the expertise of structured teams in each specialised domain. In this way, the client benefits from the permanence of the firm’s teams and the high quality of services which they provide. The Casablanca office of UGGC Law Firm was created in December 2002. UGGC Law Firm was one of the very first French law firms to become durably established in Morocco. The Casablanca office has become one of the most important French law firms in Morocco.

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Norway Atle Degré

Kluge Advokatfirma AS Linn Hoel Ringvoll

The guidelines only apply to listed companies (according to the 1 Setting the Scene – Sources and Continuing Obligations), but larger companies with dispersed Overview ownership seem to take more and more interest in them as well. The Accounting Act also includes an obligation for companies of public interest (such as listed companies) to provide a corporate 1.1 What are the main corporate entities to be discussed? governance report to be filed with the annual accounts. Norwegian law facilitates two kinds of limited companies: The There are two regulated markets for listing of shares in Norway: Oslo Private Limited Company; and the Public Limited Company. In Børs; and Oslo Axess. Oslo Axess ASA accepts younger, smaller addition there are certain company types with unlimited liability. Of and pre-commercial companies and hence the listing requirements these companies, only Public Limited Companies can be admitted with respect to turnover, results and years of operation compared to trading on regulated markets. Thus, this chapter will, unless to the listing requirements set by Oslo Børs are not as strict. The otherwise stated, refer to the Public Limited Companies only and to Continuing Obligations for Oslo Børs apply also to Oslo Axess. companies traded on regulated markets. The Oslo Stock Exchange also operates Merkur Market, a Savings banks having issued primary capital certificates may be multilateral trading platform (MTF). Merkur offers one of the fastest accepted to listing on regulated markets. These companies are to a admission processes in Europe, which can amount to as little as large extent regulated by the same company law and securities law two weeks from application to trading. The market is regulated by as public limited companies, and will not be described further in separate rules for admission to trading, and continuing obligations. this chapter. The platform offers many of the same trading advantages as a full listing, but with leaner requirements to prospectuses and accounting. However, Merkur Market is not considered a “regulated market” as 1.2 What are the main legislative, regulatory and other defined in the relevant EU directives. corporate governance sources? There is also a trade support system for the over-the-counter (OTC) market, NOTC.no which provides information about orders and Public limited companies are regulated by the Norwegian Public trade of companies subject to being recommended by an investment Limited Companies Act (Act of 13 June 1997) with amendments. firm. The OTC list is administered by the Norwegian Securities The act is to some extent mandatory, but many provisions may be Dealers Association, and as of April 2017 is fully owned by Oslo deviated from in the company’s articles of association. The articles Børs ASA. Companies traded on the OTC list are not considered as shall be filed by the company and are available to the public on “listed” in our response to the questions below. request from the Norwegian Register of Business Enterprises (Norw. “Foretaksregisteret”). Public Limited Companies are also subject to the Accounting Act, which sets out accounting obligations and accounting standards. As Norway is a part of the European Economic Area (EEA), Listed Companies are subject to IFRS reporting. Norwegian law and regulations regarding corporate governance often originate from EU regulation. A feature in the Norwegian market is the significant ownership share of the Norwegian government. The ownership is mainly managed by Companies listed on regulated markets (listed companies) are the Ministry of Trade and Fishery, except the largest listed company, subject to the Securities Trading Act which incorporates the main Statoil ASA for which the Norwegian state’s ownership is managed EU directives in the financial sector, including the directive and by the Ministry of Oil and Energy. The Norwegian government regulations on transparency, market abuse, takeovers, prospectuses, expresses specific expectations as a shareholder to these companies, shareholder rights, etc. in particular executive management and board remuneration. The Ministry of Finance has issued further regulations under the The mandate of Norway’s sovereign fund, which is managed by the Securities Trading Act. Furthermore, the Stock Exchange Rules set national bank, Norges Bank Investment Management (NBIM), does by Oslo Stock Exchange (Oslo Børs ASA) apply to listed companies. not include investments in Norway. However, there is a smaller The Stock Exchange Rules encompass Listing Rules (rules for government fund, Folketrygdfondet (the Government Pension Fund admission to listing) and Continuing Obligations (continuing Norway) which is an independent asset manager investing in Nordic obligations of listed companies). listed securities only. The Norwegian Code of Practice for Corporate Governance (“the

Corporate Governance Code”) issued by the Norwegian Corporate Governance Board is based on a ‘comply or explain’ principle.

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Shareholders may also propose an investigation of the management 1.3 What are the current topical issues, developments, of the company. If supported by more than 5% in a general meeting, trends and challenges in corporate governance? any shareholder may file a demand for investigation with the District Court, who shall open an independent investigation if the Since 2004 when the first Corporate Governance Code was issued, court considers there are reasonable grounds on which to do so. corporate governance has seen tremendous developments in Norway. The code supplements the legislation and stock exchange regulations on topics like directors’ independence, nomination 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate committees, the board of directors’ work and reporting, etc. entity/entities? Many of the (soft law) obligations introduced by the Code have since Norway been incorporated in statutory law, partly as implementation of the EU Shareholders have no specific obligations. Thus, the shareholders shareholder rights directive, and partly as governmental initiatives. are not obliged to attend the general meetings of the company, and The Code was continuously developed by annual amendments the shareholders do not have a duty to vote for or against specific during its first decade. Following these developments, there is proposals at such meetings. However, shareholders may be held generally good support for the code, and amendments are now fewer liable for damages for any losses that the shareholders cause to the and slower. company, other shareholders or third parties through negligence or Norway took an early initiative about 15 years ago, passing intentional behaviour or omissions. Such liability is very rare. legislation which required a minimum gender representation on a board of directors. The requirement is now approximately 40% 2.3 What shareholder meetings are commonly held and of each gender. Norway also has long traditions for extended what rights do shareholders have as regards them? transparency of inter alia directors’ and executive management’s remunerations. There is little public discussion on this. The annual general meetings shall be convened and organised by In April 2017 the Ministry of Trade proposed amendments to the board of directors. The board may also convene extraordinary simplify the Private Limited Companies Act, but this falls outside general meetings. If the board of directors fails to convene a the scope of this chapter. general meeting required to be held by statute or by the articles of association, such a meeting shall be convened by the District Court upon demand from a member of the company’s board of directors, 2 Shareholders the manager, a shareholder or the company’s statutory auditor. Any shareholder may attend a general meeting either electronically 2.1 What rights and powers do shareholders have in the in the case of an electronic meeting, or physically in the case of a operation and management of the corporate entity/ physical meeting. Furthermore, any shareholder may vote by letter, entities? email or other written instrument or attend by proxy granted to any person or to the board of directors. The Corporate Governance Through their right to vote and speak in the general meeting Code recommends that the company nominate a person who will be shareholders have the decisive powers of the governance of a available to vote on behalf of shareholders as their proxy, and that a company. template for providing instructions to the proxy is provided. Formally, shareholders could exercise ownership power only For shares held on a nominee account, the nominee is not permitted through the general meeting of the company. The general meeting to exercise attendance or voting rights. To vote and attend the appoints and removes the members or the board of directors, save general meeting the underlying or beneficial shareholder must for the directors that are appointed by the employees (see below). normally transfer the shares into the electronic shareholders’ register If a company has a corporate assembly, the corporate assembly has (Verdipapirsentralen (VPS)) before the general meeting or a specific the sole power to appoint and remove directors. The members of the date. corporate assembly are appointed by the general meeting, save for The annual general meeting shall resolve the annual accounts members that are appointed by the employees (see below). including any proposed dividends. Matters reserved for the general The board of directors is responsible for the management of the meeting are amendments of the articles of association, election and company. However, the general meeting may – in principle, but removal of members of the board of directors and the company’s rarely in practice – resolve that the company shall pursue a particular auditor, remuneration of the members of the board of directors and course of action and the board is obliged to carry out the general approval of the annual report. meeting’s decisions. Some decisions are, however, reserved solely for Any shareholder is entitled to address the general meeting, and the board or the corporate assembly by statute. The general meeting can request and is entitled to receive specific information on issues cannot instruct the board or the corporate assembly in such matters. related to the annual accounts, the financial position of the company If the board does not carry out the general meeting’s decisions or the and items on the agenda, provided always that the sharing of such general assembly for other reasons is discontented with work of the information is not likely to cause substantial damage to the company. board, the relevant action for the general meeting would be to remove If the information is not available at the general meeting, it must be the present directors and appoint new directors of the board. made available to the shareholders (e.g. on the company’s website) The general meeting can make amendments to the articles of no later than two weeks thereafter. association. This includes the purpose of the company, issuance Shareholders holding at least 5% of the share capital or such smaller and amortisation of shares, mergers, demergers, etc. fraction of the capital, if provided for in the Articles, can make a Shareholders are permitted to list items on the general meeting’s written request for an extraordinary general meeting to be held. An agenda, and to make proposals. Shareholders representing at least extraordinary general meeting to resolve specific issues must be 5% of the issued shares have the right to demand that a general convened by the board of directors within one month of receipt of meeting is called. such a request.

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Resolutions at general meetings are passed by simple majority of may include ownership restrictions, but this is not common in listed votes unless the proposal in question relates to an important matter companies. Financial institutions are subject to ownership approval which requires a higher majority pursuant to the Public Limited from the Financial Supervisory Authority at 10%, 20%, 30% and Liability Companies Act, e.g. an amendment of the Articles which 50%. Such restrictions may also apply for some very specific entity can only be passed by at least two-thirds of the votes cast, as well types related to licensed industries. as at least two-thirds of the share capital represented at the general The major holdings disclosure requirements under the Securities meeting. Other requirements in terms of voting may be stated in the Trading Act apply to shareholders in listed shares. There is an Articles. obligation to notify the Oslo Stock Exchange (at [email protected]) and the company when the holding of shares either (i) reaches or exceeds 5% of the share capital’s voting rights, or (ii) accounts for

Norway 2.4 Can shareholders be liable for acts or omissions of the corporate entity/entities? no less than 5% of the share capital. In addition, notification shall be made when the shareholding passes the thresholds of 10%, 15%, A public limited company is characterised by the fundamental 20%, 25%, 50% and 90%, as well as one-third and two-thirds of principle that the shareholders are not personally liable for the acts the total outstanding share capital on the day of trading. The same or omissions of the company. applies for investors who become the holder of (or disposes of) rights to acquire shares (such as options) or voting rights triggering The Public Limited Companies Act includes a provision whereby a one of the thresholds mentioned above. The Oslo Stock Exchange shareholder may be held liable for damages suffered by the company, will disseminate the notification on its newsweb platform (www. other shareholders or third parties if that shareholder intentionally or newsweb.no). negligently has caused damage to the company and/or the shareholders and/or third parties. The Norwegian Supreme Court has stated that it For listed Norwegian companies, there are also mandatory offer will not rule out the applicability of the “piercing the corporate veil” regulations when a shareholder through acquisition becomes the doctrine. There are some rare examples which could be interpreted owner of shares representing more than 1/3 of the voting rights in a as applying this principle in case law, but the shareholder’s liability in company. The offer obligation also applies when passing the 40% these cases may also rest on a basis other than the shareholding per se, and 50% thresholds. such as contractual liability or director’s liability. 3 Management Body and Management 2.5 Can shareholders be disenfranchised?

The rights attached to the shares held by an individual shareholder 3.1 Who manages the corporate entity/entities and how? cannot be reduced without the consent of that shareholder. However, in a company with several share classes, the rights of an entire class The board of directors is responsible for the management of the of shares can be reduced by amending the Articles, subject to certain company. The board is responsible for the overall planning and voting majority requirements being observed. budgeting of the company’s business and shall supervise the day- to-day management. Any decision outside the ordinary course of If a shareholder holds more than 90% of the shares of a company business which is of material importance to the company pertains to and a corresponding share of the votes, such shareholder may the board of directors. demand that the other shareholders have their shares redeemed by that shareholder (squeeze-out). The minority shareholder may also If the company has more than 200 employees, the company shall demand to be redeemed in such situation. The shares of the minority have a corporate assembly, unless otherwise agreed between the shareholders will, by the resolution of the majority shareholder, be company and the majority of the employees. If the company has transferred to the majority shareholder. If the redemption price less than 200 employees, the company has no corporate assembly, cannot be agreed upon, the redemption price must be determined by unless otherwise decided in the company’s articles of association. the District Court, normally at the cost of the majority shareholder. Norwegian listed companies are predominantly one-tier structures If redemption is executed in connection with a voluntary or public (without corporate assembly) as these companies typically want to takeover in a listed company, certain minority protection rules must avoid a corporate assembly, owing to the increased administration be observed, and the court shall presume that the value of share and costs. equals to that in the takeover bid. In companies with a corporate assembly, the corporate assembly decides, upon proposal from the board of directors, matters which concern investments that are substantial compared to the company’s 2.6 Can shareholders seek enforcement action against members of the management body? resources or such efficiency measures, or changes to the business of the company which entail a major change or reallocation of the workforce. The Public Limited Companies Act prescribes that shareholders may hold the general manager (the Chief Executive Officer), a member The general manager (i.e. the Chief Executive Officer) is responsible of the board of directors, or a member of the corporate assembly for the day-to-day management, under instructions from the board liable for any damage which they, in their capacity as such, have of directors. intentionally or negligently caused such party. 3.2 How are members of the management body appointed 2.7 Are there any limitations on, and disclosures and removed? required, in relation to interests in securities held by shareholders in the corporate entity/entities? The general meeting elects the members of the board of directors, and may remove them, by simple majority of the present shareholders. Shares are in principle freely tradeable, and the general company law The Corporate Governance Code recommends that companies have legislation has no ownership restrictions. The articles of association a nomination committee elected by the general meeting, and that

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this nomination committee facilitates the nomination and proposals published and filed. The Corporate Governance Code recommends to the general meeting. that any remuneration in addition to the resolved directors’ fees If the company has a corporate assembly, the corporate assembly should be specifically identified in the annual report. has the sole power to appoint and remove the directors elected by the shareholders. Two thirds of the members of the corporate assembly 3.5 What is the process for meetings of members of the are elected by the general assembly, and the rest by the employees. management body? Depending on the number of employees of the company, the employees may elect a certain number of members of the board: Board meetings should be held as often as required. Boards of listed ■ If a company with more than 30 employees does not have companies normally have between six and 10 scheduled meetings

a corporate assembly, the majority of the employees may per year, and may also have extraordinary meetings. Norway demand that one board member and one observer with If more than 50% of the share capital has been lost, the board of alternates are to be elected by and among the employees. directors shall make a proposal to the general meeting and suggest ■ If a company with more than 50 employees does not have necessary measures which shall be made within reasonable time. a corporate assembly, the majority of the employees may Directors must generally be personally present to speak and vote, demand that up to one third and at least two board members are to be elected by and among the employees. although the board may make valid decisions by other methods, for example by “telephone meetings”, if this is considered adequate ■ If a company has more than 200 employees and it has been by the chairman of the board, and as long as no director insists on agreed that the company is not to have a corporate assembly, the employees must elect one board member and an alternate a physical meeting and if the matter in question is not the annual member or two observers with alternates, in addition to the accounts or the board’s annual report. The employment of and representation which follows from the section above. remuneration of a general manager shall also be resolved in a physical meeting.

3.3 What are the main legislative, regulatory and other The chairman shall ensure that current matters which are the sources impacting on contracts and remuneration of responsibility of the board of directors are dealt with. The chairman members of the management body? consequently has to assess which matters are “important matters” (assessment of essentiality). The chairman has to procure the timely The remuneration for the members of the board of directors shall consideration of such matters by the board. be resolved by the general meeting (or the corporate assembly, if Matters which are to be discussed by the board of directors will be applicable). Remunerations are normally resolved in advance, but prepared by the general manager in consultation with the chairman. may also be resolved at the end of a period of service. The chairman decides what would be a satisfactory presentation The Corporate Governance Code provides some recommendations, to be sent out before the meeting – to make sure that the board of which apply on a comply or explain basis: directors has a sufficient basis for discussion. ■ The remuneration should reflect the board’s responsibility, The chairman shall in general organise the board’s discussion of expertise, time commitment and the complexity of the matters in an appropriate manner, including: company’s activities. ■ The chairman decides whether matters may be presented in ■ The remuneration of the board of directors should not be writing or be dealt with in some other adequate manner, if a linked to the company’s performance. The company should meeting is not required. The chairman shall ensure in so far not grant share options to members of its board. as possible that the members of the board of directors are able ■ Members of the board of directors and/or companies to participate in a joint discussion of matters which are to be with which they are associated should not take on specific dealt with outside of a meeting. assignments for the company in addition to their appointment ■ The chairman must give notice of the board meetings and the as a member of the board. If they do nonetheless take on such matters to be dealt with in an expedient and timely manner. assignments this should be disclosed to the board in full. The ■ The chairman shall ensure that the board forms a quorum. remuneration for such additional duties should be approved by the board. ■ The chairman chairs the board meetings. As a general rule, resolutions of the board require a simple majority of votes. In the event of equality of votes, the chairman of the meeting 3.4 What are the limitations on, and what disclosure is will normally have the casting vote. Stricter rules may be required in relation to, interests in securities held by stipulated in the articles of association. members of the management body in the corporate ■ The chairman shall assess the need for more thorough entity/entities? investigations or more in-depth information to be presented to the board in respect of matters which the board shall Members of the board of directors in listed companies shall disclose consider. any purchase, sale, exchange or subscription of shares issued by ■ The chairman shall keep an ongoing list of pending matters. the company or by companies in the same group. Disclosure shall ■ The chairman shall assess whether the company’s auditor also be made for related parties such as entities controlled by the should attend a meeting of the board. board member and the closest family members. A company who is represented on the board of directors because of its shareholding, Any director, as well as the general manager, may demand that shall also disclose such transactions. specific matters are dealt with by the board of directors. Only the chairman is competent to call a board meeting. These disclosure obligations are expected to be amended in 2017/2018 following the implementation of EU’s Market Abuse Minutes shall be kept of the board of directors’ proceedings. Directive and Regulation. Minutes shall be signed by all members who have participated in the proceedings. The board may elect two directors to sign if the The Accounting Act requires that the number of shares held by board of directors is comprised of more than five directors. members of the board of directors at the end of the accounting year is disclosed in a note to the annual accounts, which shall be

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common to have a remuneration committee. Financial institutions 3.6 What are the principal general legal duties and shall also have a risk committee. liabilities of members of the management body?

The management of the company rests with the board, and the board 3.8 What public disclosures concerning management body practices are required? shall ensure sound organisation of the company’s business activities. The board members must act in accordance with the legislation, the articles of association of the company and the instructions from the The Board shall, as part of the annual report, publish a report on general meeting when performing their activities. its corporate governance practices. The Corporate Governance Code requires that each of the recommendations in the Code shall The board must, to the extent necessary, draw up plans and budgets

Norway be described and explained. This implies that the board should for the activities of the company. provide details about its practices, including any board committees The board, and the individual directors, must keep itself up to appointed. date on the company’s financial position and shall ensure that its activities, accounts and asset management are subject to adequate control. 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? The board must supervise the day-to-day management and the company’s activities in general. Companies may, and usually do, take out D&O liability insurance. In general, the company must at all times have a sound equity based Such insurance will normally cover damages caused by negligence, on the risk and extent of the activities of the company. If it must be up to the insurance coverage, but not gross negligence and wilful assumed that the equity is lower than what constitutes a sound level, acts. the board must take immediate action, hereunder by convening The general meeting may adopt a resolution to discharge the liability a general meeting and propose measures to provide such sound for the board of directors, or others by simple majority. However, equity. Alternatively, the board is under the duty to propose that the the company may nevertheless pursue a claim based on the fact that company is to be dissolved. the general meeting in essential respects was not given correct or A board member must not receive any remuneration from parties complete information at the time of the resolution. Such resolution other than the company in connection with his or her work for the does not discharge liability for damages for other stakeholders. company. A board member or the general manager may not participate in the 4 Other Stakeholders discussion or decision of issues which are of such special importance to the board member in question, or to any connected person of such board member, as the board member must be regarded as having 4.1 What, if any, is the role of employees in corporate a major personal or financial special interest in the matter. The governance? same applies to matters concerning loans or other credit from the company to such persons. The employees have a significant role in Norwegian corporate Members of the board of directors may be held liable for loss caused governance, as elected members of the board of directors and the by negligent or wilful actions or omissions. corporate assembly. Reference is made to the election rules referred to in question 3.2 above. The board members elected by and amongst the employees have the same rights and obligations as the 3.7 What are the main specific corporate governance shareholder elected members. responsibilities/functions of members of the management body and what are perceived to be the Companies with at least 50 employees shall inform and discuss key, current challenges for the management body? issues of significance for the employees working conditions with elected representatives for the employees, according to the The challenge for the board is to focus on the strategic development Employment Protection Act. This includes information about the of the company and challenge the day-to-day management, at the development of activities and the financial status, development of same time as maintaining the many supervisory functions. the size of the work force and decisions that may lead to significant The Corporate Governance Code has some more specific changes in the organisation of the work or employment. recommendations than those set out in the legislation above. Representatives for the employees shall be informed in takeover ■ The board of directors should produce an annual plan for its bids, and shall have a right to publish a statement according to the work, with particular emphasis on objectives, strategy and Securities Trading Act. A takeover bid shall also include information implementation. about issues of significance for the employees. ■ The board of directors should issue instructions for its own work as well as for the executive management, with particular 4.2 What, if any, is the role of other stakeholders in emphasis on clear internal allocation of responsibilities and corporate governance? duties. The board of directors should evaluate its performance and ■ The board of directors shall manage the company in the interest expertise annually. of the company itself. The legislation spells out the details of the ■ In order to ensure a more independent consideration of relations to the shareholders, as described above. The interest of the matters of a material character in which the chairman of company is considered to include the interest of the debtholders, the board is, or has been, personally involved, the board’s employees and possibly others. consideration of such matters should be chaired by some other member of the board. A stakeholder may have the right to appoint board members if this The Board shall (except for smaller companies) have an audit is provided for in the Articles of Association, but this is extremely committee by and amongst the board members. It is also quite rare in listed companies.

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The fact that debt holders may hold directors and the general This supplements the continuing obligation for listed companies to manager liable for loss illustrates that they have a particular role publish inside information as defined in the Securities Trading Act, in the board of directors’ management of the company. The same and the requirement to publish a prospectus as specified. applies to other contractual parties. The company shall, prior to the close of a calendar year, announce its financial calendar for publication of interim reports for the 4.3 What, if any, is the law, regulation and practice subsequent year. concerning corporate social responsibility? 5.3 What is the role of audit and auditors in such The board of directors of large companies shall, according to the disclosures?

Accounting Act, annually disclose a report on the company’s Norway corporate social responsibility principles. The report shall describe The annual report is prepared by the board of directors, adopted by the company’s measures to integrate human rights, labour rights, the board of directors and audited by the company’s auditor. The social issues, environment and combatting of corruption in its report, which is subject to final approval by the shareholders at the business strategies, day-to-day management and in relation to its annual general meeting, must include statements from the auditor(s) stakeholders. If the company has no such principles, the report regarding whether the auditor finds that the annual report gives a shall state this fact. The report may be replaced by reports carried true and accurate view of the financial situation of the company. out in accordance with international reporting standards such as UN sustainability initiative and the Global Reporting Initiative. The report shall be part of the annual report issued with the annual 5.4 What corporate governance information should be published on websites? financial reporting, or in a document publicly available.

There are no requirements for publication on the company’s 5 Transparency and Reporting website. Annual and interim reports shall be filed with the Financial Supervisory Authority, and shall be publicly disclosed through Oslo Stock Exchange’s News Service (www.newsweb. 5.1 Who is responsible for disclosure and transparency? no), or other public, efficient and non-discriminatory publication channel. Announcement of annual and interim reports can be done The Board of Directors is responsible for disclosure and by reference to a website, for example the company’s own website. transparency in the annual report and in general. Day-to-day The Oslo Stock Exchange has published a Code of Practice for disclosures of stock exchange announcements etc. are normally Investor Relations, which is not statutory but is recommended. the responsibility of the general manager (the Chief Executive The Code recommends that information for investors and the Officer), who is also responsible for preparing drafts and relevant market is presented in a single area of the company website that is background material for the board of directors. readily accessible/visible to investors. The area should be labelled The Corporate Governance Code recommends that the board of with a descriptive name such as “Investor relations”, “Investor directors establishes guidelines for contact with shareholders other information” or “Investor”. The code recommends that this area than through general meetings. provides specific information regarding: ■ Corporate governance policy. 5.2 What corporate governance related disclosures are ■ Articles of Associations. required? ■ Board of Directors and senior executives. ■ Corporate social responsibility. Listed companies shall provide annual financial statements and half ■ The 20 largest shareholders. year reports. Reports shall be in Norwegian, except if an exemption is granted. However, most listed companies provide dual language ■ Price information for the listed shares, for several markets if reports in both English and Norwegian. The reports shall be relevant. published by the Oslo Stock Exchange or another widely available ■ Analyst coverage and consensus estimates. channel, when resolved by the board of directors. The audited and ■ Notified trades by primary insiders (members of the board approved annual report of all public and private companies must be and executive management). filed with the Norwegian Register of Accounts. ■ Disclosure of large shareholders. A corporate governance report and social responsibility report as ■ General information about the shares. referred to above shall be included in the board’s annual report, or in ■ Information to shareholders of general meetings, dividends, an available document referred to in the annual report. prospectuses and the operator of the company’s VPS issuer account.

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Atle Degré Linn Hoel Ringvoll Kluge Advokatfirma AS Kluge Advokatfirma AS PO Box 1548 Vika PO Box 1548 Vika NO-0117 NO-0117 Norway Norway

Tel: +47 51 82 29 00 Tel: +47 51 82 29 00 Email: [email protected] Email: [email protected] URL: www.kluge.no/en URL: www.kluge.no/en Norway Atle Degré, a partner in Kluge Advokatfirma AS since 2010 advises Linn Hoel Ringvoll has extensive experience with financing and Norwegian and non-Norwegian clients with company law, corporate corporate law. She has for many years assisted both financial governance and financial market law. He was general counsel at institutions and other companies – many of which are owned fully or the Oslo Stock Exchange for more than ten years, and is a former partly by governmental entities – with external and group financing chairman of the Norwegian Corporate Governance Board. of companies’ businesses, ship financing and project financing. She provides strategic and legal advice to clients, both in connection with In the area of financial market law, he provides advice in IPOs, market disputes and in connection with planning projects or restructurings. abuse regulation, insider trading regulation, M&A, takeovers, and equity and debt issues. He also focuses on the regulatory aspects Ringvoll has particular knowledge and experience with cross-border such as licence requirements and compliance for various financial issues, including choice of law, jurisdiction, international enforcement undertakings, securities firms, asset management firms and other and particular risks connected with cross-border transactions. companies subject to licensing requirements and supervision by the Financial Supervisory Authority of Norway. As the former general counsel at of the Oslo Stock Exchange, he has been responsible for administrative and regulatory work in connection with the laws and regulations that apply to listed companies, stock exchange members, securities firms, debt issuers and other actors in the securities market. He has contributed in several official legislative reviews and been responsible for regulatory, framework and concession processes.

Kluge is a Norwegian full service independent law firm with offices in Oslo, Stavanger, Bergen and Hamar. Kluge offers comprehensive advice and assistance within all major fields of business law, with particular focus on energy/oil and gas, real estate/construction, public sector, dispute resolution and industry/finance. Our team advises on M&A, project work, dispute resolution and day-to-day operations. Established in Stavanger, Norway, in 1923, Kluge is a preferred adviser and discussion partner for many of the most important players in our selected markets, with a solid international network.

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Poland Łukasz Bobeł

WBW Weremczuk Bobeł & Partners Attorneys at Law Krzysztof Weremczuk

obliged to disclose their specific data; an entry into the NCR 1 Setting the Scene – Sources and is necessary to complete the JSC’s formation process; Overview ■ the Accountancy Act dated 29 September 1994, setting out the principles of accountancy, audit and (to some extent) transparency which shall apply to commercial partnerships 1.1 What are the main corporate entities to be discussed? and companies (and some other entities); ■ the Act on Public Offering, Conditions Governing the This chapter focuses on corporate governance (“ ”) issues CG Introduction of Financial Instruments to Organised regarding Polish joint stock companies (“JSC”) whose shares may Trading, and on Public Companies (“Act on Public be admitted to trading on the WSE (Warsaw Stock Exchange) Main Offering”) dated 29 July 2005, which provides, inter alia, Market (regulated market) and NewConnect (alternative trading for some disclosure requirements and CG rules relating to system). public (listed) JSCs; and The JSC is a legal entity with the capital divided into (as a rule, freely) ■ the Act on Trading in Financial Instruments (“TFI”) dated tradeable shares. It may be established for any purpose allowed by 29 July 2005, which also introduces certain disclosure and law, by at least one shareholder (who cannot be, however, a single transparency requirements, as well as CG rules relating to shareholder limited liability company). What is important is that listed JSCs and their shareholders. the JSC provides protection for the personal assets of shareholders The statutory provisions on CG are supplemented by the against the company’s creditors. Namely, according to the general memorandum of association of the JSC (“MoA”), as well as rule, shareholders are not liable for the debts of the JSC. Moreover, the regulations adopted by the corporate bodies of the JSC, i.e. statutory provisions relating to JSCs do not include the counterpart resolutions of the general assembly of shareholders (“GA”), of article 299 of the Code of Commercial Partnerships and and regulations (by-laws) of the management board (“MB”) or Companies (“CCPC”) which applies to limited liability companies supervisory board (“SB”). (“LLC”) and provides that if enforcement against the LLC proves For JSCs listed on the WSE Main Market and on NewConnect, there to be ineffective, the members of the management board (“MB”) are also, in particular, two specific non-statutory CG sources: who (at their fault) failed to file a petition for bankruptcy of the ■ “The Code of Best Practice for WSE Listed Companies company at the correct time shall be jointly and severally liable for 2016” (“The New Code of Best Practice”), which entered its obligations. into force on 1 January 2016; and JSCs constitute companies whose shares are traded on a public ■ “Good Practice of NewConnect Listed Companies”. market. Each of the mentioned Acts (together hereinafter referred to as the “Codes of Practice”) constitutes a set of CG rules and standards, 1.2 What are the main legislative, regulatory and other adopted by the WSE, which govern relations between listed corporate governance sources? companies and their market environment. Although application of those rules is voluntary, it is basically (except for the so-called The laws mentioned below are up to date as of 1 April 2017. ‘recommendations’) subject to the ‘comply or explain’ principle (if the listed company decides not to comply with any of the mentioned The provisions concerning corporate governance of JSCs are rules, it is required to provide the market with direct information included mainly in the following Acts: regarding this, as well as the reasons for such a decision; failure to ■ the Code of Commercial Partnerships and Companies fulfil the ‘explain’ duty may result in financial penalties imposed by (“CCPC”) dated 15 September 2000, which is the main legislative corporate governance source that regulates the the WSE). incorporation, organisation, functioning, dissolution, merger, division and transformation of commercial partnerships and 1.3 What are the current topical issues, developments, companies (including JSCs); trends and challenges in corporate governance? ■ the National Court Register Act dated 20 August 1997, which provides for certain disclosure and transparency The main recent legislative change relating to corporate governance requirements relating to commercial partnerships and issues was connected with entry into force, as of 3 July 2016, of EU companies, as well as some other entities. Kept by district Market Abuse Regulation (“MAR”). MAR changed substantially courts, the National Court Register (“NCR”) is a public register where all the above entities are entered into and the obligations of the listed companies (both those which shares

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are admitted to trading on a regulated market and alternative There is, however, an unwritten rule that all corporate rights trading system) relating to disclosure of inside information. As a (described briefly in question 2.1) are associated with the correlative consequence of MAR implementation many listed companies duties. For instance, the right to vote on GAs is associated with the adopted specific regulations which outline internal information respective duty to exercise it at least in those cases when a resolution policy and list major activities that shall be treated as confidential of shareholders is required by law and necessary (so that the MB information and as a consequence shall be made available publicly could manage the JSC effectively). The examples of such cases are to investors. The legal importance of such internal information listed in question 2.1 above (e.g. conclusion of a loan agreement policies is questioned and in particular there are doubts as to their with a member of the MB, SB or a commercial proxy, acquisition potential impact upon liability for breach of MAR obligations. and disposal of real estate).

Poland Naturally, the shareholders who are members of the MB or SB 2 Shareholders have additional CG related responsibilities which result from their membership in the corporate bodies of the JSC.

2.1 What rights and powers do shareholders have in the 2.3 What shareholder meetings are commonly held and operation and management of the corporate entity/ what rights do shareholders have as regards them? entities?

The GA may be convened as an ordinary or extraordinary assembly. Shareholders participate in the operation and management of JSCs by adopting resolutions in the most important company matters According to the general principle, the ordinary GA is required to be listed in the CCPC or in the MoA. held within six months of the end of each financial year. The agenda of the ordinary GA includes at least: A resolution of shareholders (“GA”) is required under the CCPC particularly in the following matters: ■ consideration and approval of the MB report and the financial statement for the previous financial year; ■ consideration and approval of the MB report on the operations of the company and the annual financial report; ■ adoption of a resolution on division of profits or financing of losses; and ■ approval of the performance of duties by members of the company’s governing bodies; ■ approval of the performance of duties by members of the MB and SB. ■ disposal of, or tenancy of, the enterprise or its organised part and the creation of a limited right in rem over them; On the other hand, the extraordinary GA can be convened to adopt any other resolutions – if required by law or the MoA, as well as in ■ acquisition and disposal of real estate, the right of perpetual usufruct, or a share in real estate (unless the MoA provides all cases when governing bodies or persons authorised to convene otherwise); the GA consider it desirable. ■ conclusion of a credit agreement, a loan agreement, a surety It should be noted that shareholders representing at least half of the agreement or other similar agreement with a member of the share capital or of the total number of votes in the company have the MB, SB, a commercial proxy or a liquidator (or for the benefit right to convene the extraordinary GA. Moreover, a shareholder or of any such person), unless the law provides otherwise; shareholders representing at least one-twentieth of the share capital ■ amendments to the MoA; (or less, if the MoA provides so) may request that the extraordinary ■ merger, division or transformation of the company; and GA be convened, as well as that certain matters be placed on the agenda of that GA. If the extraordinary GA is not convened ■ dissolution of the company. within the statutory time limit, the registry court may authorise the Resolutions are binding only internally (i.e. they apply to the JSC’s shareholders to convene the extraordinary GA on their own. Subject bodies, the shareholders and the company itself). However, legal to relative provisions of the CCPC and the MoA, a shareholder or acts executed without the resolution of shareholders that is required shareholders representing at least one-twentieth of the share capital by an act of law are invalid; those executed without the resolution may also request that certain matters be placed on the agenda of required by the MoA are valid, but may result in the liability of the next GA as well as – in the case of public companies – submit members of the MB for a breach of the memorandum. to the company drafts of the resolutions to be adopted at the GA. Unless the MoA provides otherwise, shareholders have the right to Furthermore, during the GA, each of the shareholders may submit appoint and remove – by a resolution – members of the SB, as well drafts of resolutions concerning the matters placed on the agenda. as remove at any time any member of the MB. Apart from the powers mentioned above, shareholders have, inter The MoA may also grant some personal rights in the area of CG to alia, the following rights as regards the GA: particular shareholders, such as the right to solely appoint or dismiss ■ crucially, the right to participate in the GA and vote on it (also certain members of the MB or SB. by proxy); Moreover, every shareholder has the right to request from the MB ■ the right to request a secret vote; and (during the GA or at the time when the GA is not held) certain ■ the right to bring an action for annulment of a resolution or information concerning the company, and the MB is generally declaration of its invalidity. obliged to provide such information on conditions prescribed by According to the New Code of Best Practice, JSCs listed on the law. WSE Main Market shall enable their shareholders to participate in a GA and exercise the voting right using electronic communication 2.2 What responsibilities, if any, do shareholders have as means if this is justified by the structure of the shareholding or regards the corporate governance of their corporate expectations of the shareholders notified to the JSC. entity/entities? In a single-shareholder JSC, all rights of the GA are exercised by the single shareholder. There are no significant CCPC provisions imposing on shareholders of the JSCs any responsibilities as regards the CG of their company.

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for damages included in the Civil Code (if they suffer damage due to 2.4 Can shareholders be liable for acts or omissions of acts or omissions of the member of the MB and are able to prove it). the corporate entity/entities?

According to the general principle, shareholders are not liable for 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by obligations of the JSC. However, this rule is not without exception. shareholders in the corporate entity/entities? Firstly, a shareholder is jointly and severally liable with the company and persons who acted in the name of the JSC after signing the MoA First of all, if the JSC is a single-shareholder company, details of but before its registration in the NCR (“JSC in organisation”) for the sole shareholder have to be reported to the registry court and the obligations of that JSC in organisation (up to the value of the accordingly entered into the register of entrepreneurs maintained for Poland unpaid contribution to finance the subscribed shares). the company. Secondly, shareholders may be liable (with all their assets) for tax Moreover, for registered shares of the JSC, the MB is obliged to arrears and social security contributions of the JSC in organisation if keep a share register, into which, inter alia, information on the the enforcement against the mentioned company proves to be fully shareholders holding such shares and on the transfer of the shares in or partially ineffective and it has no MB or even an attorney acting question should be entered. on its behalf. There are also some disclosure requirements connected to the For liability of a shareholder who is also a member of the MB, see relation of dominance and dependence between companies (for question 2.6. example, both a shareholder and a member of the MB/SB of a company (“X”) may demand that a company/partnership being a 2.5 Can shareholders be disenfranchised? shareholder in X provides information as to whether it remains in a position of dominance/dependence with respect to a particular The essential right of each shareholder of the JSC is the right to company/partnership being a shareholder in X too; the entitled vote at GAs. However, according to the CCPC, there are certain person may also demand disclosure of the number of shares or votes situations where this essential right may be excluded or it cannot that the requested company holds in X). be exercised. Furthermore, pursuant to the Act on Public Offering, a shareholder First of all, the voting right may be excluded in JSCs under the MoA who acquires or disposes of a qualifying holding in a public JSC with respect to shares which are preference shares in respect of (specified in the mentioned Act) shall report such a transaction dividends (non-voting shares). both to the Polish Financial Supervision Authority (“KNF”) and the company. Information received from the shareholder should Secondly, according to the CCPC, the voting right arises as of the subsequently be published on the company’s website as well as date on which the share is paid for in full (unless the MoA provides submitted by the company to KNF and WSE. As for the JSCs listed otherwise). Thus, according to the general rule, a shareholder on the WSE Main Market, the Act on Public Offering introduces cannot vote at GAs until he or she makes full payment for the shares. also some limitations regarding acquisition of a certain number of Moreover, a shareholder may not (personally/by proxy/as a proxy shares in such companies i.e. the special procedure in which the of another person) vote on resolutions concerning his liability to acquisition in question may only be carried out. the company. For some specific limitations on (plus disclosure requirements in Additionally, a shareholder may be deprived of his corporate rights relation to) interests in securities held by members of the MB, see by redemption of shares (if it is allowed by the MoA). This may question 3.4. be implemented with the consent of a shareholder (voluntary redemption) or without such consent (forced redemption), depending on the circumstances and provisions of the MoA. Redemption of all 3 Management Body and Management shares of the shareholder leads to his or her exclusion from the JSC.

Finally, on certain conditions, shareholders may have their shares 3.1 Who manages the corporate entity/entities and how? compulsorily purchased (the rules governing compulsory purchase of shares in private JSCs are set forth in the CCPC, while those The right to manage the affairs and to represent the JSC is vested in concerning public companies are included mainly in the Act on the MB. Pursuant to the CCPC, the MB may consist of one or more Public Offering). members (individuals only, shareholders, and/or non-shareholders). If the MB comprises more than one member, the way of executing 2.6 Can shareholders seek enforcement action against both of the mentioned powers can be (discretionally) determined members of the management body? by the MoA. Unless the MoA provides otherwise, representations in the name of the JSC may be made by two members of the MB Principally, there are two ways for shareholders to seek enforcement acting jointly or by one member acting together with a commercial actions against members of the MB. proxy. On the other hand, unless the MoA includes any different Firstly, as a member of the MB, under the CCPC, is liable to the rules, all members of the MB may manage the affairs of the JSC JSC, inter alia, for damage caused by acts or omissions in breach of acting jointly. Unless the MoA provides otherwise, the resolution of law or provisions of the MoA (unless he or she is not at fault), each the MB shall be adopted by an absolute majority of votes. of the shareholders may bring against him or her – on behalf of the Moreover, as stated in question 2.1, some matters require a resolution JSC – an action for compensation. The condition is that the JSC of shareholders. The MoA may also provide that prior to carrying out has not brought such an action itself within one year of the date on actions specified therein, the MB shall obtain the consent of the SB. which the act causing the damage was discovered. Most important of all, the CCPC provides that the GA and the SB Secondly, shareholders are entitled to seek compensation of damage do not have the right to give the MB any binding instructions with on their own behalf according to the general principles of liability respect to the management of the affairs of the JSC.

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3.2 How are members of the management body appointed 3.5 What is the process for meetings of members of the and removed? management body?

According to the CCPC, members of the MB are appointed and The CCPC does not include any detailed provisions governing the removed by the SB. However, the MoA may provide otherwise, process for meetings of members of the MB. It only states that: 1) e.g. grant the right to appoint and/or dismiss the members to the GA, all members shall be properly notified of the meeting; 2) unless the one or some of the shareholders or even to third parties. MoA provides otherwise, resolutions of the MB shall be adopted by Notwithstanding the above, the CCPC provides that a member of an absolute majority of votes; 3) the resolutions of the MB shall be the MB may be removed at any time by a resolution of the GA included in minutes signed by the members of the MB present at the Poland (regardless of any provisions of the MoA). meeting; and 4) in some cases, a member of the MB is obliged to The mandate of a member of the MB also expires upon death, withhold from deciding on the matters. resignation or (in most cases) as a result of the end of tenure. The MoA (or internal regulations of the MB adopted by an authorised The maximum tenure is five years. company’s body) may introduce some further requirements regarding the meetings, as well as regulate the process in detail. The MoA may, The MoA may provide for a partial renewal of the MB in such a for example, stipulate that if the number of votes is equal, the president way that a certain number of the members step down in an order of the MB has the casting vote. They may also confer certain powers determined by a draw of lots, or by seniority of appointment or in in managing the operations of the MB upon the president. another order.

3.6 What are the principal general legal duties and 3.3 What are the main legislative, regulatory and other liabilities of members of the management body? sources impacting on contracts and remuneration of members of the management body? The main duty of the members of the MB is to manage the affairs Contracts of members of the MB are subject to acts of law (e.g. the and represent the JSC. However, in the case of a conflict between CCPC, the Civil Code, the Labour Code), the MoA and (unless the the interests of the JSC and the interests of a member of the MB, memorandum provides otherwise) the resolutions of the shareholders his or her spouse, relatives and in-laws up to the second degree or (in practice, the competence to set the MB remuneration is often persons with whom he or she has personal relations, the member is vested in the SB). obliged to withhold from deciding on the matters. According to the New Code of Best Practice, JSCs listed on the Pursuant to the CCPC, when performing their duties, members WSE Main Market should have a remuneration policy for MBs. of the MB are required to ‘exercise diligence characteristic of Further, the motivational plans for MBs shall be prepared in a way the professional nature of their activity’. If they fail to meet that as to make the level of the remuneration dependent upon the real, requirement, they may find themselves liable for obligations of the long-term financial situation of the company, long-term increase in company or the damage caused to it. value to the shareholders as well as the stability of the company. For instance, members of the MB who have provided false data in representations on contributions towards the share capital (required 3.4 What are the limitations on, and what disclosure is for registration of the JSC in the NCR or registration of the increase required in relation to, interests in securities held by of the share capital of the JSC) are jointly and severally liable members of the management body in the corporate with the JSC to its creditors, for three years from the date of the entity/entities? mentioned registration. Moreover, members of the MB can be jointly and severally liable for Firstly, according to the CCPC, a member of the MB may not, tax arrears and social security contributions of the JSC, particularly without the consent of the JSC, engage in a competitive business or if the enforcement against the company proves to be ineffective participate in a competitive company (as a member of its governing and they do not demonstrate that, in appropriate time, a petition for body), partnership or civil law partnership (as a partner), or any other bankruptcy of the company was filed. competitive legal person (as a member of its governing body). The same prohibition refers to participation in a competitive company For liability for damage caused to the company, see question 2.4. where the member of the MB holds at least 10% of shares or has the right to appoint at least one member of the MB. Unless the MoA 3.7 What are the main specific corporate governance provides otherwise, the consent should be given by the governing responsibilities/functions of members of the body which is entitled to appoint the MB. management body and what are perceived to be the key, current challenges for the management body? Secondly, pursuant to the TFI, during the restricted period defined therein (i.e. for instance, the period between the time when a member of the MB gains certain inside information concerning the There are basically no further principal statutory CG responsibilities/ company or its shares, and the time when such information is made functions of members of the MB of the private JSC other than those public), members of the MB of the public JSC may not generally mentioned above. On the other hand, when it comes to public JSCs, acquire or dispose of (for their own account or for the account of a the provisions of particular acts of law and the New Code of Best third party), any of the company’s shares, derivative rights attached Practice provide for some additional CG related rules applicable to thereto or other financial instruments related to such shares. those companies. Moreover, members of the MB of the public JSC shall notify KNF For instance, members of the MB of the JSC listed on the WSE and the company of any transactions executed by them or by persons Main Market are obliged, inter alia, to: related to them and for their own account, whereby they acquire or ■ request – before the company executes a significant agreement dispose of any shares in the company (as well as derivative rights with its related entity or a shareholder holding more than 5% and other financial instruments related to the company’s securities), of shares – from the SB the approval of the agreement in admitted or sought to be admitted to trading on a regulated market. question;

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■ provide to other members of the MB notification of any specific corporate governance rules apply to state-owned companies conflicts of interest which have arisen or may arise, and where a major role is played by the Ministry which supervises refrain from taking part in the discussion and from voting on the given state-owned company and very often adopts internal the adoption of a resolution on the issue which gives rise to regulations concerning the operation of the controlled companies. such a conflict of interest; ■ delegate to participate in the GA those of them who can answer questions which may be submitted at the GA (e.g. by 4.3 What, if any, is the law, regulation and practice shareholders); and concerning corporate social responsibility? ■ seek the consent of the SB for holding positions in governing bodies of companies outside of the capital group. There are no significant statutory provisions concerning corporate

social responsibility in Polish law. However, companies – including Poland In light of the current situation in the financial market, the key JSCs – are becoming more aware of the underlying ideas and more challenges for the MB of public JSCs seem to be the following: often take them into consideration when determining the policies 1) enhancing transparency; 2) improving quality of communication and business strategy. between the company and investors; and 3) strengthening protection of shareholders’ rights, including those not regulated by legislation, as the mentioned factors appear to have a direct positive impact on 5 Transparency and Reporting the market valuation of the company, reducing the cost of capital.

5.1 Who is responsible for disclosure and transparency? 3.8 What public disclosures concerning management body practices are required? Responsibility for disclosure and transparency in the JSC generally rests with the MB. For general information on the issue, see section 5 on Transparency and Reporting. For disclosure requirements, see questions 5.2 and 5.4.

3.9 Are indemnities, or insurance, permitted in relation to 5.2 What corporate governance related disclosures are members of the management body and others? required?

Liability insurance for members of the MB and other corporate There is a general rule that both data and corporate documents of bodies of JSCs (i.e. D&O insurance) is permitted under the Polish JSCs should be reported to the registry court so that they can be law. D&O insurance is usually purchased by the JSC itself, even if registered in the register of entrepreneurs of the NCR or at least it is for the sole benefit of the mentioned persons (its purpose is to disclosed in the registration files kept for the company. ensure that some strategic decisions of the executives of a company The above requirement refers, in particular, to any amendments to can be made without fear of personal financial loss). the MoA, the appointment and dismissal of members of the MB and SB, the approval of the annual financial statement, and many other events concerning the activity and legal status of the JSC. 4 Other Stakeholders The register of entrepreneurs of the NCR is public (anyone may request written excerpts from it, inspect the company’s registration 4.1 What, if any, is the role of employees in corporate file, as well as access all registration details of all registered entities governance? currently disclosed in the register by visiting the following website: https://ems.ms.gov.pl). Moreover, almost all entries into the NCR The general rule is that employees of the JSC have no powers in (and some other corporate information, for instance concerning corporate governance (unless they are shareholders or members in-kind contributions made by shareholders) must be published of the corporate bodies at the same time). Nevertheless, under the in the Official Court and Business Gazette (Monitor Sądowy i Act on Informing and Consulting Employees, dated 7 April 2006, Gospodarczy), and also available on the Internet. they are entitled to be informed of some of the aspects of the JSC’s For disclosure requirements applying to JSCs listed on the WSE activity (e.g. economic situation, current and future undertakings), Main Market or on NewConnect, which have to be met by publishing as well as to be consulted with regard to those matters. certain (also CG-related) information on companies’ websites, see question 5.4. Please note that in addition to publishing the above 4.2 What, if any, is the role of other stakeholders in information on corporate websites, public companies are also corporate governance? obliged to submit it to the Polish Financial Supervision Authority (“KNF”). Apart from the company’s bodies and to a limited extent employees of the company there are also other stakeholders in corporate 5.3 What is the role of audit and auditors in such governance in Poland. They include organisations which group disclosures? companies from a specific sector (e.g. banks, insurance companies). The role of such organisations is to lay down expected market The Accountancy Act generally requires all JSCs to subject their standards of corporate governance rules applicable to companies annual financial reports to audit. The purpose of an audit isfor belonging to a given sector. Such standards are basically not the auditor to issue an opinion on whether a given financial report mandatory but very often followed by the companies. Further, in is prepared in compliance with the accepted accounting principles respect of the listed companies, as mentioned above, the major role in and whether it gives a true and fair view of the property, financial respect of corporate governance is played by WSE, which lays down standing and the financial results of the audited JSC. Code of Best Practice for listed companies. As already mentioned The opinion of an auditor is generally also required to confirm what above such Code is based on ‘comply or explain’ principle. Finally, is a fair value of the in-kind contributions made by shareholders

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(stipulated in the respective report of the promoters/MB), and ■ current reports regarding events relating to the JSC or whether it corresponds to at least the nominal value of the shares its subsidiary, listed in the Regulation of the Minister of subscribed for such contributions or the higher issue price. Finance dated 19 February 2009 (e.g. changes to the share capital, redemption of the shares, appointment, dismissal The role of audit and auditors is therefore to ensure reliability of the or resignation of a member of the MB or SB, acquisition or disclosures made by JSCs. disposal by the JSC of its own shares, certain major transactions of the company, etc.), as well as other information required to be published under statutory provisions (e.g. acquisition 5.4 What corporate governance information should be published on websites? or disposal of a qualifying holding in the company or share sale/purchase transactions, regarding shares in the company, concluded by members of its governing bodies); and Poland According to the CCPC, all public companies are required to have a ■ periodical reports (quarterly, semi-annual and annual reports). website and publish in particular the following information there: the business name of the company, its seat and address; the name of the Similar (but in narrower scope) disclosure requirements relate to the registry court where the documents of the JSC are filed; the number JSCs listed on NewConnect. Namely, the companies in question are under which the JSC is entered into the NCR; the tax identification obliged to publish on their websites in particular: number (“NIP”); the amount of the share capital and the amount ■ confidential information as defined EU Market Abuse of contributions made to cover the share capital (importantly, if a Regulation; private JSC decides to have a website, it is also obliged to publish all ■ current reports regarding events (also in the area of CG) of the above information on it); and information regarding the GA relating to the JSC, set forth mainly in the Appendix 3 to the including, inter alia, the date, time, venue, detailed agenda, drafts Alternative Trading System Rules (list of events is similar to of the resolutions to be adopted, and the adopted resolutions and those applicable to JSCs listed on WSE Main Market); and results of the voting. ■ quarterly and annual reports. Moreover, pursuant to the Act on Public Offering, the JSCs listed There are some further disclosure requirements for public JSCs on the WSE Main Market have to publish on their websites in from the applicable Codes of Best Practice. particular: ■ confidential information as defined in article 154.1 of the TFI and EU Market Abuse Regulation (i.e. simplifying the issue, information which has not been made public and which, if made public, would be likely to have a significant effect on the prices of shares);

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Łukasz Bobeł Krzysztof Weremczuk WBW Weremczuk Bobeł & Partners WBW Weremczuk Bobeł & Partners Attorneys at Law Attorneys at Law ul. Iłłakowiczowny 8/2 ul. Iłłakowiczowny 8/2 60-789 Poznań 60-789 Poznań Poland Poland

Tel: +48 61 8 510 700 Tel: +48 61 8 510 700 Email: [email protected] Email: [email protected] URL: www.wbwlegal.pl URL: www.wbwlegal.pl Poland Łukasz Bobeł is the managing partner of WBW Weremczuk Bobeł & Krzysztof Weremczuk is a partner with WBW Weremczuk Bobeł & Partners and is responsible for M&A and corporate practice within the Partners. He graduated from the Law Faculty of Adam Mickiewicz firm. He graduated from the Law Faculty of Adam Mickiewicz University University in Poznań in 2000 and since then has remained a member in Poznań in 2002 (magna cum laude). In 2002, he also completed a of the Regional Chamber of Legal Advisors. Krzysztof Weremczuk’s Cambridge University course on British and European Union Law. He area of expertise covers corporate matters as well as banking and is the member of the Regional Chamber of Legal Advisors in Poznań. financial issues. Krzysztof Weremczuk also advises clients on real Łukasz Bobeł specialises mainly in M&A transactions and in the capital estate projects (purchase and development), provides day-to-day markets. He advised a number of international clients in complicated legal support in general commercial matters and represents clients in cross-border M&A transactions and on IPOs and SPOs on the Warsaw court disputes. He works for both domestic and international clients. Stock Exchange. Łukasz Bobeł is a member of supervisory boards of a number of companies. He also authors a number of publications on civil, commercial and administrative law.

WBW Weremczuk Bobeł & Partners is one of the most reputable national law firms in Poland, specialising mainly in M&A transactions, Corporate law and Banking & Finance. The firm was established by partners formerly working in one of the biggest international law firms who have vast experience in advising on complicated cross-border transactions, as well as in providing legal assistance to international clients. The firm has been cooperating on a number of cross-border transactions with major international law firms. The firm provides legal services to both Polish and foreign entrepreneurs (those already operating on the Polish market or willing to enter it). The firm’s M&A practice has been steadily recognised byThe Legal 500 and IFLR1000. The firm was also awarded, for a number of times, the prize of ‘M&A Law Firm of the Year’ in Poland by a number of international magazines, including Finance Monthly, ACQ Finance Magazine, Lawyer’s Monthly and Dealmaker’s Monthly.

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Portugal

Cuatrecasas João Mattamouros Resende

best corporate practices, deciding on which code to choose is left to 1 Setting the Scene – Sources and the company’s discretion exclusively and is no longer undertaken Overview by the CMVM. The decision-making bodies of the company shall now justify their option and explain said option, thereby allowing greater freedom of choice” (preamble of the Regulation). Since 1.1 What are the main corporate entities to be discussed? the Corporate Governance Codes of both CMVM and IPCG set different rules, this is a step with relevant consequences as it enables Corporate governance issues arise in all corporate entities but we issuers to choose from the two different sources of law. will focus on issuers of shares admitted to trading on a regulated market situated or operating in Portugal and subject to Portuguese Complementing the above-mentioned legislative, regulatory and law (“sociedades anónimas abertas”). soft law sources, the articles of association of the issuers remains a very relevant piece of corporate governance material that structures the level of compliance of each issuer. In this sense, issuers have 1.2 What are the main legislative, regulatory and other plenty of room and freedom of choice to adapt their corporate corporate governance sources? governance structure in a way they deem preferable.

The main legislative sources on corporate governance matters in Portugal are the Commercial Companies Code (“CSC”), which 1.3 What are the current topical issues, developments, sets the rules generally applicable to companies, namely share trends and challenges in corporate governance? companies, and the Securities Code (“CVM”), which comprises a complementary set of rules applicable to companies with shares The existence of two different Codes – CMVM and that of the open to public investment, notably but not limited to companies IPCG – has caused significant inconvenience, especially because with shares admitted to trade on regulated markets. the Portuguese market is a capital stock exchange market which is narrow in scope. As to regulatory sources, the Portuguese Securities Exchange Commission (“CMVM”), a public agency with administrative The need to find a balance which would allow for the prevention of and financial autonomy, published a new Corporate Governance a recommendatory duplication but without abandoning the essential Code in 2013 and Regulation 4/2013 on Corporate Governance idea of leaving the corporate governance code to self-regulation has (”Regulation”). become clear both to the CMVM and IPCG. In addition, the Portuguese Corporate Governance Institute “In correspondence with the availability and spirit of cooperation that the CMVM promptly revealed for this purpose, the IPCG has (“IPCG”), a private association active in promoting and researching been working on the preparation of a document whose content corporate governance matters, enacted its own Code on Private would respect the essential physiognomy of the IPCG Code of 2014 Governance in 2014. This is currently under revision. and, at the same time, would resemble the fundamental concerns Legislative and regulatory sources are mandatory but the CMVM of the CMVM in matters of corporate governance. The legislative has implemented the “comply or explain” principle as to the rules amendments, which have in the meanwhile taken place, especially set forth in the Corporate Governance Code(s). In other words, in matters of accountability and audit of financial statements, issuers have “the duty to provide and disclose information by way equally impose some adjustments to the Code” (Preface of the IPCG of a report on the structure and practices of corporate governance Corporate Governance Code subject to consultation since June 1, (corporate governance report), the content of which is the result 2016). of convening legal, regulatory rules and of the description of the On 16 March 2016 the CMVM and IPCG enacted a joint statement degree of the adoption of Governance Codes of a recommendatory in which they communicated the common goal of allowing greater nature” (preamble of the Regulation). room for self-regulation through the preparation of a single unified The entry into force of the Regulation has implemented an important Corporate Governance Code, ultimately leading the CMVM to change concerning the relevance of Corporate Governance Codes stop publishing its own Corporate Governance Code. The CMVM enacted by entities other than the CMVM itself: “the use of a would then retain and focus on its supervisory powers and duties. corporate governance code other than the CMVM code (article In this sense, the IPCG has committed to preparing and presenting 2/1) is now allowed and no prior examination by said entity is now to public consultation a new Corporate Governance Code which required. Notwithstanding the fact that the CMVM will continue to contains the main principles, according to research, of Corporate provide a Governance Code that promotes the implementation of Governance matters and gains the support of the main parties

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interested in good corporate governance of listed companies. Most The legislative and regulatory differentiation of the institutional notably, the support of investors. investors, setting forth specific duties and responsibilities, are also Following the referred joint statement, the public consultation ways of promoting their involvement in good corporate governance period of the new proposed Corporate Governance Code of the practices. IPGC started on 1 June 2016. Since then, interested parties have submitted 25 queries. 2.3 What shareholder meetings are commonly held and The recent developments of the world economy, and the turmoil that what rights do shareholders have as regards them? has affected the Portuguese financial system and the banking sector, as well as the Portuguese capital market in general, in recent years Typically, companies hold an annual general meeting within three has raised awareness of corporate governance matters, notably in months of each year end, or within five months in the case of Portugal what concerns accountability, business with interested related parties companies that consolidate accounts or that apply the equity method and the composition and functioning of the management body. of accounting in order to vote on the annual accounts. Shareholders are required to hold a general meeting when companies 2 Shareholders need to approve any matters that are not reserved to any other corporate body or matters that are reserved to the shareholders, namely a merger, spin off, conversion, amendment of the articles of 2.1 What rights and powers do shareholders have in the association, winding-up of the company, dismissal of directors and operation and management of the corporate entity/ any other matters for which the law requires a qualified majority for entities? approval.

Unlike other types of corporate companies, the CSC sets a clear In all of the above-mentioned matters a qualified majority of two distinction in public limited companies between the powers of thirds of the issued votes is required to approve the resolution, shareholders and the powers of directors. As a general rule, the daily unless the shareholders meet on a second call, in which case a operation and management of the company are matters exclusively simple majority will be sufficient, provided that at least half of the within the powers of the management body and shareholders only share capital is present or duly represented. have a say when the management body asks the shareholders to vote Shareholders holding or representing at least 2% of the share on a specific operational or management matter. capital are entitled to ask the Chairman of the Shareholders’ Matters such as the acquisition, transfer and creation of encumbrances Meeting corporate body to call a shareholders’ meeting, to include over real estate assets or shares in other companies’ share capital, items on the meeting agenda and to present resolution proposals. the voting on the shareholders’ meetings of subsidiaries or affiliated Shareholders also have access to the contents of the minutes of companies, the granting of guarantees by the company, important the shareholders’ meetings, as well as to the identification of the modifications to the company’s organisation, the definition of shareholders who participated and voted in said meetings. human resources policies, marketing and sales strategy and many others are within the authority and powers of the management body. 2.4 Can shareholders be liable for acts or omissions of Only exceptional organisational matters, notably but not limited to a the corporate entity/entities? merger, a spin off or a conversion into a different type of corporate entity require the shareholders to vote (upon a proposal made As a general rule, there is no liability of shareholders for acts or beforehand by the management body). omissions of corporate entities, which are in principle limited. Also, the directors have the authority and duty to prepare the However, shareholders that are able, either solely or jointly with company’s annual accounts that the shareholders subsequently other shareholders, by virtue of the voting rights held by means of approve. In case, for instance, the shareholders disagree with the shareholder agreements, to designate or elect, directly or indirectly, annual accounts proposal, shareholders should vote that new annual any member of the Management Body or of the Supervisory Body, accounts proposal is prepared, or that changes should be made is jointly liable with the designated or elected person, whenever to the existing one, explaining the reasons for such vote, by the the shareholder committed a fault in the designation or election of management body. The management body should act accordingly, such person and the latter is deemed liable towards the company unless they believe the requested changes violate legal rules, in or the shareholders, provided such person has been designated or which case they should recourse to the court within eight days of elected with the votes of such shareholder(s) and less than half of the shareholders’ vote. the votes of the other shareholders present or duly represented at the shareholders’ meeting. 2.2 What responsibilities, if any, do shareholders have as Also, shareholders that are able, either solely or jointly with other regards the corporate governance of their corporate entity/entities? shareholders, by virtue of the voting rights held or by means of shareholder agreements, to dismiss, directly or indirectly, any member of the management body or of the supervisory body, is Shareholders are expected to participate in the running of the jointly liable with the designated or elected person, whenever the company, requesting and carefully analysing the information shareholder as a result of its influence leads such person to adopt disclosed about the company and actively exercising their voting a conduct for which such person is deemed liable towards the rights accordingly. company or the shareholders. Legislative steps have been taken to facilitate the involvement of the shareholders by allowing them to vote while not physically attending the shareholders’ meeting, either through representation 2.5 Can shareholders be disenfranchised? by any third party, a correspondence vote or allowing the use of technological means, so long as the authenticity of the voting is Only in very limited circumstances may shareholders be safeguarded. disenfranchised.

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Where 90% of the shares of a company are owned by a shareholder, management of the company which are not specifically set forth as the remaining 10% may be compulsorily purchased by the falling under the competence of the shareholders’ meeting. controlling shareholders, subject to compliance with a legally In terms of the representation of the company in the execution of prescribed procedure. legal acts (for example, entering into agreements), the CSC assigns Also, the lack of transparency of the ultimate ownership of a those “exclusive and full” powers to the management body, but may shareholding of a company to be disclosed to CMVM and the also appoint attorneys-in-fact for the performance of specific acts or market causes the suspension of the voting and financial rights of categories of acts. such shareholding (with the exclusion of the preemption right in The management body may also delegate to one or more directors case of a share capital increase). or to an executive committee the “day-to-day management of the Finally, and generally speaking, shareholders with a conflict of company”. Portugal interest are legally prevented from voting. Concerning the legal framework applicable to directors and the executive committee, it should be noted that: 2.6 Can shareholders seek enforcement action against i) The appointment of an executive committee, as well as the members of the management body? scope of its powers, or the delegation of powers to one or more directors are at the discretion of the board of directors and it should not be decided by the shareholders’ meeting or Without prejudice to a claim for compensation of damages caused to determined, for example, by a shareholders’ agreement. the shareholders individually, shareholders who hold at least 2% of the ii) The revocation of an appointment or amendments to the share capital of a share company with shares admitted to trading on a terms of the delegation of powers is also at the full discretion regulated market situated or operating in Portugal may claim damages of the board of directors, which may make such amendments on behalf of the company, whenever the latter has not done so. at any time. iii) Notwithstanding the delegation of decision-making powers 2.7 Are there any limitations on, and disclosures to an executive committee or to delegate directors, said required, in relation to interests in securities held by delegation does not inhibit or limit the capacity of the board shareholders in the corporate entity/entities? of directors to make binding decisions. The board of directors is a collective corporate body, meaning that Limitations on the number of shares a shareholder can hold were decisions are made following analysis, discussion and voting (which common in the past but are becoming increasingly rare and the usually occur in a meeting). For the board of directors to validly legal and regulatory framework are working towards eliminating resolve on any issue, the majority of its members must be present them completely. There is no restriction as to the pace at which at the relevant meeting. The resolutions are taken by the majority of a shareholder may acquire shares and build up a stake in the share the votes of directors (present or represented and those who voted capital of a company with shares admitted to trading on a regulated by post). market. In special cases, such as regulated industries, there are When a company adopts the Traditional Model, the supervision of certain restrictions on the acquisition of shares in companies. the company (which has shares traded on a regulated market situated The law sets forth a substantial list of disclosure of qualified or operating in Portugal) is carried out by a Supervisory Board and shareholdings. The aim of such duties is to disclose to the market official chartered accountant or an official chartered accountants relevant information about the company, as well as enable the company (which shall be autonomous from the board). triggering of the duty to make a mandatory offer to acquire the The Supervisory Board must oversee the management of the shares of the remaining (minority) shareholders whenever a company, notably: shareholder, or group of shareholders and others acting in concert, a) Oversee the compliance with the law and the by-laws. acquire a shareholding higher than one third of the share capital of the company, and provided certain additional requisites are met b) Verify the cash flow and the existence of assets or goods owned by the company or received by it as a guarantee, (such as obtaining control over the company). deposit or on any other grounds. The company itself is also subject to significant disclosure duties. c) Verify the accuracy of the accounts documents. d) Verify whether the accounting policies and valuation criteria 3 Management Body and Management adopted by the company lead to a correct assessment of the state of the company. e) Supervise the efficiency of the risk management, internal 3.1 Who manages the corporate entity/entities and how? control systems and internal audit systems (if such systems exist). The CSC currently provides for three different models of The official chartered accountant shall, above all, perform all organisational structures of management and supervision, namely: examinations and assessments necessary for maintaining accurate i) Management body and supervisory board (“Traditional accounts and meeting all legal requirements. Model”). Anglo-Saxon Model ii) Management body, including an audit committee and an In this model, the administration or management of the company is official chartered accountant (“Anglo-Saxon Model”). carried out by a Board of Directors, however some members of the iii) Executive management body, general and supervisory board Board of Directors (at least three) form an audit committee. and official chartered accountant (“Two-Tier Model”). This model has been deemed as having the advantage of providing There are significant differences between the models. more effective control of management decisions, taking into account Traditional Model that privileged access to information by the supervisors grants them In the Traditional Model the management is carried out by a Board access to all the information related to the resolutions to be taken by of Directors, which has authority over all matters related to the the board of directors and to the implementation of the same, as well as to the company’s financial situation.

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In turn, the coinciding of the management and supervision functions of the members of the audit committee may lead to the approval 3.3 What are the main legislative, regulatory and other of management decisions in detriment of the supervisory function. sources impacting on contracts and remuneration of members of the management body? This means that management and supervision functions will be carried out by a sole corporate body. The main sources are those referred to in question 1.2. Directors that form the audit committee: i) May not have executive powers. 3.4 What are the limitations on, and what disclosure is ii) Shall have fixed remuneration. required in relation to, interests in securities held by iii) May not be dismissed, except with just cause. members of the management body in the corporate iv) May participate in the Board of Directors’ resolutions. entity/entities? Portugal v) May participate in the executive committees’ meetings. The members of the management body and related parties such as In terms of the authority of the Audit Committee, it is the same as spouses and minor descendants are entitled to acquire shareholdings that of the Supervisory Board. and other securities interests in the company (absent any criminal This model requires the appointment of an Executive Committee. or fraudulent conduct) and must disclose such facts to the company. The appointment is a discretionary act of the Board of Directors and The company must disclose the list of shareholdings in the annual members of the Audit Committee also vote. The revocation or the management report. amendment of the terms of the appointment may occur at any time. Two-Tier Model 3.5 What is the process for meetings of members of the Under the two-tier model, the company’s management is in general management body? carried out by an Executive Board of Directors. Members of an Executive Board of Directors hold equally the representation The management board meetings must be formally convened by powers of the company. the chairman of the management body or two other members. The The Executive Board of Directors may be appointed and dismissed management body should meet at least once a month. by the General and Supervision Board or by the Shareholders’ The members of the management body shall receive in writing and Meeting (in accordance with the provisions of the company’s with sufficient notice a notice regarding the meeting, including a list articles of association). of the items on the agenda, unless the dates of the meetings have The General and Supervision Board has other powers besides been previously agreed/established or the articles of association supervision powers and for that reason it has been deemed a hybrid allow for any other process. corporate body. By way of example, it may have authority to appoint and dismiss Executive Directors. 3.6 What are the principal general legal duties and In this model, some of the powers granted by law to the general and liabilities of members of the management body? supervision body would not usually belong to a supervision corporate body and the law and the articles of association of the company may Directors are subject to duties of care and trustworthiness. require the previous consent of the general and supervision board for the execution of certain acts (typically strategic decisions may The law defines the standard of such duties as that of a wise and be subject to consent). orderly manager. Due care means that the director must have the availability and the proper technical capacity and skills for the Although a decision such as the appointment and dismissal of performance of the relevant duties. the members of the Executive Board of Directors may be within the authority of the Shareholders’ Meeting or the General and The duty of trustworthiness includes the obligation to act in the Supervision Board, the powers of the Executive Board of Directors best interests of the company, considering the best interests of its is legally set forth and as a general rule cannot be amended. In stakeholders, and with regard to the interests of employees, creditors this model, the powers of the Executive Board of Directors are not and customers. Additionally, it is generally accepted that such duty subject to delegation. includes a non-competition obligation towards the company. In accordance with the provisions of the relevant company’s articles of association, the power to dismiss without just cause the members 3.7 What are the main specific corporate governance of the Executive Board of Directors falls either to the General and responsibilities/functions of members of the Supervision Board or to the Shareholders’ Meeting. management body and what are perceived to be the key, current challenges for the management body? Decisions of the Executive Board of Directors or of the General and Supervision Board require that the majority of its members are To the extent the management body is exclusively in charge of the present at the relevant meeting. Resolutions shall be taken by the management of the company, it is expected to promote the interests majority of the votes of members present or duly represented and of all stakeholders and to treat all shareholders equally. also of those voting by correspondence. The fact that most companies are ultimately controlled by a shareholder or group of shareholders means that the independence 3.2 How are members of the management body appointed of the management body and the quality of its members remains a and removed? significant area of concern. Management body remuneration is also a matter that typically attracts significant attention. Please see our answer to question 3.1.

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situated or operating in Portugal warrants the active role they play 3.8 What public disclosures concerning management in the Portuguese society, notably supporting specific projects, body practices are required? foundations, museums and many other entities with significant social impact. The annual management report usually discloses information on how the company is run, notably clarifying the different duties and roles of each corporate body, as well as relevant polices in human resources, 5 Transparency and Reporting management body payment, environmental policies and others.

5.1 Who is responsible for disclosure and transparency? 3.9 Are indemnities, or insurance, permitted in relation to Portugal members of the management body and others? Ultimately, it is up to the management body to disclose relevant information on the company’s activities, as well as the company’s An indemnity (at least EUR 250,000) to cover the possible best corporate governance practices. The company’s annual liability of each member of the management body is mandatory. management report is prepared by the management body and must Such indemnity may be substituted by an insurance policy but contain detailed information as set out in the Regulation. the company may only pay the insurance in excess of the above mentioned amount of EUR 250,000. 5.2 What corporate governance related disclosures are required? 4 Other Stakeholders Issuers of shares admitted to trading on a regulated market situated or operating in Portugal and subject to Portuguese law shall disclose 4.1 What, if any, is the role of employees in corporate in a chapter of the annual management report that is specifically governance? drawn up for said purpose, or as an annex thereto, a detailed report on the corporate governance structure and practices. Such chapter Employees are not entitled to a seat in the management body of should contain all relevant information for understanding the model a company and in practice are usually under-represented in a and adopted governance practices, notably but not limited to the company’s structure. However, employees can be an effective tool following information: in improving the corporate governance of Portuguese companies. a) The structure of their capital, including shares which are Works councils are entitled to information on several management not admitted to trading, with an indication of the different matters such as general plans of activity, production organisation, classes of shares and, for each class of shares, the rights and provisions, forecasts, volume and management of sales, personnel obligations attaching to it and the percentage of share capital management, remuneration packages, social benefits and that it represents. performance and absences, accounting systems, financing needs, b) Any restrictions on the transfer of shares, such as clauses on taxes and other similar costs, projects regarding the alteration consent for disposal, or restrictions on the ownership of shares. of the company’s mission, share capital increase or reduction or c) Qualifying holdings in the company’s share capital. reconversion of the company’s activity. d) Identification of any shareholders that hold special rights and In addition, a works council must be consulted concerning matters a description of such rights. such as changes to the criteria for the definition of professional e) The system of control of any employee share scheme where categories and the promotion of employees, alteration of the the voting rights are not exercised directly by the employees. establishment location, any measure that may imply a significant f) Any restrictions on voting rights, such as limitations on the reduction of the work force, a decrease of working conditions or voting rights of holders of a given percentage or number changes to work organisation, insolvency or winding up of the of votes, deadlines for exercising voting rights, or systems company, changes to working schedules, disciplinary dismissals, whereby the financial rights attaching to securities are separated from the holding of securities. collective dismissals and job extinction procedures. g) Shareholders’ agreements among shareholders which are The implementation of whistle blower programmes as an effective known to the company and may result in restrictions on the system of risk management control is becoming increasingly common. transfer of securities or voting rights. h) The rules governing the appointment and replacement 4.2 What, if any, is the role of other stakeholders in of board members and the amendment of the articles of corporate governance? association. i) The powers of the board, notably in respect of resolutions to The role of stakeholders such as customers, suppliers, the local increase equity. community and others is in practice quite limited in Portugal. j) Any significant agreements to which the company is a party However, awareness of the importance of involving such and which take effect, alter or terminate upon a change of stakeholders is increasing due to the occurrence of certain events control of the company following a takeover bid, as well as the effects thereof, except where their nature is such that their which have an impact on the media and the actual operations of the disclosure would be seriously prejudicial to the company; this affected companies. exception shall not apply where the company is specifically obliged to disclose such information on the basis of other 4.3 What, if any, is the law, regulation and practice legal requirements. concerning corporate social responsibility? k) Any agreements between the company and members of the management body or employees providing for compensation if they resign or are made redundant without valid reason or The relative size and importance within the Portuguese economy if their employment ceases because of a takeover bid. of companies with shares admitted to trading on a regulated market

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l) Core information on the internal control and risk management systems implemented in the company regarding disclosure of 5.4 What corporate governance information should be financial information. published on websites? m) Compliance with the Corporate Governance statement to which the issuer is subject by virtue of legal or regulatory The information on the company’s annual management report must provisions. The issuer shall also specify those parts of said be published on the company’s website. However, companies code that deviate and the reasons therefore. with shares admitted to trading on a regulated market situated or n) Compliance with the Corporate Governance statement to operating in Portugal and subject to Portuguese law must disclose which the issuer voluntarily abides and shall specify those significant information to the CMVM. The CMVM will then parts of said code that deviate and the reasons therefore. publish on its own website said information in order to ensure o) Location as to where the public may find the Corporate adequate transparency towards investors. Portugal Governance Code to which the issuer is subject, in accordance to the previous subparagraphs. p) A description of the way the issuer’s corporate bodies João Mattamouros Resende function, as well as the Committees created therein. Cuatrecasas Praça Marquês de Pombal, 2 The corporate governance report shall include, in addition to the 1250-160 Lisbon information referred to in the preceding paragraphs, an assessment Portugal of the company regarding compliance with the recommendations set Tel: +351 21 355 38 00 out in the Corporate Governance Code adopted. Email: [email protected] URL: www.cuatrecasas.com Issuers should explain in an effective, justified and reasoned way, the rationale for non-compliance with the recommendations set out in the corporate governance code, demonstrating adequacy João provides legal assistance in mergers and acquisitions, private of the alternative solution adopted (in terms of the principles equity, venture capital, securities and general corporate law. of good corporate governance) and compliance with relevant He has been a member of the Portuguese Bar Association since 2000 recommendations. and of the Brazilian Bar Association (S. Paulo) since 2010. He has been a Solicitor of the High Court of Justice of England and Wales since 2007. He has been an Attorney and Counselor at Law in New 5.3 What is the role of audit and auditors in such York since 2014. disclosures? João has the following qualifications:

Auditors are legally required to monitor and supervise the efficacy ■■ A Law Degree from the School of Law of the Portuguese Catholic University of Lisbon (2000). of the risk management systems in place within the company, and to render an opinion as to the annual management report prepared by ■■ A post-graduate in Commercial Law from the School of Law of the Portuguese Catholic University of Lisbon (2003). the management body. ■■ A Master’s in Legal and Commercial Sciences from the School of Law of the Portuguese Catholic University of Lisbon (2004).

Cuatrecasas works in over 10 countries. It represents companies that are leaders in their sectors, advising them on their investments in major markets. The firm has over 900 lawyers, organised by business and industry-specific practice areas, who provide the knowledge and experience of the business law specialities applicable in each case. 16 offices on the Iberian Peninsula coordinate with the firm’s teams in Bogotá, Brussels, Casablanca, London, Luanda, Maputo, Mexico City, New York, São Paulo and Shanghai, thus optimising efficiency of resources and client proximity, and benefiting from the different time zones. The international desks (covering Africa, Latin America, China, France, Germanic countries and the Middle East) and over 20 country-specific groups guarantee the comprehensive approach of the legal advice from Spain and Portugal. In continental Europe, Cuatrecasas has developed a non-exclusive network with three other leading law firms – Chiomenti in Italy, Gide in France and Gleiss Lutz in Germany – allowing it to offer clients an integrated service in complex cross–border transactions.

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Puerto Rico Fernando J. Rovira-Rullán

Ferraiuoli LLC Yarot T. Lafontaine-Torres

imposed by the exchanges in which their securities are 1 Setting the Scene – Sources and traded. As previously indicated, we will not cover such rules Overview and regulations in this chapter. 2. Organisational Documents: A Corporation’s or LLC’s organisational documents are an important source of 1.1 What are the main corporate entities to be discussed? corporate governance requirements. A Corporation’s articles of incorporation, its by-laws and its shareholders’ This chapter will focus on privately held corporations agreement may include particular provisions regarding voting (“Corporations”) and limited liability companies (“LLC(s)”). requirements, meetings and shareholder rights, among others. The majority of Puerto Rican businesses are incorporated as Please note that although a shareholders’ agreement is an Corporations, however, in recent years, LLCs have gained important source of corporate governance for Corporations, popularity among business owners and their counsel given the the Corporations Act does not impose on a Corporation or its shareholders the obligation to adopt such document. particular advantages that LLCs offer such as: (i) the freedom to structure management (i.e. member managed, manager managed, or Although the Corporations Act has default provisions centralised management structure such as board managed); (ii) they applicable to LLCs, an LLC operating agreement is the principal source of corporate governance requirements. This are not required to file financial statements with the Puerto Rico is due to the fact that one of the LLC’s principal benefits is Department of State; (iii) streamlined corporate formalities; and (iv) the freedom provided to the members in determining the the option to be taxed as a partnership or as a regular Corporation. governance structure of the company, the formalities, if any, Please note that although there are publicly traded companies that shall be required, and ultimately how the company is organised under the laws of Puerto Rico that trade in national stock managed. However, under Puerto Rico law, and contrary markets (i.e. NYSE and AMEX) and over the counter markets (i.e. to Delaware law, the Corporations Act does not impose on the members of an LLC the obligation to adopt an operating NASDAQ), we will not cover corporate governance requirements agreement. If no operating agreement is adopted, the applicable to publicly traded companies under United States federal LLC will be subject to the default provisions contained in securities laws and regulations, and applicable securities exchanges the Corporations Act. For the purpose of this Corporate rules and regulations. Governance Guide, we will treat LLCs as if an operating agreement has been adopted. 1.2 What are the main legislative, regulatory and other corporate governance sources? 1.3 What are the current topical issues, developments, trends and challenges in corporate governance? 1. Legislative Sources: Puerto Rico Corporations and LLCs are subject to the requirements of the Puerto Rico General The most recent development in corporate governance is the Corporations Act of 2009, as amended (the “Corporations amendment of the Corporations Act in December 2015 to allow Act”) and case law from the Puerto Rico Supreme Court. It for the organisation, merger, and/or conversion of Public Benefit is important to note that the Corporations Act is modelled on the Delaware General Corporations Act (the “Delaware Corporations (“Benefit Corporations”) in Puerto Rico. Benefit Corporations Act”) and that the Puerto Rico Supreme Corporations that are organised under the Corporations Act are Court has stated that judicial decisions from Delaware required to file annual reports and social benefit reports, setting courts in connection with the interpretation of the Delaware forth the public benefit provided by the Corporation. One of the Corporations Act shall be highly persuasive and illustrative advantages of organising a Benefit Corporation is that its directors, before Puerto Rico courts. This principle of interpretation in making their determinations, are allowed to consider factors other has not been expressly extended by the Puerto Rico Supreme than the best interests of its shareholders. For example, they are Court to Delaware court decisions interpreting the Delaware allowed to take into consideration, among others things, the general Limited Liability Company Act (the “Delaware LLC Act”), public benefit pursued, the best interests of its employees and the however, it seems highly probable that the same principle community at large. In addition, directors of Benefit Corporations would apply. shall not be liable for any damages caused due to decisions made in Please note that Puerto Rican publicly traded companies good faith and in pursuit of the general public benefit set forth in the registered with the Securities and Exchange Commission Certificate of Incorporation. are subject to regulations promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and A major challenge in Puerto Rico is that the majority of private such other rules and other corporate governance requirements companies in Puerto Rico are closely-held family businesses that

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generally do not have the sophistication of larger businesses with regards to matters of corporate governance. Thus, given the nature 2.3 What shareholder meetings are commonly held and of these companies, corporate governance formalities are not always what rights do shareholders have as regards them? strictly followed or enforced, and this may raise difficulties or problems when attempting to execute certain types of transactions, The Corporations Act requires that Corporations hold an annual such as obtaining commercial financing or a merger and acquisition meeting of shareholders and allows the board of directors to of an ongoing concern. convene special meetings of shareholders to discuss and take action on particular matters. The Corporations Act further provides that Another significant challenge for most closely-held family businesses the notification period for annual or special meetings shall be no is the adoption and successful implementation of an orderly plan of less than ten (10) days or more than sixty (60) days prior to such succession that will smoothly transfer the management of the business meeting. If the notification is for a special meeting, the purpose from one generation to the next. Often, these companies are founded of said meeting must also be disclosed in the notification. In Puerto Rico and managed by one individual who may not take the time to nurture or addition, the by-laws of the Corporation may establish additional identify another person or persons to succeed him after his retirement rules regarding who may convene special shareholder meetings. or death. The lack of a generation transition plan has resulted in the For example, they could provide that the shareholders holding a termination of many successful businesses in Puerto Rico. majority of the voting rights may convene a special meeting. In annual and special meetings the shareholders have the right to vote 2 Shareholders (either in person or via proxy) on the matters brought before them. Contrary to Corporations, LLCs are not statutorily required to hold annual or special member meetings, thus, the establishment of such 2.1 What rights and powers do shareholders have in the meetings and the rules governing the same are subject to the discretion operation and management of the corporate entity/ entities? of its members or as otherwise stated in the operating agreement.

One of the basics tenets of corporate law under the Corporations Act 2.4 Can shareholders be liable for acts or omissions of is that the business of a Corporation shall be managed by or under the the corporate entity/entities? direction of a board of directors. Thus, shareholders are generally not involved in the management of the Corporation. The principal A basic tenant of corporate law and a principal advantage of organising exception to the foregoing occurs in the context of close corporations a business as a Corporation or as an LLC is the concept of limitation in which the shareholders are primarily responsible for the operation of liability. This concept dictates that the liability of shareholders or and management of the entities. Nonetheless, shareholders have the members for the debts or other liabilities of the company is limited right and the power to elect the board of directors and they also have to those amounts invested in said Corporation or LLC by such the right to vote on and approve extraordinary transactions such as: shareholder or member. Notwithstanding the foregoing, a shareholder (i) any amendment to the certificate of incorporation or the by-laws; or member may be found responsible for the acts or omissions of the (ii) a merger or consolidation; (iii) the sale of all or a substantial company pursuant to the doctrine of “piercing the corporate veil”. amount of the assets of the Corporation; or (iv) a dissolution. Puerto Rico courts have stated that the corporate veil shall be upheld Contrary to Corporations, LLCs are regularly managed in a unless such entity and the limited liability benefits afforded by it decentralised fashion by their members (similar to a partnership) are used to: (i) defeat public policy; (ii) justify an inequality; (iii) and members actively participate in the operation and management commit fraud; or (iv) defend crime. Although a judicial action of the LLC. The Corporations Act provides that unless otherwise to pierce the corporate veil is very fact specific, the main factors established in the operating agreement, the LLC will be managed considered by the Puerto Rico courts are: (i) when fraud is present by the members owning more than fifty per cent (50%) of the equity and the corporate entity is used as a conduit to “legalise” illegal acts; interests in the LLC. Notwithstanding the foregoing, the members and (ii) when the corporation is a mere instrument or alter-ego of the may choose to implement a centralised management structure, shareholders. Please note that the alter-ego factor is not, by itself, similar to that of a Corporation, including the election of a board sufficient to pierce the corporate veil. of managers and the appointment of officers. If this were to be the case, the members need to specify in the LLC’s operating agreement 2.5 Can shareholders be disenfranchised? the particular requirements regarding the management structure, including what rights they wish to retain for themselves and not It is important to note that a Corporation may not take away voting delegate to the LLC’s board of managers and officers. rights once they have been granted to shareholders. Notwithstanding the foregoing, there are certain situations in which shareholders may 2.2 What responsibilities, if any, do shareholders have as become “disfranchised”. For example, disenfranchisement occurs in regards the corporate governance of their corporate the context of “squeeze-out” mergers whereby pursuant to the vote entity/entities? of a majority shareholder, the minority shareholders are required to tender their shares in exchange for a cash payment and do not Generally, except for certain extraordinary matters such as a merger become shareholders of the surviving Corporation. Furthermore, or consolidation, the sale of all or substantially all of the assets or in certain circumstances shareholder rights may be diluted by the dissolution for which shareholder approval is required, shareholders issuance of additional shares or new classes of securities. do not have corporate governance responsibilities in Corporations. Notwithstanding the foregoing, the Corporations Act imposes upon the majority or controlling shareholders a duty of loyalty to 2.6 Can shareholders seek enforcement action against the Corporation and to the other minority shareholders regarding members of the management body? corporate matters. In the case of LLCs, the Corporations Act establishes that members are bound by the same duty of loyalty to Yes. Shareholders (and in certain situations creditors) may pursue the LLC and to the other members of the same. direct or derivative actions against management. In a derivate

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action, a shareholder or group of shareholders pursue a claim on as an analogy in order to solve a controversy. For example, if the behalf of the Corporation in the event that the directors or officers of members adopted a board of managers structure, then corporate the Corporation fail to do so or violate one or more of their fiduciary law may be applied by a court of law or if the members adopted duties. This inaction in the part of management typically takes place a member managed structure, the general partnership law may be if the directors or officers of the Corporation are responsible for the applied by analogy in deciding the particular controversy. damages alleged under the derivative action. It is important to note that under a derivative action any relief or award granted by the 3.2 How are members of the management body appointed courts shall be for the sole benefit of the Corporation and not for and removed? the shareholder(s) who initiated the action. On the other hand, a shareholder may also present a direct action against the Corporation The members of the board of directors of a Corporation are elected and its management body alleging that he or she has suffered

Puerto Rico annually by a majority vote of the shareholders present at the annual damages as an individual shareholder. meeting of shareholders, in person or via proxy, who have the right In the case of an LLC, the Corporations Act expressly states that to vote at such meeting. It is important to note that the certificate of only a current member of the LLC may file a derivative suit. incorporation may provide for the creation of a staggered board with two or three groups of directors who may serve for a period of one 2.7 Are there any limitations on, and disclosures to three years. In a staggered board only one group of directors will required, in relation to interests in securities held by be elected at each annual meeting of shareholders. shareholders in the corporate entity/entities? In a non-staggered board of directors, any one director or the whole board of directors may be removed with or without cause by the The Corporations Act does not impose any limitations or require holders of a majority of the shares entitled to vote for the election disclosure in relation to the ownership interest held by shareholders of directors. In a staggered board of directors, shareholders may or members. Notwithstanding the foregoing, in the banking and only remove a director for just cause, unless otherwise provided insurance industry when a shareholder attains a certain level of in the certificate of incorporation. Furthermore, if the certificate ownership, disclosure to the appropriate regulators is required. of incorporation authorises cumulative voting, no director may Furthermore, it is common for local financial institutions or be removed if the cumulative votes against his or her removal are government agencies to request such information and disclosures sufficient to elect such director as a member of the board of directors. pertaining to the ownership structure of an entity requesting In the event of a vacancy as a result of the removal, resignation or financing from a financial institution, requesting that a licence be death of a director, the remaining members of the board of directors issued by a government agency, or entering into a contract with a may designate a director without seeking the approval of the government agency. shareholders. A director designated to the board of directors in such a fashion shall serve for the remainder of the former director’s term. 3 Management Body and Management Unless otherwise specified in the certificate of incorporation or by- laws, the officers of a Corporation are appointed by the board of directors without the need to seek the consent of the shareholders. 3.1 Who manages the corporate entity/entities and how? The board of directors has the exclusive power to appoint and remove corporate officers as they deem in the best interests of the As a general rule, Corporations are managed by or under the Corporation. direction of a board of directors. Notwithstanding the foregoing, the The members of an LLC may choose to appoint a manager or a certificate of incorporation could establish a different management group of managers who will have the rights and responsibilities structure, in which case the person or group of persons designated provided in the operating agreement. We note that the Corporations in the certificate of incorporation would assume all of the powers Act does not directly address the removal of the manager of an LLC and responsibilities traditionally granted to the board of directors. but a manager may be removed by the members holding a majority Furthermore, the certificate of incorporation may grant to the board interest in the LLC. of directors the power to execute management agreements, provided, however, that the terms of such management agreement may not exceed three (3) years. It is important to note that the board of 3.3 What are the main legislative, regulatory and other directors of a Corporation, generally, does not engage in or manage sources impacting on contracts and remuneration of the daily operations of the Corporation; instead such responsibilities members of the management body? are delegated by the board of directors to the officers that it appoints. The Corporations Act does not impose any limitation on the Contrary to a Corporation, an LLC’s default rule for management compensation of directors. Unless otherwise specified in the is member managed, however, the operating agreement may certificate of incorporation or the by-laws, the board of directors provide for a centralised management structure similar to that of has the authority to determine the compensation to be paid to the a Corporation (i.e. a board of managers and officers). As the name officers and directors of the Corporation. The Corporations Act implies, in a member-managed LLC the members are responsible for does not specifically address this matter in connection with LLCs. the day to day operations of the company. In certain instances, the members may decide to appoint a manager, who does not have to be a member, to oversee the day to day operations of the company. As 3.4 What are the limitations on, and what disclosure is mentioned in question 1.2, Delaware case law is highly persuasive required in relation to, interests in securities held by in Puerto Rico. Although the Puerto Rico Supreme Court has yet to members of the management body in the corporate entity/entities? express itself on the following matter, it is important to note that the Delaware Chancery Court recently stated in Obied v. Hogan, WL 3356851 (2016) that the choice of management structure chosen The Corporations Act does not impose any requirement regarding by the members shall have consequences when drawing case law share ownership disclosures and/or limitations. Unless otherwise provided in the company’s organisational documents, the directors

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and officers of Corporations and the managers of LLCs are not with businesses that compete with the Corporation. Nor should the required to be shareholders/members in order to hold their respective directors and officers use material non-public information for their offices. personal gain. The Corporations Act expressly extends the duties set forth above to 3.5 What is the process for meetings of members of the the members and managers of LLCs. management body? A director will be found to have violated his duty of care in the event that a plaintiff is able to prove that the actions of the director The Corporations Act does not impose a statutory requirement to were grossly negligent. In order to establish that the director was hold a minimum number of board of director meetings nor does it grossly negligent the plaintiff must first overcome the presumption provide or establish specific guidelines as to how to conduct the provided by the Business Judgment Rule. The Business Judgment

order of business in a board meeting. The Corporations Act simply Rule provides a presumption that in making a decision the director Puerto Rico requires, unless otherwise stated in the certificate of incorporation was informed and acted in good faith and in what he believed or the bylaws, that the board of directors meeting may be held in were the best interests of the Corporation. Furthermore, the person or by electronic means of communication (such as telephone Business Judgment Rule provides that the plaintiff must prove that or video conferences) provided that all members of the board of a reasonable commercial basis for the director’s decision did not directors assisting such meeting are able to listen to each other exist. The underlying purpose of the Business Judgment Rule is to simultaneously. allow directors and officers to make reasonable business decisions Furthermore, unless prohibited by the Corporation’s bylaws, any without holding them responsible for the success or failure of action required or permitted to be taken at any meeting of the board each venture. In the event that the presumption established by the of directors may be taken without a meeting, if all members of the Business Judgment Rule is overcome, the implicated directors are board of directors consent thereto in writing, and such consents are subject to the Entire Fairness judicial standard of review. Under filed with the minutes of the proceedings of the board of directors. the Entire Fairness standard of review, a director must show that Thus, any rules governing the meetings of the board of directors, the decision was taken with the utmost good faith and that it was such as minimum notification periods, frequency of meetings and inherently fair to the shareholders. quorum are most commonly specified in the Corporation’s by-laws. Notwithstanding the forgoing, a Corporations Certificate of The Corporations Act does, however, expressly provide that Incorporation may include a provision limiting or eliminating the meetings of the board of directors may be held in person or by personal responsibility of a director or officer for breaching his/her means of electronic communication (such as telephone or video fiduciary duties, with the exception of the duty of loyalty and acts or conferences) provided that all members of the board of directors omissions done in bad faith. assisting the meeting are able listen to each other simultaneously. Furthermore, unless prohibited by the Corporation’s by-laws, any 3.7 What are the main specific corporate governance action required or permitted to be taken at any meeting of the board responsibilities/functions of members of the of directors may be taken without a meeting, if all the members of management body and what are perceived to be the the board of directors consent thereto in writing, and the writing or key, current challenges for the management body? writings are filed with the minutes of proceedings of the board of directors. As mentioned in question 3.1 above, the Corporations Act states that The Corporations Act does not govern the meetings of the members the business of the Corporation will be managed by or under the of an LLC nor does it provide or establish rules governing the supervision of a board of directors. The board of directors will be structure or process for the meetings of the members or any responsible for instituting the corporate strategy to be followed by governing body. Given the fact that the Corporations Act does the Corporation and they are also responsible for the appointment not require that a meeting of the management body of an LLC be and supervision of the officers of the Corporation. held, such requirements are generally established in the company’s The corporate governance responsibilities of an LLC fall on the operating agreement. members of the LLC, unless the operating agreement appoints a manager to run the business, in which case the corporate governance structure will more closely resemble that of a Corporation. 3.6 What are the principal general legal duties and liabilities of members of the management body? Currently, the main challenges for management are related to the fact that the majority of private companies in Puerto Rico are closely- The directors and officers of a Corporation are bound by three (3) held family enterprises that may not have sophisticated corporate principal legal obligations: (i) to act pursuant to the objectives and governance procedures, which in turn may present difficulties in the purposes of the Corporation; (ii) to perform their duties with the execution of certain transactions (such as a sale of the business or care and attention that a reasonable and competent person would obtaining financing). In addition, another relevant challenge in the exercise under similar circumstances (“duty of care”); and (iii) to act current environment is that the same closely-held family enterprises in a just manner and exercise their powers with the utmost loyalty may face a generational change in ownership, and often these and in the best interest of the Corporation and its shareholders companies (which typically relied on the original founder(s)) do (“duty of loyalty”). not have an ownership or management transition plan in place for the continuous operation of the business. The lack of a generation The duty of care includes responsibilities such as: (i) the duty to transition plan has resulted in the termination of many successful monitor; and (ii) the duty to make enquiries. The duty of loyalty businesses in Puerto Rico. imposes upon directors and officers the obligation to act in the best interest of the Corporation and its shareholders, setting aside their own personal interests. In order to comply with this duty of loyalty, 3.8 What public disclosures concerning management the directors and officers must avoid transactions that may result body practices are required? in a conflict of interest with the Corporation. The directors and officers of a Corporation should not engage in or become involved The Corporations Act does not contain any provisions that require

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public disclosure by private Corporations or LLCs concerning the (information transparency, economic impact in the communities management practices of the board of directors, corporate officers or where the Corporation operates, and health and safety initiatives); members. Please note that under applicable federal securities laws and human capital (policies and practices against discrimination, and regulations, publicly traded companies are subject to additional elimination of work violence, and development of human capital). disclosure requirements. In addition, the reports must set out the public benefits that the entity brings to the community in which it operates.

3.9 Are indemnities, or insurance, permitted in relation to In addition, a significant number of companies practise various members of the management body and others? levels of corporate social responsibility. Generally, Puerto Rico companies and business leaders are actively involved in an array Yes. The Corporations Act permits Corporations and LLCs to of non-profit entities that provide a wide variety of services and benefits to local communities.

Puerto Rico indemnify a person due to the fact that such person was a director, an officer, a manager, an employee or a member of the company. Such indemnification may include attorneys’ fees, and any other 5 Transparency and Reporting fines or amounts paid as a result of a judgment or settlement. The indemnification will not proceed if the person is found liable to the company in connection with the cause of action for which such 5.1 Who is responsible for disclosure and transparency? person is requesting the indemnification. The Corporations Act further allows a Corporation or an LLC to buy The directors and officers of a Corporation are the parties responsible insurance on behalf of its directors, officers, managers or employees. for disclosure and transparency. Under the Corporations Act, if an officer or director knowingly publishes false information regarding material aspects related to the Corporation’s situation or 4 Other Stakeholders business, such officer or director shall be responsible for any loss or damage resulting from the false information. Please note that the 4.1 What, if any, is the role of employees in corporate aforementioned provision applies to LLCs. governance? 5.2 What corporate governance related disclosures are Under the Corporations Act, there is no statutory provision required? regarding the involvement of employees in corporate governance. Nonetheless, a company may designate an officer to be in charge of Besides making the company’s organisational documents, such corporate governance procedures and compliance. as the certificate of incorporation and by-laws, in addition tothe shareholders’ agreement, if adopted, in the case of Corporations 4.2 What, if any, is the role of other stakeholders in and the certificate of organisation and the operating agreement corporate governance? in the case of LLCs, available to the shareholders and members of the Corporation or LLC, there is no statutory requirement for Under the Corporations Act, there is no statutory provision private companies regarding corporate governance disclosures to regarding the involvement of other stakeholders such as creditors, private parties. However, the Corporations Act requires that all labour unions and employees in corporate governance. Corporations file an annual report to the Puerto Rico Department of State which, among other things, details the identity of at least two officers and/or directors of the Corporation. The Corporations 4.3 What, if any, is the law, regulation and practice Act does not require such disclosure for LLCs with the Puerto Rico concerning corporate social responsibility? Department of State.

Currently, there are no laws or regulations that specifically address corporate social responsibility. However, as previously mentioned 5.3 What is the role of audit and auditors in such disclosures? in question 1.3, in December 2015, the Puerto Rico government enacted Act 233-2015 which amended the Corporations Act to allow the creation of Public Benefit Corporations. Public Benefit Under the Corporations Act, Corporations with an annual business Corporations are required, among other things, to file annual reports volume in excess of $3 million are required to file with the Puerto and social benefit reports regarding: environmental matters (product Rico Department of State an audited balance sheet together with cycle management, reduction of waste and residues, use of clean their annual report. LLCs are not required to file financial reports technologies, reduction of a negative environmental footprint, with the Puerto Rico Department of State. and responsible use of natural resources); corporate operations 5.4 What corporate governance information should be published on websites?

Currently, there is no statutory requirement for private companies to publish any corporate governance information on their websites.

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Fernando J. Rovira-Rullán Yarot T. Lafontaine-Torres Ferraiuoli LLC Ferraiuoli LLC 221 Ponce de León Avenue, 5th Floor 221 Ponce de León Avenue, 5th Floor San Juan, 00917 San Juan, 00917 Puerto Rico Puerto Rico

Tel: +1 787 766 7000 Tel: +1 787 766 7000 Email: [email protected] Email: [email protected] URL: www.ferraiuoli.com URL: www.ferraiuoli.com

Mr. Rovira-Rullán is a Capital Member of Ferraiuoli LLC and Chair of Mr. Lafontaine-Torres is a Senior Associate in the Corporate Puerto Rico its Corporate and Real Estate Department. He joined Ferraiuoli LLC Department of Ferraiuoli LLC. His main practice areas include in 2004 after serving as Senior Vice President and Deputy General mergers and acquisitions; private equity; alternative investment funds; Counsel of a publicly traded financial institution. Before that, Mr. securities regulation (including private placement offerings), banking Rovira-Rullán worked as an Associate in the Corporate Department of and financial institution regulations; corporate governance; and another leading Puerto Rico law firm from 1998 until 2002. general corporate law. Mr. Rovira-Rullán is admitted to practise in Puerto Rico and New Prior to joining Ferraiuoli LLC, Mr. Lafontaine-Torres was a financial York. His principal areas of practice include mergers and acquisitions analyst in a leading Puerto Rico distressed asset management firm. (local and cross-border experience), commercial lending, real estate, In addition, during the summer of 2008, Mr. Lafontaine-Torres was an general corporate law, corporate governance and fiduciary duties, analyst at the investment bank Lehman Brothers, Inc. intellectual property, and tourism and hospitality. Mr. Lafontaine-Torres obtained his J.D. degree from the University of Since 2010, Mr. Rovira-Rullán has been rated by Chambers & Partners Puerto Rico School of Law. During his legal studies, Mr. Lafontaine- in its Global and Latin America editions as a Leader in Corporate and Torres was the Editor-in-Chief of the Third Volume of the University of Commercial areas of practice. He serves as an adjunct professor Puerto Rico Business Law Journal. at the University of Puerto Rico School of Law, where for 15 years he has offered advanced corporate law courses such as Business Organisation and Mergers and Acquisitions.

Ferraiuoli LLC is one of the leading corporate law firms in Puerto Rico. The firm provides value-added comprehensive legal advice to industry- leading private and publicly owned companies on mergers and acquisitions, securities regulation, tax, real estate, commercial lending, general corporate law, intellectual property, bankruptcy, labour and employment, energy and land use, litigation, government and legislative affairs, and health and insurance law. Ferraiuoli LLC has received international recognition in the legal field fromChambers & Partners, a London-based legal directory firm that publishes, on an annual basis, the leading directories of the legal profession identifying the world’s top lawyers and law firms. In its 2010–2016 Latin America and Global editions, Chambers & Partners ranked Ferraiuoli LLC as a leader in both Corporate and Intellectual Property, and several firm attorneys were named “Leaders in their Fields” by the publication. Ferraiuoli LLC has further been honoured as one of Puerto Rico’s outstanding firms by Chambers & Partners, being shortlisted as one of the candidates for Puerto Rico’s “Law Firm of the Year” for the years 2011–2016.

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Russia Anton Dzhuplin

ALRUD Law Firm Timur Akhundov

“PJSC”) and closed JSCs are treated as non-public JSCs (the 1 Setting the Scene – Sources and “JSC”). Closed joint stock companies and open joint stock Overview companies established before September 01, 2014 shall adjust their names in accordance with the current forms of legal entities when amending the charter. 1.1 What are the main corporate entities to be discussed? The main features of the JSC include the following points: The principal and most commonly used legal entities for business ■ A JSC’s shares are distributed only among its founders or in Russia are Limited Liability Companies, Joint Stock Companies other predetermined groups of persons. It is not permitted to (non-public) and Public Joint Stock Companies. It is worth focusing conduct an open subscription of shares to an unlimited group on the description of these forms of legal entities. of persons. If it is provided by the charter, shareholders could have pre-emptive purchase rights. Pre-emptive purchase rights Limited Liability Company (“LLC”) can extend not only to the sale of shares but also to other The absence of necessity to issue shares in LLCs makes this form of transactions with consideration. In closed joint stock companies legal entity more customary and flexible with the least burdensome established before September 01, 2014, shareholders continue statutory obligations. The equity participation of the owners is to have pre-emptive purchase rights by default until the introduction of the first amendment to the charter. determined by their capital contribution. The charter capital of the LLC is divided into “participatory shares”. “Participatory ■ JSCs may not have as its sole shareholder another business shares” are not actually “shares”; they fall outside the scope of the entity consisting of a single entity. Russian securities law and are therefore not subject to registration as ■ The minimum charter capital of a JSC may not be less than securities with the respective governmental authority. RUB 10,000 (approx. USD 180). The main features of the LLC include the following points: ■ It is possible to limit, in the charter, the total amount of shares or their nominal value or the maximum number of votes, ■ the number of participants may not exceed 50 (and shall which belong to one shareholder. not be less than one). If the number of participants exceeds 50, the entity shall be reorganised into a JSC (joint stock ■ It is possible to broaden the competence of the board of company) or a manufacturing cooperative within one year. directors by delegating to it issues which usually fall under Furthermore, the LLC may not have another business entity the competence of the General Meeting of Shareholders consisting of a single entity as its sole participant; (except certain issues). It is also possible to broaden the competence of the General Meeting of Shareholders. ■ the minimum charter capital may not be less than RUB 10,000 (approx. USD 180); ■ The board of directors is an optional corporate body if the number of shareholders is less than 50. ■ the General Meeting of Participants is the highest governing body of the LLC, and almost all matters fall within its ■ It is possible to stipulate, in the charter, a procedure exclusive competence. The board of directors is an optional of convocation and holding of the General Meeting of corporate body; Shareholders (and the board of directors) and that of adoption of corporate resolutions, which differs from the procedure ■ it is possible to broaden the competence of the board of prescribed by relevant legislation. directors by delegating issues which fall under the competence of the General Meeting of Participants (except certain issues, ■ The JSC has no obligation to publish accounts. prescribed by the law) to it. It is also possible to broaden the Public Joint Stock Company (“PJSC”) competence of the General Meeting of Participants; The JSC company is a PJSC if such company meets at least one of ■ it is possible to stipulate, in the charter, a procedure the following criteria: of convocation and holding of the General Meeting of ■ The company name contains a reference to the fact that such Participants (and the board of directors) and adoption of a JSC is public. decisions which differs from the procedure prescribed by relevant legislation; and ■ The minimum charter capital is RUB 100,000 (approx. USD 1,790). ■ the LLC has no obligation to publish accounts. ■ There are an unlimited number of shareholders, and the Joint Stock Company (“JSC”) number of shares a shareholder can own is not limited. Please note that before September 01, 2014 joint stock companies ■ The PJSC may not have as its sole shareholder another were divided into (i) open JSCs, and (ii) closed JSCs. From business entity consisting of a single entity. September 01, 2014 open JSCs are treated as public JSCs (the

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■ Open subscription to shares issued by it and free trade of In addition to the laws and special regulations, there is a Code on them on the conditions established by a statute and other legal Corporate Governance (which is not mandatory but recommended for acts. use by legal entities), adopted by the Central Bank of Russia, which ■ Additional obligations are imposed on PJSCs having more sets out basic principles of corporate governance in legal entities. than a certain number of shareholders. Internal Corporate Governance Sources of Legal Entities ■ Obligation to publish an annual report, a balance sheet and a The main constitutional document in LLCs, JSCs and PJSCs is the statement of profits and losses. charter. ■ Shareholders do not have pre-emptive purchase rights. In addition, the companies are entitled to have internal corporate ■ It is not required to obtain other shareholders’ consent for the governance rules, policies, and regulations of certain bodies (e.g. of

sale of shares to a third party. Russia the board of directors). ■ Comprehensive competence of the General Meeting of Shareholders. The Corporate Agreement (The Shareholders’ Agreement) ■ The board of directors must be appointed. The number of Shareholders (participants) of a legal entity are entitled to conclude members of the board of directors is no less than five. corporate agreements according to which they undertake to execute their corporate rights in the agreed manner or refrain from exercising of their corporate rights (including voting on general meetings, execution 1.2 What are the main legislative, regulatory and other of other actions with regard to company’s management, and transfer of corporate governance sources? shares of the company). If provisions of a corporate agreement are in conflict with those of the charter, the corporate agreement provisions, Legislation as a general rule, shall nevertheless be valid and enforceable. The laws which have the most important impact on corporate governance in the Russian Federation are: 1.3 What are the current topical issues, developments, 1. The Civil Code of the Russian Federation (the “ Civil trends and challenges in corporate governance? Code”), and namely its first book containing basic civil law provisions. As part of the arbitration law reform of 2016 the topical issue of 2. Federal Law No. 14-FZ dated February 08, 1998 (as amended) arbitrability of corporate disputes was addressed. Pursuant to the “On Limited Liability Companies” (the “LLC Law”). reform, it is now possible to enter into an arbitration agreement in 3. Federal Law No. 208-FZ dated December 26, 1995 (as respect of corporate disputes which were signed on or after February amended) “On Joint Stock Companies” (the “JSC Law”). Other laws and regulations applicable to certain types of legal 01, 2017. It should be noted that corporate agreements concluded entities include the following: before February 01, 2017 are deemed unenforceable and cannot be referred to arbitration. 1. Federal Law No. 39-FZ dated April 22, 1996 “On the Securities Market” (the “Securities Law”). The revised arbitration laws distinguish three categories of corporate 2. Federal Law No. 135-FZ dated July 26, 2006 “On disputes depending on their arbitrability: Protection of Competition” (the “Competition Law”). ■ arbitrable corporate disputes (e.g. ownership over shares, 3. The Arbitrazh Procedure Code of the Russian Federation disputes arising from SPAs, establishment of encumbrances (the “Arbitrazh Procedure Code”). over shares and their enforcement) might be submitted to arbitration institutions, provided it is permanent arbitration 4. The Federal Law No. 382-FZ dated December 29, 2015 institution within or outside the territory of Russia; “On Arbitration (Arbitral Proceedings) in the Russian Federation”. ■ conditional arbitrable – disputes (e.g. disputed related to the establishment, reorganisation and liquidation of legal 5. The Code of Administrative Offences (the “Administrative entities, claims of shareholders for recovery of damages Code”). caused to a legal entity, issuance of securities, etc.) might 6. Federal Law No. 57-FZ dated April 29, 2008 “On Making be submitted only by the permanent arbitration institution Foreign Investments into the Business Entities which seated in Russia, acting under approved arbitration rules for are of Strategic Importance for the Country’s Security corporate disputes; and Protection and Defence Support”. ■ non-arbitrable disputes (e.g. disputes related to convening 7. Federal Law No. 224-FZ dated July 27, 2010 “On general shareholders’ meetings; disputes, contesting acts and Countering the Illegal Use of Insider Information activities of the public authorities, buy-back and compulsory and Market Manipulation and on Amending Certain buy-out of shares by JSCs or PJSCs, expulsion of shareholders Legislative Acts of the Russian Federation”. (participants) from an LLC, etc.) could not be submitted to an 8. Federal Law No. 307-FZ dated December 30, 2008 “On arbitration institution. Audit Activity”. A foreign arbitration institution with a widely acknowledged 9. Central Bank Regulation No. 428-P dated August 11, international reputation is allowed to operate within the territory 2014 “On Standards of Securities Emission, Procedure of of the Russian Federation, providing that they have obtained a State Registration of Issue (Additional Issue) of Issuance permit from the Russian Government. If no such permit is obtained, Securities, State Registration of Reports on the Results their awards will be deemed to have been adopted on an ad hoc of Issue (Additional Issue) of Issuance Securities and basis. As of today no foreign arbitration institution has applied for Registration of Securities Prospectus”. a permit, however this may be partially because of the necessity 10. Central Bank Regulation No. 454-P dated December of the relevant foreign arbitration institution to adapt its rules and 30, 2014 “On Disclosure of Information by Issuers of regulations to the procedural requirements of Russian legislation. Issuance Securities”. According to information available to us, at least several renowned 11. Central Bank Regulation No. 534-P, dated February 24, international arbitration institutions are considering the possibility 2016 “On the Admission of Securities to On-exchange of applying for the abovementioned permit. The situation is to be Trading”. monitored further. 12. Moscow Exchange listing rules.

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2 Shareholders 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them?

2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ Shareholder meetings in JSCs and PJSCs entities? There are two types of general meetings of shareholders (“GMS”) in JSCs and PJSCs: the annual GMS (which are held in terms Shareholders of the company form the supreme management body of provided by the company’s charter but no sooner than two months the company, i.e. the general meeting of shareholders. Shareholders and no later than six months after the end of the reporting year); and

Russia of LLCs, JSCs and PJSCs have the following rights: the extraordinary GMS (other meetings held apart from the annual 1. To participate in managing the affairs of the company. meeting of shareholders). 2. To receive information on the activities of the entity, On the annual GMS, the shareholders have to elect the board of its accounting books and other documents in the order directors and the revision committee, approve the auditor, approve established by the laws and constitutional documents of the the annual report and the annual accounting (financial) report (unless company. this matter is referred to the competence of the board of directors 3. To participate in the distribution of profits of the company. of the company). Apart from these matters, the annual GMS can 4. To receive, in the case of liquidation of the company, the consider other issues included on the agenda. company’s assets after settlements with creditors of the The extraordinary GMS can be convened by the board of directors, company. upon demand of the revision committee, auditor of the company or 5. To claim for exclusion of a company’s shareholder from the shareholders who own no less than 10% of shares of the company as company (except for PJSCs) in court with payment of the of the date of submission of the meeting demand. The extraordinary actual value of its shares to the court, in cases where such GMS shall be held within 40 days from the date of submission to the a shareholder’s actions/omissions has caused significant company of the demand on holding an extraordinary GMS; in some harm to the company or it has considerably complicated its cases this term might be prolonged to 75 days. activities in achieving the objectives for which it was created. 6. To dispute decisions of management bodies of the company Some of the matters referred to the competence of the GMS may and challenge transactions of the company. be adopted by the majority of votes of shareholders (such as the determination of the number of members of the board of directors, 7. To claim for damages incurred by the company on behalf of the company. establishment of the executive body of the company, etc.), whereas certain matters require a super majority approval (75% of votes), 8. To perform other rights provided by the law and constitutional such as: the introduction of changes into the charter of the company; documents of the company. reorganisation of the company; and other matters provided by the However, it needs to be mentioned that PJSCs or JSCs could have JSC Law. different types of shares – ordinary shares and preference shares. Owners of ordinary shares have the same rights as provided by the Shareholder meetings in LLCs law, whereas owners of the preference shares do not have the right LLCs have two types of GMS: the ordinary GMS (which is held of vote on general meetings of shareholders (unless it is otherwise in terms provided by the company’s charter at least once a year); provided by the JSC Law), but they have the right to receive a fixed and the extraordinary GMS (any other meeting held apart from the amount to be paid as the dividends, as well as the pre-emptive ordinary meeting of shareholders). The company’s charter should right (in comparison with other shareholders) of acquisition of the provide the term for holding the ordinary GMS, whose agenda will company’s assets left after liquidation of the company. include approval of the annual results of business of the company; such a GMS must be held no sooner than two months and no later In PJSCs or JSCs the exact scope of access to information on a than four months after the end of financial year. transaction, the right to challenge a transaction of the company and to claim damages depends on the amount of shareholding. The extraordinary GMS can be held under the decision of the executive body of the company and the decision of the board of directors, upon demand of the revision committee, auditor of the 2.2 What responsibilities, if any, do shareholders have as company or shareholders who are owners of no less than 10% of the regards the corporate governance of their corporate entity/entities? total participatory shares of the company. The extraordinary GMS shall be held within 45 days from the date of receipt of the demand for holding the extraordinary GMS by the company, but not earlier Shareholders of LLCs, PJSCs and JSCs have the following than 30 days from the date of notifying each participant about the responsibilities: planned extraordinary GMS. 1. To pay for their shares in accordance with the provisions of the law and the company’s charter. Most of the matters which refer to the competence of the GMS may be adopted by the majority of votes of shareholders (such as 2. Not to disclose confidential information concerning the company to third parties. determination of the main purposes of the company’s business, establishment of an executive body of the company, etc.), whereas 3. To participate in the company’s decision-making process so certain matters require a super majority approval (⅔ of votes) that the company could operate its usual course of business. or a unanimous resolution of shareholders (e.g. liquidation or 4. To refrain from any actions aimed at causing losses to the reorganisation of the company). company. According to the Civil Code, shareholders of LLCs and JSCs are 5. To refrain from any actions (or omissions) which can make it difficult or impossible to achieve the goals for which the entitled to transfer matters which refer to the competence of the company was established. GMS to the competence of the board of directors by unanimous voting (except for certain matters provided by the law). 6. To perform other obligations provided by the law and constitutional documents of the company.

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In addition, in certain cases, a shareholder buying shares of the 2.4 Can shareholders be liable for acts or omissions of company shall be obliged: the corporate entity/entities? ■ to obtain the prior consent of, or to make a notification to, the antitrust authority (in accordance with the Competition Law); As a general rule, the shareholders are not liable for acts or and omissions of the corporate entity and bear risk of damages related ■ to make a mandatory offer or request to all other shareholders to the business of the company within the value of their shares. upon acquisition of more than 30 percent of PJSC voting However, the Russian law provides certain exceptions to this rule: shares. 1. Shareholders who have not fully paid for their shares are jointly liable for obligations of the company within the Russia unpaid part of such shares. 3 Management Body and Management 2. Shareholders who have the actual opportunity to determine the actions of a legal entity are liable to compensation for 3.1 Who manages the corporate entity/entities and how? damages to a legal entity if such damages were caused by unreasonable or unfair actions of such shareholders. 3. Shareholders who have the actual opportunity to determine In addition to the GMS as the supreme management body in LLCs, the actions of a legal entity bear subsidiary liability in the JSCs and PJSCs, a company’s governing bodies include: case of bankruptcy of the legal entity caused by the actions/ 1. The supervisory board (board of directors). omissions of such shareholders. 2. Executive bodies (sole executive body and/or collegial 4. Shareholders may be brought to administrative liability for executive body). offences in connection with fictitious or deliberate bankruptcy, The concept of governing bodies in Russia differs from the foreign as well as for illegal actions during the bankruptcy procedure. law concept; in Russia, the board of directors is principally a supervisory body (along with the GMS) rather than a management 2.5 Can shareholders be disenfranchised? body, while the management body includes executive bodies (sole executive body (which, according to the recent amendments In general, in accordance with the Russian law, shareholders may to Russian law, may consist of several directors) and/or collegial not be deprived of their rights. executive body). Nevertheless, for the purposes of this publication, the GMS, board of directors and executive bodies as a company’s There are, however, certain exceptions from that principle: management bodies will be referred to in a general sense. 1. The shareholder of more than 95 percent of PJSC voting shares is obliged to buy out the shares of other minority The creation of a board of directors is not mandatory for JSCs (with shareholders at their request. Without such request, the buy- less than 50 shareholders) and LLCs. Shareholders of the company out is at the discretion of the shareholder of more than 95 elect members of the board of directors, and the board of directors is percent of PJSC voting shares. accountable to shareholders of the company. Members of the board 2. The court may issue an order of prohibition of voting for of directors have to act solely in the interests of the company, and matters which refer to the competence of the GMS or board are not obliged to follow the instructions of the shareholders. The of directors of the company, which may constitute or be company’s board of directors is entitled to decide on matters which directly associated with subjects of disputes, considered by do not refer to the competence of the GMS. the court. The sole executive body manages the operational and day-to-day 3. When the GMS or board of directors approves the related- business of the company and is entitled to act on behalf of the party transaction if such approval is required by the charter company without power of attorney, conclude transactions on its the vote of the related party is not counted. behalf, review and approve employment appointments, etc. The In practice, however, it is possible to provide certain limitations or competence of the sole executive body includes issues which do not temporary deprivation of rights of shareholders in different cases refer to the competence of the GMS and board of directors of the (e.g. in the case of a deadlock) in the corporate agreement. company. The sole executive body is accountable to the GMS and the board of directors of the company. 2.6 Can shareholders seek enforcement action against members of the management body? 3.2 How are members of the management body appointed and removed? Shareholders of the company are entitled to sue the sole executive body or members of the board of directors for compensation of The board of directors in JSCs and PJSCs shall comprise at least damages incurred by the company through the wrongful acts of such five members. In LLCs, the charter may provide a different management bodies. number of members of the board of directors. In JSCs and PJSCs, members of the board of directors are elected by cumulative voting 2.7 Are there any limitations on, and disclosures of shareholders of the company. In LLCs, the charter may provide required, in relation to interests in securities held by other voting procedures with regard to appointment of the board of shareholders in the corporate entity/entities? directors. In cumulative voting, the number of votes held by each shareholder is multiplied by the number of seats on the board of In general, there are no limitations regarding the number of shares directors, and voting shareholders may cast all its votes for one which the particular shareholder can hold. However, certain nominee or distribute its votes among several nominees. Nominees exceptions are provided by the Foreign Investment Law with regard who received the majority of votes shall be appointed to the board to foreign ownership of companies, performing business in banking, of directors, and only individuals may be appointed to the board insurance, weapon production and other specific areas set out in the of directors (generally, there are no limitations by age, nationality, Foreign Investment Law. length of tenure provided by Russian law).

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Members of the board of directors are elected for a period until the Decisions on meetings of the board of directors shall be taken next annual GMS. In JSCs and PJSCs, a decision on the termination by the majority of votes of all members of the board of directors of powers of members of the board of directors may be adopted participating in such meetings, except for the cases provided in the only in respect of all members of the board of directors. In cases law or in the charter of the company. where the charter of an LLC does not provide cumulative voting for the election of members of the board of directors, it is possible 3.6 What are the principal general legal duties and to prescribe provisions in relation to the termination of powers of liabilities of members of the management body? certain members of the board of directors of an LLC.

The sole executive body of the company is appointed by the decision According to Russian legislation, all members of the management

Russia of the GMS, unless this matter falls within the competence of the bodies of a company shall act in the best interests of the company, board of directors. reasonably and in good faith. Members of management bodies have two core duties: a duty of loyalty; and a duty of care. No one is 3.3 What are the main legislative, regulatory and other obliged to follow the instructions of shareholders with regard to the sources impacting on contracts and remuneration of adoption of a decision which refers to the competence of such a members of the management body? management body. A possible liability of the members of the management bodies is Contracts and remuneration of members of the board of directors damages, incurred by guilty actions in relation to the company. The and sole executive body are regulated on two levels: sole executive body is liable for damages only in cases where it is ■ Legislation: the LLC Law (in relation to LLCs); and the JSC proved that during the performance of its rights and obligations, it Law (in relation to JSCs and PJSCs). was acting unreasonably and in bad faith. No liability is inferred in ■ Local company’s regulations: constitutional and internal case of unsuccessful commercial decisions taken by the manager. documents of the company; and employment contracts.

3.7 What are the main specific corporate governance 3.4 What are the limitations on, and what disclosure is responsibilities/functions of members of the required in relation to, interests in securities held by management body and what are perceived to be the members of the management body in the corporate key, current challenges for the management body? entity/entities? Current legislation does not contain any specific corporate governance In general, there are no limitations regarding members of the responsibilities/functions of members of the management body; management bodies holding shares. With regard to the disclosure however, it may be provided in a company’s charter. of interests in securities held by the members of the management In terms of significant challenges for management bodies in courts, bodies, all members of the management bodies and shareholders of particular note is the decision case No. 305-ЭС15-14197, of the company have to submit information about the legal entities adopted on March 31, 2016 by the Supreme Court of the Russian which, independently or together with their affiliate (affiliates), hold Federation, which in fact recognised in principle the possibility of 20% of voting shares to the board of directors, revision committee challenging the decision of the GMS/participants, not only by actual and auditor of the company. shareholders/participants, but also by beneficiaries of the company Members of management bodies for the purpose of identification (even if corporate structure beneficiaries own the company through of related-parties transactions shall disclose the information on the a complex corporate chain in foreign jurisdictions). controlled companies. The person is considered a controlling person and potentially a related party if it has the right of direct or indirect disposal of more than 50% votes in the supreme management body 3.8 What public disclosures concerning management of the controlled company or the right to appoint (elect) the CEO body practices are required? and (or) more than 50% of the collegial management body of the controlled company on the basis of shareholding in the controlled PJSCs and JSCs carrying public placement of bonds or other company, the shareholding agreement, etc. securities are required to disclose information about the resolution passed by its board of directors, including on the following matters: ■ convocation of an annual or extraordinary GMS; 3.5 What is the process for meetings of members of the management body? ■ appointment or formation and early termination of powers of the sole executive body; GMS ■ dividend-related recommendations; The procedure of holding a GMS in LLCs, JSCs and PJSCs is ■ inclusion of the company’s liquidation in the agenda of a regulated by the Civil Code, the LLC Law and the JSC Law. GMS; Shareholders of LLCs and JSCs can unanimously decide to amend ■ approval of a major transaction; the charter of the company and to provide the procedure of holding ■ confirmation of the company’s registrar appointment and the a GMS which differs from the legislative provisions. terms of contract with it; Meeting of the Board of Directors ■ repurchase of the company’s outstanding shares, bonds and other securities; and A meeting of the board of directors shall be convened by the chairman of the board of directors at his own discretion, at the ■ establishing and closing of branches and representative request of a member of the board of directors, the internal auditor, offices. external auditor, and/or sole executive body. The annual report of such companies should also contain a brief The quorum for holding a meeting of the board of directors is at least biography of each member of the board of directors, including their 50% of the number of elected members of the company’s board of current positions in other companies. directors (if a larger amount is not specified in company’s charter).

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■ timely submission of annual reports and other accounts to 3.9 Are indemnities, or insurance, permitted in relation to respective authorities; and members of the management body and others? ■ provision of information to shareholders and creditors with details of the company’s activities. Article 53.1 of the Civil Code provides that the agreement on indemnity of members of management bodies for committing unfair actions (in LLCs and JSCs) and for committing unfair and 5.2 What corporate governance related disclosures are required? unreasonable actions (for PJSCs) is void.

Liability insurance is optional for members of management bodies LLC and very few companies in Russia use it. According to Article 49 of the LLC Law, an LLC is not obliged to Russia disclose information about its business activity, except for certain 4 Other Stakeholders cases provided by the LLC Law: 1. The company that has acquired more than 20% of voting shares of a JSC or PJSC, or more than 20% of the charter 4.1 What, if any, is the role of employees in corporate capital of another LLC, is obliged to publish information governance? about it in the special press. 2. Within three business days after the company’s decision to Employees do not usually play an important role in corporate reduce its share capital, the company shall report it to the governance in Russia. There are no legal requirements as to federal tax authority and publish that information in the employee representation in management bodies of the company. special press twice with an interval of one month. 3. Information about the company’s reorganisation shall be 4.2 What, if any, is the role of other stakeholders in published once a month in the special press. corporate governance? 4. In cases of placement of public bonds and other equity securities, an LLC is obliged to publish its annual reports and Though there are no legal requirements as to other shareholders’ balance sheets. representation in management bodies of the company, participants JSC and PJSC and/or shareholders holding 1% or more of the company’s voting According to Article 92 of the JSC Law, the following information shares/participatory interest are entitled to contest decisions of the shall be disclosed by the company: company and file derivative claims for compensation of damages 1. Annual reports and annual financial statements. caused to the company by its management bodies or shareholders. 2. A message on the holding of the GMS. In this way shareholders definitely play an important role in 3. A prospectus for securities issuance. supplementary compliance control. 4. Other information determined by the Central Bank of Russia. 5. A JSC that has more than 50 shareholders shall disclose 4.3 What, if any, is the law, regulation and practice annual reports and annual financial statements. concerning corporate social responsibility? Please also see question 3.4 above. Corporate social responsibility is not subject to legal regulation in Russia. However, many leading Russian companies, such as 5.3 What is the role of audit and auditors in such Gazprom, Russian Railways, and Systema, etc. are involved in disclosures? certain corporate social responsibility programmes. Such companies publish an annual report on corporate social responsibility on their The JSC or PJSC must have its annual accounts audited by an website. external auditor. Such auditor shall be appointed by the decision of the GMS. 5 Transparency and Reporting 5.4 What corporate governance information should be published on websites? 5.1 Who is responsible for disclosure and transparency? Please see question 3.8 above. The sole executive body of the company is responsible for the following disclosures of the company: ■ organisation of the maintenance and the state and reliability of accounts;

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Anton Dzhuplin Timur Akhundov ALRUD Law Firm ALRUD Law Firm 17 Skakovaya Street 17 Skakovaya Street Building 2, 6th floor Building 2, 6th floor 125040 Moscow 125040 Moscow Russia Russia

Tel: +7 495 234 96 92 Tel: +7 495 234 96 92 Email: [email protected] Email: [email protected] URL: www.alrud.com URL: www.alrud.com Russia Anton Dzhuplin is a Partner at ALRUD Law Firm. Anton’s diverse Timur Akhundov is an Associate at ALRUD Law Firm. Timur has corporate practice includes M&A, domestic and international corporate experience of conducting due diligence, structuring and support finance, IPOs, private equity, joint ventures, public takeovers, corporate with the M&A transactions, particularly, in the Oil & Gas and mining governance, restructuring and insolvency. He has an exceptional sectors. Timur also has expertise in production-related regulatory track record in many industries and he leads the firm’s work in the issues, the environment, industrial safety and licensing. He also has pharmaceutical and infrastructure industry. crucial experience in consulting clients on regulatory issues for natural resources and infrastructure industries. Anton joined ALRUD Law Firm in 2007. He became a Partner in 2014. Anton has broad industry experience and is always admired by Timur joined ALRUD Law Firm in 2012. In 2010, he graduated from his clients and business partners for his sharp advice and business Moscow State Institute of International Relations of the Ministry intelligence. of Foreign Affairs of the Russian Federation (MGIMO University) international law department, specialising in international private and Anton graduated from the State University Higher School of civil law. He holds a Bachelor’s degree and a Master of laws diploma Economics, Faculty of Tax and Financial Law. He is a member of the with honours. International Bar Association.

Established in 1991, ALRUD Law Firm is one of the leading and most reputable Russian law firms. The firm provides the full scope of legal services to local and international clients in the areas of banking & finance, corporate/M&A, commercial law, competition/antitrust, data protection, dispute resolution, energy/natural resources, intellectual property, labour and employment, restructuring/insolvency, real estate, and tax law, etc. ALRUD Law Firm serves clients from diverse industries such as energy/infrastructure, mining, banks, consumer goods, retail, investment management, government/public, healthcare, life sciences/chemicals, industrials, insurance, technology, media and telecoms, and transport/logistics. ALRUD Law Firm’s reputation, reliability and competence are recognised by the leading global legal directories: Chambers & Partners; The Legal 500; IFLR; and Best Lawyers, etc.

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Serbia Dr. Gorana Kršikapa LL.M.

TSG Tomić Sinđelić Groza Ljubica Tomić

9. Law on Accounting (Official Gazette of, RS No. 62/2013) 1 Setting the Scene – Sources and (hereinafter, the “LoAcc”). Overview 10. Law on Audit (Official Gazette of RS, No. 62/2013) (hereinafter, the “LoAud”). 1.1 What are the main corporate entities to be discussed? 11. Corporate Governance Code (Official Gazette of RS, No. 99/2012) (hereinafter, the “CGC”). The most important legal forms of corporate entities relevant for 12. Law on Public Companies (Official Gazette of RS, 15/2016) providing an overview on corporate governance trends in Serbia (hereinafter, the “LPC”). are private and public joint-stock companies. Even though the Law on Companies (hereinafter, the “LoC”) does not explicitly classify 1.3 What are the current topical issues, developments, joint-stock companies into different categories, there are special trends and challenges in corporate governance? obligations prescribed for joint-stock companies that publicly emit their shares through public offers. On the other hand, the LoC does Serbia has not yet developed significant court practice in the sphere allow the possibility for the founders of a joint-stock company to of corporate governance related to directors’ liability. Given that impose limitations on the transfer of shares in the company statute the duties of care and loyalty are seen as foremost strategies towards in the form of pre-emption right or compulsory preliminary approval addressing the so-called first agency problem, i.e. the potential of a transfer. conflict between the shareholders’ and managers’ interests, a consistent court practice would have to offer in future a higher degree of legal security in this area. Furthermore, with regard to public 1.2 What are the main legislative, regulatory and other corporate governance sources? companies, the new Law on Public Companies (“LPC”), in force as of 4 March 2016, has made the effort to regulate some corporate The main legal source relevant for questions on corporate governance issues which were left open with regard to public governance is the Law on Companies (Official Gazette of the companies before its enactment and to follow the recommendation RS, No. 36/2011, 99/2011, 83/2014 and 5/2015) as lex generalis of the EU Commission Progress Report (2014) which called for applicable to all commercial entities, i.e. legal persons established “improving corporate governance of public companies”. for performing lucrative activities. In addition, there are several other laws regulating this field of law: 2 Shareholders 1. Law on Contracts and Torts (Official Gazette of Socialistic Federal Republic of Yugoslavia, No. 29/78, 39/85, 45/89 and 57/89; Official Gazette of the Federal Republic of Yugoslavia, 2.1 What rights and powers do shareholders have in the No. 31/93; and Official Gazette of Serbia and Montenegro, operation and management of the corporate entity/ No. 1/2003 – Constitutional Charter). entities? 2. Law on the Capital Market (Official Gazette of RS, No. 31/2011, 112/2015 and 108/2016) (hereinafter, the “LoCM”). The scope of activities of a shareholders’ meeting is adopting 3. Law on Takeover of Joint-stock Companies (Official Gazette decisions on the following: 1) amendments to the company statute; of RS, No. 31/2011, 112/2015 and 108/2016) (hereinafter, the 2) share capital increases and reductions, as well as any issue of “LoT”). securities; 3) number of approved shares; 4) changes in rights 4. Law on Protection of Competition (Official Gazette of RS, or privileges attached to any class of shares; 5) corporate status No. 51/2009 and 95/2013). changes and changes of legal form; 6) acquisition and disposal 5. Law on Banks (Official Gazette of RS, No. 107/2005, 91/2010 of high-value assets; 7) profit distribution and loss coverage; and 14/2015). 8) adoption of financial statements, as well as of audit reports if 6. Insurance Law (Official Gazette of RS, No. 139/2014). financial statements were audited; 9) adoption of reports ofthe board of directors, or of the supervisory board in case of a two- 7. Labour Law (Official Gazette of RS, No. 24/2005, 61/2005, 54/2009, 32/2013, 75/2014 and 13/2017) (hereinafter, the tier management; 10) remuneration of directors, or members of the “LL”). supervisory board in cases of a two-tier management, or rules for the determination of such remuneration, including remuneration payable 8. Law on environmental impact assessment (Official Gazette of RS, No. 135/2004 and 36/2009) (hereinafter, the “LEIA”). in shares and other securities of the company; 11) appointment and

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dismissal of directors; 12) appointment and dismissal of supervisory or take other actions for the purpose of carrying out joint influence board members in cases of a two-tier management; 13) initiation on the management or operations of that person. of liquidation and filing for bankruptcy; 14) appointment and compensation of the auditor; 15) other items included in the agenda 2.3 What shareholder meetings are commonly held and of the shareholders’ meeting in accordance with the LoC; and 16) what rights do shareholders have as regards them? other items in accordance with the LoC and the company statute. Rights and powers of shareholders are stemming from the Shareholders’ meetings may be ordinary or extraordinary. ownership rights on a share or more specifically, on a share of a An ordinary shareholders’ meeting is held once a year, within six certain class. In general, every shareholder has a right to be present months as of the end of an accounting year. However, any failure Serbia at the shareholders’ meeting and to participate in the work thereof to hold an ordinary shareholders’ meeting does not affect the legal – in person or via proxy. A company may not introduce special validity of transactions, actions and decisions of a company. An requirements for proxies or limit their number. Each shareholder ordinary shareholders’ meeting is convened by the board of directors, has a voting right on questions concerning which of his/her class or the supervisory board in case of a two-tier management. Notice of shares has a right to vote. In addition, each shareholder also of shareholders’ meeting is sent not later than 30 days before the has a right to participate in the debate at a shareholders’ meeting scheduled date of a session. concerning items on the agenda, which includes a right to propose, raise questions concerning the shareholders’ meeting agenda and Extraordinary shareholders’ meeting is held as and when needed, the right to get an answer in accordance with the company statute as well as in cases provided by the LoC or the company statute. and shareholders’ meeting procedural rules. However, the company Should it be established that during the preparation of annual statute may specify a minimum number of shares a shareholder must or other financial statements that a company operates with a loss hold in order to be able to participate in person in the shareholders’ due to which the value of its net assets fell below 50% of its share meeting, which may not be higher than 0.1% of the total number capital, an extraordinary shareholders’ meeting must be convened of shares of a relevant class. Shareholders who individually do not and a notice of such session must specify the reason for convocation hold the above mentioned minimum number of shares are entitled to and contain a draft agenda which must include a draft decision to participate in the shareholders’ meeting through a joint proxy holder liquidate the company and/or a draft decision on other measures that or to vote in absentia. need to be taken. Shareholders may vote in writing without attending a session, An extraordinary shareholders’ meeting is convened by the decision provided they have certified their signatures on the voting form of the board of directors or the supervisory board in cases of a two- in accordance with the law governing certification of signatures. tier management: 1) on its own initiative; 2) upon request from However, the company statute may waive this signature certification shareholders holding a minimum of 5% of the company’s share requirement. A shareholder who voted in absentia is deemed to be capital, or shareholders holding a minimum of 5% of shares within present for the purposes of voting on the items of the agenda on a class with the right to vote on items on the proposed agenda, unless which he/she voted. the company statute provides for a lower percentage threshold of the company’s share capital or a lower number of shares within a class The company statute or the shareholders’ meeting procedural rules with the right to vote on items on the proposed agenda. The said may provide for participation in the shareholders’ meeting by request must include information on every petitioner and a reasoned electronic means. draft agenda for the session. In order to qualify as a petitioner, the shareholder must hold shareholder status for a minimum of three 2.2 What responsibilities, if any, do shareholders have as months before lodging such request and retain such status until regards the corporate governance of their corporate the passing of a decision pursuant to the request. In addition, the entity/entities? agenda for an extraordinary shareholders’ meeting must be based solely on the draft agenda included in the said request, except where Shareholders who own a significant share in the company’s share certain items are outside the scope of the shareholders’ meeting. capital or a shareholder who is the controlling shareholder of the Exceptionally, an extraordinary shareholders’ meeting of a company company in terms of the LoC are the persons with special duties in liquidation is convened by the company’s liquidator. Notice of an towards the company to which special limitations and disclosure extraordinary shareholders’ meeting is sent at least 21 days before requirements are applicable. The rules described in question 3.4 the date of such session. below are mutatis mutandis applicable to those shareholders. In general, the shareholders’ meeting agenda is determined by a According to the LoC, significant share in the share capital exists decision on convocation of the shareholders’ meeting passed by the if one person, independently or with other persons acting jointly board of directors, or the supervisory board if a company has a two- with that person, owns more than 25% of the voting right in the tier management. The shareholders’ meeting may decide and debate company. Majority share in the share capital exists if one person, only on items included in the agenda. independently or with other persons acting jointly with that person, One or more shareholders holding or representing a minimum of owns more than 50% of the voting right in the company. Control 5% of voting shares may propose to the board of directors, or the implies the right or possibility that one person, independently, or supervisory board in case of a two-tier management, additional items with other persons acting jointly with him, carries out the controlling to be included in the shareholders’ meeting agenda for debate and influence on the business operations of another person by means of additional items for decision-making by the shareholders’ meeting, having a share in the share capital, by means of a contract or right provided that they provide an explanation for their proposal or submit to appoint the majority of directors, i.e. supervisory board members. the text of a proposed decision. Such proposal is made and contains It is considered that a particular person is the controlling member of information on petitioners, and is sent to the company not later than the company whenever such a person owns the majority share in the 20 days before the date of an ordinary shareholders’ meeting, or not company’s share capital independently or with affiliated persons. later than ten days before the date of an extraordinary shareholders’ Acting jointly exists when two or more persons, pursuant to a meeting. A public joint-stock company shall publish such proposal mutual express or tacit agreement, use voting rights in a certain way on its web page not later than the first succeeding business day as of

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the date of receipt. If the board of directors, or the supervisory board always publish all notices on shareholders’ meeting on its web page. in case of a two-tier management, accepts the proposal, the company Such web page publication must last at least until the date of the submits the new agenda without delay to all shareholders entitled to shareholders’ meeting. In addition, a company’s statute may stipulate participate in the shareholders’ meeting. If the board of directors, that notice of the shareholders’ meeting is also to be published in at or the supervisory board in case of a two-tier management, does not least one top-selling daily newspaper with nationwide distribution accept the proposal within three days of receipt, a petitioner of such in the Republic of Serbia. proposal is entitled to request within a further period of three days Session handouts for shareholders’ meetings must be made available a court award in non-litigious proceedings ordering the company to shareholders at the time of sending of notice: 1) at the company’s to include the proposed items in the shareholders’ meeting agenda. premises during normal working hours, either in person or through

A list of shareholders entitled to participate in a shareholders’ a proxy; or 2) on the company’s web page, so that shareholders may Serbia meeting is produced on a cut-off day that is referred to as a download the handouts in their entirety. The company statute may shareholders’ day, which is the tenth day before the date of such also stipulate other ways of making session handouts available to a session. The mentioned shareholders’ list is produced on the basis company’s shareholders. of a certificate from the central records of shareholders maintained A public joint-stock company shall publish on its web page, together with the Registry of the Central Securities and Depositary Clearing with a notice of the shareholders’ meeting, the total number of House. Even if a shareholder included in a the mentioned list shares and voting rights as at the date of publication of such notice, transfers his/her shares to a third party after the shareholders’ day, including the number of shares of each class with the right to vote he/she will retain the right to participate in such shareholders’ on individual items of the agenda. meeting based on shares he/she held on the shareholders’ day. Each Notwithstanding the above, a shareholders’ meeting of a company shareholder included in the mentioned shareholders’ list has a right other than a public joint-stock company may be held even to lodge a written request to the board of directors, or the executive without compliance with the above-mentioned requirements if all board if a company has a two-tier management, to be provided with shareholders attend and if none of them oppose it. the mentioned list in writing or electronically without delay, and in any case not later than on the first succeeding business date after the A shareholders’ meeting is, as a rule, held in a company-registered date of receipt of a request. However, in case of a public joint-stock office. The board of directors, or the supervisory board in case of a company with more than 10,000 shareholders as at the shareholders’ two-tier management structure, may decide to hold a shareholders’ day, the company is considered in compliance with the obligation meeting in another venue, should it be necessary in order to facilitate to disclose the shareholders’ list if it gives all shareholders lodging the organisation of the meeting. a request the access to the shareholders’ list at company premises Quorum for a shareholders’ meeting is constituted by a simple starting from the first succeeding business day after the shareholders’ majority of the total number of votes attached to the class of shares day until the day preceding the date of a shareholders’ meeting. The entitled to vote on an issue, unless a different majority is provided company has a duty to inform its shareholders of the possibility of by the company statute. Own shares of a given class and shares for such access in the invitation to the shareholders’ meeting session. which the voting rights are suspended are not taken into account Notices sent to shareholders regarding a shareholders’ meeting for quorum purposes. The shareholders’ meeting may decide on contain, in particular: 1) the date of dispatch; 2) the time and venue an issue only if the meeting is attended by shareholders or their of the session; 3) a draft agenda, with a clear indication of items on representatives that hold or represent a required number of votes which voting of the shareholders’ meeting is proposed, as well as attached to a class of shares entitled to vote on an issue. the indication of the class and total number of shares entitled to vote The shareholders’ meeting adopts decisions by a simple majority on such decision and the required majority; 4) information on ways of votes of the present shareholders with a right to vote on an issue, to receive session handouts; 5) instruction on shareholders’ rights in unless a higher number of votes is required for specific issues in connection with their participation in the shareholders’ meeting and accordance with the LoC or the company statute. clear and precise information about the rules for exercising those The qualified majority is, on the other hand, required for adopting rights, which rules must be in accordance with the LoC, the company certain decisions such as, for example: decisions on the acquisition statute and the shareholders’ meeting procedural rules; 6) a proxy and disposal of high-value assets, which requires a three-quarters form, if a company stipulated the mandatory use of such form; and 7) majority of the votes of the present shareholders with voting rights; a notification concerning the shareholders’ day, with an explanation a decision on a change of legal form, which requires a three-quarters that only those shareholders who are the company’s shareholders on majority of the votes of the present shareholders with voting rights, that date are entitled to participate at the shareholders’ meeting. A unless a different majority is provided by the company statute; and a company does need to include the elements referred to under numbers decision on corporate status change, which requires a three-quarters 4), 6) and 7) should it indicate the web pages from which such data majority of the votes of the present shareholders with voting rights, and/or documents can be downloaded. A notice on the shareholders’ unless a different majority is provided by the company statute, etc. meeting is sent to persons who are company shareholders on the If a shareholders’ meeting of a joint-stock company is delayed due date when the board of directors or the supervisory board decided to to a lack of quorum, it may be reconvened with the same agenda not convene the shareholders’ meeting, or the date of passing of a court later than 30 days and not earlier than 15 days after the adjourned decision if the shareholders’ meeting is convened by court order. The session. Notice on a repeated session must be sent to shareholders notice is sent: 1) to the addresses of shareholders stated in the records not later than ten days before the date of such repeated session. If of shareholder information and such notice is considered delivered the date of a repeated session is predetermined in the notice on an on the date of its dispatch by registered mail, or by electronic mail if adjourned session, a repeated session is held on that date, which a shareholder agreed in writing to a different method of invitation; or cannot fall earlier than eight days or later than 30 days after the date 2) by publication on the company’s web page and the web page of the of the adjourned session. The shareholders’ day for an adjourned Serbian Business Registers Agency. session shall remain valid for a repeated session. A public joint-stock company shall also publish its notices of A repeated ordinary session may be held even if the above-mentioned shareholders’ meetings on the web page of a regulated market or quorum requirement is not met, unless provided otherwise in the multilateral trading platform where its shares are listed and it must

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company statute. Quorum for a repeated extraordinary session is At the proposal of a shareholder who holds the shares accounting one third of the total number of shares with the right to vote on an for at least 90% of the share capital of the company and who has issue, unless a different number of votes is provided by the company at least 90% of votes of all shareholders holding common shares statute. (redeemer), the shareholders’ meeting renders a decision on If there is no quorum in a repeated shareholders’ meeting or if compulsory repurchase of all stocks of the remaining stockholders the meeting is not held when due, the board of directors, or the of the company with the payment of the price determined by mutatis supervisory board in case of a two-tier management structure, shall mutandis application of the provisions of the LoC regarding payment convene a new shareholders’ meeting. to dissenting stockholders. The shares held by the persons affiliated to the redeemer are deemed to be the stocks held by the redeemer, Decisions in repeated meetings are passed by a majority provided

Serbia provided that those persons have been affiliated to the redeemer for for by the LoC and the company statute, which in case of a public a period of at least one year prior to the adoption of the decision on joint-stock company may not be lower than one quarter of the total compulsory repurchase. The company statute may stipulate that the number of shares with a voting right on an issue. compulsory repurchase is not permitted or a higher percentage of Finally, if certain issues on the agenda need to be voted on by special the redeemer’s participation in the share capital of the company may classes of shareholders, such voting may be held in the ordinary be stipulated as a condition for compulsory repurchase. A decision shareholders’ meeting or in a specially convened shareholders’ to amend the company statute modifying the mentioned provisions meeting of shareholders of that class, if so required by shareholders needs to be adopted by a three-quarter majority of the votes of the of a special class of shares representing at least 10% of the total attending shareholders, unless a higher majority is laid down by the votes of the shares with the right to vote on that issue. The company company statute. statute may exclude the possibility of a special shareholders’ meeting. The convocation, conduct, determination of quorum and participation in a special shareholders’ meeting is governed by the 2.6 Can shareholders seek enforcement action against members of the management body? provisions of the LoC on convocation, conduct, determination of quorum and participation in an ordinary shareholders’ meeting. A director can be held liable to a company for any damage he/she causes to it by violating the provisions of the LoC, the company 2.4 Can shareholders be liable for acts or omissions of statute or a decision of the shareholders’ meeting. Notwithstanding the corporate entity/entities? the foregoing, a director shall not be liable for damage if he/she acted in accordance with a decision of the shareholders’ meeting. According to Serbian law, the lifting of the corporate veil is If the damage occurs as a result of a decision of the board of directors, possible under certain conditions. A shareholder, as well as a all directors who voted in favour of such decision are liable for the legal representative of such person if the person concerned has damage. Any director who abstained from voting is deemed to have diminished capacity, is liable for the company’s obligations if they cast an affirmative vote for the purposes of establishing liability for abuse the rule of limited liability. Such abuse is considered to have damage. Any director who did not attend a meeting in which the taken place in particular if the mentioned shareholder: 1) uses the board of directors passed the decision in question and did not vote company to achieve an objective that is otherwise prohibited for in favour of such decision by other means is deemed to have cast an that person; 2) uses or disposes of the company’s assets as their own affirmative vote for the purposes of establishing liability for damage personal property; 3) uses the company or its assets to cause damage unless he/she opposed the decision in writing within eight days of to the company’s creditors; or 4) reduces the company’s assets for learning of its passing. The period of limitations for a company’s their own personal gain or for the gain of third parties, although they damage claims is three years as of the occurrence of damage. A knew or ought to have known that the company would be unable to company may not waive a damage claim, except by a decision of the meet its obligations. A creditor of a company may take legal action shareholders’ meeting passed by a three-quarters majority of votes against such shareholder before a competent court within six months of present shareholders with voting right. However, shareholders of learning of such abuse, but in any case not later than five years holding or representing at least 10% of a company’s share capital as of the date of committing such abuse. If creditors’ claims are not have a right to veto such decision. due and payable at the time of learning of such abuse, the six-month period shall commence on the date when such claims become due The LoC mandates special duties inter alia upon directors, supervisory and payable. board members, representatives and procurator of the company. In certain cases of breaches of those special duties, shareholders have right to: 1) bring an individual legal action, i.e. file a claim on his/ 2.5 Can shareholders be disenfranchised? her behalf and for his/her own account for compensation of damage caused to him/her by such person through a breach of special duties A shareholder of a share with voting rights and his/her related parties owed to a company; 2) bring a derivative legal action, i.e. file a claim are barred from voting in sessions deciding on: 1) his/her release on his/her behalf and for the company’s account; or 3) enter the from liabilities to the company or a reduction of those liabilities; lawsuit as an intervener on the claimant’s behalf. Special preclusive 2) filing or dropping of lawsuits against him; and 3) approval of periods are applicable for filing those claims. transactions in which such shareholder has a personal interest. All such instances represent a clear conflict of interest. The votes of shareholders barred from voting in the mentioned situations are not 2.7 Are there any limitations on, and disclosures required, in relation to interests in securities held by taken into account for quorum purposes. However, even in those shareholders in the corporate entity/entities? situations, mentioned shareholders are not barred from participating in the meeting and debates on those questions. Shareholders with special duties towards the company (as defined in In addition, there are shares where voting rights are excluded such question 2.2 above) are subject to special limitations and disclosure as own shares, preferential shares (save for certain situations defined requirements might be applicable. The rules described in question by the LoC), cases of certain cross-holdings of shares in linked 3.4 below are mutatis mutandis applicable in this context as well. companies, warrants and convertibles.

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Moreover, Serbian law prescribes a duty to publish a takeover bid reasonably be expected for carrying out of that duty in a company. If in case of acquiring shares above certain thresholds in a target such person possesses specific knowledge, skills or experience, this company which is joint-stock company that fulfils either of the knowledge, skills and experience is taken into account on assessing following cases: 1) its shares are traded on the Serbian regulated the degree of diligence. It is considered that the members of the market or multilateral trade platform (MTP); or 2) it has over 100 company management may also base their actions on information shareholders on the last day of each of the preceding three months and opinions of persons who are experts in a particular field, for and share capital of at least EUR 3,000,000. whom they reasonably believe that they acted with diligence in that A person is obliged to publish a takeover bid when, directly or case. The member of the company management who proves that indirectly, acting solely or jointly, he/she acquires shares with voting they acted in keeping with their due diligence duty shall not be held rights of the target company which, together with the shares he/ liable for damages incurred by the company as a result of such act. Serbia she already holds, surpass the threshold of 25% of the shares with One-tier management: voting rights of the target company (“control threshold”). After Any person with legal capacity may be a director. The company going above the control threshold and publishing the takeover bid, statute may also lay down further stipulations with which a potential the acquirer is obliged to publish a takeover bid when, acting solely director must comply. A director may not be: 1) a director or a or jointly, through direct or indirect acquiring of shares with voting member of the supervisory board in more than five companies; 2) a rights of the target company increases the percentage of voting person sentenced for a crime against the economy, during a period rights by more than 10% (“additional threshold”). Exceptionally, of five years, as of the day of finality of the ruling, where this period the acquirer is obliged to publish a takeover bid when, acting solely does not include the time spent serving a prison sentence; or 3) a or jointly, through direct or indirect acquiring of shares with voting person imposed with a security injunction prohibiting him from rights of the target company increases the percentage of voting conducting the activity which constitutes the predominant business rights by less than 10%, if with such acquisition he/she will exceed activity of the company, for the duration of such prohibition. the threshold of 75% of the voting rights (“the final threshold”). A company has one or more directors. The number of directors of a However, there is no duty to publish a takeover bid for the acquirer company is set out by the company statute. If a company has three or who, after reaching the mentioned final threshold of at least 75% of more directors, they make up the board of directors of the company. shares with voting rights, further acquires shares with voting rights. Provisions of the LoC on the board of directors apply mutatis mutandis The LoT also provides for certain exceptions to the above duty to to a company that has one or two directors, except for the provisions on publish a takeover bid. the meetings of the board of directors. A public joint-stock company In addition, separate competition laws requiring clearance from has a board of directors which comprises at least three directors. A the Serbian Commission for Protection of Competition might be director is registered in accordance with the registration act. applicable prior to carrying out mergers or acquisitions in certain Directors may be: 1) executive directors; or 2) non-executive cases. Furthermore, a separate clearance might also be needed directors. If a company has less than three directors, each director from the National Bank of Serbia prior to acquiring a qualified is an executive director. A public joint-stock company shall have shareholding in certain companies active in the financial sector, such non-executive directors whose number is higher than the number of as banks, insurance companies, etc. executive directors. Executive directors conduct the operations of the company and are legal representatives of the company, unless 3 Management Body and Management the company statute prescribes that only some executive directors represent the company. Directors may appoint one of the executive directors authorised to represent the company to be the general 3.1 Who manages the corporate entity/entities and how? manager of the company. The general manager of the company coordinates the work of executive directors and organises the According to Serbian law, management of the company may be operations of the company. The company statute or a decision of the organised as a single-tier management structure or as a two-tier general meeting may lay down the requirements that a director must management structure. The statute of the company prescribes fulfil in order to be appointed as the general manager, and prescribe whether the management of the company is organised as single tier in detail its authorities and competences. Non-executive directors or a two-tier. oversee the work of executive directors, propose a business strategy In case of a single-tier management structure, company bodies are of the company and oversee its implementation. Non-executive classed as the shareholders’ meeting and one or more directors, i.e. directors decide on granting approval in the cases of existence of board of directors. In case of a two-tier management structure, personal interest of an executive director of the company. A public company bodies are classed as the shareholders’ meeting, supervisory joint-stock company has at least one non-executive director who is at board and one or more executive directors, i.e. executive board. In the same time independent from the company (independent director). case of a sole-member company, the function of the shareholders’ Two-tier management: meeting is exercised by the sole shareholder. Any change in the type I) Executive board (directors): If the company has three or more of management organisation is made in the form of amendments to executive directors, they form an executive board. A public the company statute. joint-stock company has at least three executive directors. Directors, supervisory board members, representatives and Executive directors are subject to the same conditions and limitations for the appointment as discussed above in case procurators are persons with special duties towards the company, one of directors in a one-tier management structure. The number of which is a duty to act in accordance with due diligence standards. of executive directors is determined by the articles of The members of the company management need to perform, in association. Executive directors may have no deputies and that capacity, their duties with due diligence, showing the care of are registered in accordance with the Registration Act. a prudent businessman, and with reasonable conviction that they II) Supervisory board: Supervisory board members are subject act in the company’s best interest. Care of a prudent businessman to the same conditions and limitations for the appointment as implies the degree of attention enacted by a reasonably diligent discussed above in case of directors in a one-tier management person who possesses knowledge, skills and experience which could structure. The supervisory board has at least three members.

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The number of supervisory board members is determined If a company is left without a director, and a new director is not by the articles of association and is odd. Supervisory board registered in the register of business entities within a further 30-day members may have no deputies. Supervisory board members deadline, a shareholder or another interested party may seek that may neither be executive directors, nor procurators of the director of the company be appointed by a court in an urgent non- company. Supervisory board members are registered in contentious proceeding and the court shall render a decision upon accordance with the Registration Act. A public joint-stock the motion within a term of eight days from the day the motion was company has at least one member of the supervisory board received. who is independent from the company. The above provisions regulating the independent director in a one-tier management Two-tier management: structure apply mutatis mutandis to the independent member Executive directors are appointed by the supervisory board of

Serbia of the supervisory board. a company. The appointment commission, if any, nominates a The company adopts by-laws in order to regulate the manner for candidate for an executive director. If no appointment commission conducting and organising internal supervision of operations. has been set up in the company, each member of the supervisory board In public joint-stock companies at least one person competent may nominate a candidate for an executive director. Concerning the for internal supervision of operations shall meet the conditions term of office of the executive directors, the same rules as discussed prescribed for an internal auditor, in accordance with the law above in case of one-tier management apply. The supervisory board governing accounting and auditing. Annual financial statements of may appoint one of the executive directors, authorised to represent public joint-stock companies are subject to audit. the company, to be the general manager of the company. The supervisory board shall appoint a general manager if the company has an executive board. The term of office of an executive director 3.2 How are members of the management body appointed terminates upon the expiry of the period for which he was elected. and removed? If, during his term of office, an executive director stops fulfilling the eligibility requirements, it is deemed that his term of office terminated One-tier management: as of the day of cessation of fulfilment of those requirements. The Directors are appointed by the shareholders’ meeting. A candidate supervisory board may dismiss an executive director even prior to the for the director may be nominated by: 1) a director, i.e. a board of expiry of the term of office for which he was elected without stating directors; 2) an appointment commission, if any; or 3) shareholders reasons. An executive director may, at any time, resign by giving entitled to propose the agenda for the shareholders’ meeting of a written notice to the supervisory board. The resignation produces the company. In a public joint-stock company, a candidate for the effect as of the date of the submission of notice, unless a later date director may be nominated by the appointment commission and is specified therein. If a sole executive director of the company the stockholders entitled to propose an agenda for a session of the resigned, he shall continue to conduct the activities which may not be general meeting of the company. In a public joint-stock company, postponed until appointment of a new director, but not longer than 30 directors are appointed by the cumulative vote, if so prescribed by days as of the day of registration of such resignation, in accordance the company statute. Directors are appointed for a period stipulated with the Registration Act. If within a term of 60 days from the day by the company statute, which may not be longer than four years. when the company remained without the sole executive director, a Upon the expiry of the term of office, a director may be reappointed. new executive director is not elected, the business entities register The LoC also prescribes separate rules for co-opting of directors. shall ex officio, or at the request of an interested party, initiate the procedure of forced liquidation of the company. The term of office of a director terminates upon the expiry of the period for which he was appointed. If, during his term of office, Supervisory board members are appointed by the shareholders’ a director ceases to fulfil the requirements for the duty of the meeting. A candidate for a supervisory board member is nominated company’s director, it is considered that his term of office ceased by: 1) the supervisory board; 2) the appointment commission, if as of the day he ceased fulfilling such requirements. The term of any; or 3) the shareholders entitled to propose an agenda for the office of a director shall terminate if the shareholders’ meeting session of the shareholders’ meeting. fails to adopt the company’s annual financial statements within the The above provisions on the term of office, its termination, dismissal deadline set for holding of an ordinary session of the shareholders’ and co-option of directors in a one-tier management structure meeting. Unless otherwise prescribed by the company statute, the apply mutatis mutandis to the term of office and co-optation of the appointment of a director after termination of the term of office is supervisory board members. A member of the supervisory may at done at the first upcoming session of the shareholders’ meeting, any time resign by giving written notice to the remaining members during which time the director whose term of office terminated of the supervisory board. The resignation produces effect as of the continues to perform his duty, unless his post has been filled by day of submission, unless a later date is specified therein. co-opting. The general meeting of the company may dismiss the There are additional requirements applicable to the management director even prior to the expiry of the term of office for which he of companies active in financial sector such as banks, insurance was appointed, without stating the reasons. A director may resign companies, etc. at any time by giving written notice to the remaining directors. In single director companies, the director submits his resignation by 3.3 What are the main legislative, regulatory and other giving notice to the chairman of the shareholders’ meeting or to sources impacting on contracts and remuneration of the shareholder of the company who owns the highest number of members of the management body? shares carrying the right to vote. The resignation produces effect in relation to the company as of the day of submission, unless a later One-tier management: date was specified therein. The resignation of a director is registered in accordance with the Registration Act. If the sole director of the A person employed in the company may not be a non-executive company resigned, he shall continue to conduct the activities which director. A director is entitled to remuneration for his work, may not be postponed until a new director is appointed, but not for and may also be rewarded by being awarded with shares. The more than 30 days from the day of registration of that resignation in company statute, a decision of the general meeting or a decision of accordance with the Registration Act. the supervisory board if the company has a two-tier management structure determine the remuneration and reward package, as well

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as the method of its determination. Remuneration and rewards may transaction, i.e. undertaking a legal action by the company from depend on the company’s operating results, but remuneration may which a third party has a commercial interest, if such third party not be determined as a share in the company’s profits. Rewards may has a financial relationship with it (or with its affiliated person), and also be in the form of shares, i.e. warrants of the company or another if it can be expected that the existence of such relationship affects company that is affiliated to the company. In a public joint-stock its actions. company, the remuneration and rewards package are presented The members of the company management shall not, for their own separately within the company’s annual financial statements. If personal interest or in the interest of their affiliated persons: 1) use stocks have been given as a reward, there should be a note on the the company’s property; 2) use information they had access to in type, class, number and par value of the stocks, i.e. book value in their official capacity, which otherwise was not publicly available; case of no-par stocks, acquired by the director or the acquisition of 3) abuse their position in the company; or 4) use possibilities for Serbia which he/she is entitled to on those grounds. concluding transactions available to the company. The duty to avoid Two-tier management: The provisions of the LoC relating to the conflict of interest exists regardless of whether the company remuneration of directors apply mutatis mutandis to the remuneration was able to use the assets, information, or conclude the mentioned for the work of executive directors and members of the supervisory transactions. board. According to the LL, rights and duties of a director or other The members of the company management shall keep the company’s legal representatives may be set out in an employment contract or a business secrets. The mentioned duty to keep business secrets exists contract on rights, obligations and responsibilities. A director or other even after they cease to have their official capacity, in the period of legal representative of the employer may establish labour relations two years following the day of termination of that capacity. Articles by means of an employment contract either for a definite or indefinite of association, the company statute, the company’s resolution or period of time. The employment relation for a definite period of time a contract concluded with such member of the management may shall last until the expiry of the period of engaging the director or provide for that period to be longer, but it must not exceed five years. other legal representative of the employer, and/or until his/her release A business secret is defined as information which, if disclosed to a of duty. In case of the conclusion of a contract on rights, obligations third party, may damage the company, as well as information that and responsibilities the director or other legal representative shall has, or may have, economic value because it is not generally known have the rights to remuneration for work, and other rights, obligations or easily available to third parties who could acquire economic and responsibilities in conformity with the contract. On behalf of benefit through its use or disclosure, and with regard towhich the company, the above-mentioned contracts are concluded with the company took appropriate measures to maintain its secrecy. the director or other legal representative by the competent authority A business secret is also information determined by law, another established by law or general act of the employer. regulation or company document as a business secret. A company document: 1) may determine as a business secret only a piece of 3.4 What are the limitations on, and what disclosure is information which meets the conditions set out the LoC; and 2) may required in relation to, interests in securities held by not determine as a business secret all information which refers to members of the management body in the corporate the operation of the company. The information designated to be a entity/entities? business secret may be of a productive, technical, technological, financial or commercial nature, a study or a research finding, as well In general terms, the members of the company management are as a document, formula, drawing, facility, method, procedure, notice not limited in their right to hold shares in the corporate entity/ or internal instruction, and the like. entities. However, according to the LoC, directors, supervisory A member of the company management may not, without obtaining board members, representatives and procurators have in general approval: 1) have the capacity of a general partner, a member of special duties towards the company, such as inter alia: 1) a duty to a limited liability company who own a significant share in the keep the company secret; 2) a duty to avoid conflict of interest; 3) a company’s share capital or a limited liability company member who duty to keep business secrets; and 4) a duty to abide by any ban on is the controlling member of the company in terms of the LoC; be competition. In some of these situations, there are certain disclosure a shareholder who owns a significant share in the company’s share duties on behalf of the company manager(s) in question and also capital or a shareholder who is the controlling shareholder of the some possibilities for approval of certain actions by company bodies company in terms of the LoC; be a director, supervisory board that have competence to act in that particular situation. member, representative or procurator; or liquidator (other persons The member of the company management shall notify the board of may also be designated by means the company statute) in another directors, i.e. supervisory board in case of a company with a two- company which has the same or similar scope of business activity tier management structure, of the existence of any personal interest (hereinafter referred to as: the competing company); 2) be a sole (or interest of its affiliated person) in the legal transaction entered trader who has the same or similar scope of business activity; 3) into by the company, or in the legal action taken by the company. be employed in a competing company; 4) be otherwise engaged in In case of a company which has one director, the notification is a competing company; or 5) be a member or founder of another sent to the shareholders’ meeting, i.e. supervisory board in case of legal entity that has the same or similar scope of business activity. a two-tier management structure. It is considered that there is a Articles of association, or the company statute: 1) may extend the personal interest of a member of the company management in case mentioned ban to other persons, but may not intrude upon these of: 1) entering into a legal transaction between the company and persons’ acquired rights; 2) may determine that the ban is valid that person (or its affiliated person); 2) a legal action (taking actions even after the termination of the capacity, but for no longer than in court and other proceedings, waiving the rights, and similar) two years; and 3) may designate tasks, the manner or place of their that the company undertakes towards this person (or towards its performance that do not constitute a breach of the duty to abide by affiliated person); 3) entering into a legal transaction between the the ban on competition. This ban is not relevant if there is only one company and a third party, or undertaking a legal action towards a company member. third party, if such third party has a financial relationship with it (or with its affiliated person), and if it can be expected that the existence of such a relationship affects its actions; or 4) entering into a legal

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rules of its procedure which must be in accordance with the LoC, 3.5 What is the process for meetings of members of the the company statute and supervisory board decisions. management body? The above-mentioned rules on method of work of the board of directors, its sessions, their convening, quorum and method of One-tier management: holding thereof, presence of other persons and its decision-making The company statute may regulate the method of work of the board in a one-tier management structure apply mutatis mutandis to the of directors and the board of directors may also adopt the rules of supervisory board. its procedure which is in accordance with the LoC and the company statute. The board of directors of a public joint-stock company 3.6 What are the principal general legal duties and

Serbia shall adopt the rules of procedure of the board of directors at its liabilities of members of the management body? first session. The board of directors of a public joint-stock company holds at least four sessions a year. If the chairman of the board of directors fails to convene a board session at the written request of According to the LoC, in general, directors, supervisory board any of the directors, in the manner that the session is held within 30 members, representatives and procurators have special duties days from the day the request was submitted, the session may also towards the company such as: 1) a duty to act with due diligence, be convened by that director stating the reason for convening the showing the care of a prudent businessman, and with reasonable session and proposing an agenda. A written invitation for a session conviction that their actions are in the company’s best interest; 2) of the board of directors stating the agenda incorporated with files a duty to report transactions and actions in which there is personal for the session is served on directors within the term set forth by interest; 3) a duty to avoid conflicts of interest; 4) a duty to keep the articles of association or the rules of procedure of the board business secrets; and 5) a duty to abide by a ban on competition. of directors, and if such term is not prescribed, the invitation is In addition, according to the LoCM, the director and members served eight days prior to the day of the session, at the latest, unless of the management board of the issuer, unless a member of the otherwise agreed by all directors. Decisions passed at the session of management board has specifically voted against authorisation of the board of directors which has not been convened in accordance the public offering, are considered legally responsible in the event with the LoC, with the company statute or the rules of procedure of that a prospectus or summary contains materially false, inaccurate the board of directors, are not valid, unless otherwise agreed by all or misleading information, or omits material facts. directors. A majority of the total number of directors constitutes a One-tier management: quorum for the work of a session of the board of directors, unless The board of directors, at an ordinary session of the general meeting a higher number is prescribed by the company statute or the rules submits reports on the following: 1) accounting and financial of procedure of the board of directors. Sessions of the board of reporting practices of the company and its affiliated companies, if directors may also be held in writing or electronically, by phone, any; 2) compliance of the company’s operations with the law and telegraph, fax or some other means of audio-visual communication, other regulations; 3) qualification and independence of the company provided none of the directors oppose it in writing, unless otherwise auditors in relation to the company, if the financial statements of prescribed by the company statute or the rules of procedure of the the company were subject to an audit; and 4) contracts concluded board of directors. Absent directors may also vote in writing, and between the company and directors, as well as with persons affiliated then they are deemed to have attended the session for the purposes to them in terms of the LoC. of quorum, unless otherwise prescribed by the company statute or the rules of procedure of the board of directors. The attendance of A director is liable to the company for damages he/she caused to it the company auditor at the session of the board of directors, at which by a breach of the provisions of the LoC, company statute or of a the company’s financial statements are discussed, is mandatory. The resolution of the shareholders’ meeting. Exceptionally, a director board of directors passes decisions by a majority vote of the directors shall not be liable for damages if he/she acted in accordance with a present, unless a higher majority is prescribed by the company resolution of the shareholders’ meeting. statute or the rules of procedure. If during decision-making, the If the damage occurs as a consequence of a decision of the board of votes of directors are evenly distributed, the chairman of the board directors, all the directors who voted for that decision are liable for of directors has the casting vote, unless otherwise prescribed by the the damages. In that case, a director who abstained from voting is articles of association or the rules of procedure. deemed to have voted for the decision in respect of the liability for the The board of directors may set up commissions to assist it in its work, damages. If a director neither attended the board of directors session particularly for the purpose of preparing decisions it adopts, i.e. at which the decision was passed, nor voted for it in another manner, supervising the implementation of certain decisions, or performing it is deemed that he/she voted for that decision in respect of the particular expert tasks for the needs of the board of directors. The liability for damages, if he/she failed to oppose the decision in writing board of directors of a public joint-stock company shall set up an within a term of eight days upon becoming aware of its adoption. The audit commission. company’s claim for damages becomes statute-barred within a term of three years, counting from the day the damage occurred. Two-tier management: A company may not waive a claim for damages, other than in The executive board renders decisions and acts outside sessions. If accordance with a resolution of the shareholders’ meeting of the executive directors disagree on a certain issue, the general manager company which is passed by a three-fourths majority vote of the may convene a session of the executive board. At the session, a present shareholders, but such a resolution may not be passed if the decision is rendered by a majority vote of the executive directors, and shareholders that hold or represent at least 10% of the share capital in the event of an even distribution of votes the general manager has of the company oppose it. a casting vote. The provisions on sessions of the board of directors in a one-tier management structure that are discussed above apply Two-tier management: mutatis mutandis to the quorum for holding, and the method of The same rules as discussed above on liability of executive directors holding the sessions of the executive board. The company statute and reporting obligations apply mutatis mutandis to the liability and and decision of the supervisory board may regulate the method of the reporting obligation of the executive board and the supervisory work of the executive board, and the executive board may adopt board.

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observe the limitations regarding the closing of certain transactions 3.7 What are the main specific corporate governance or types of affairs that require the consent of the supervisory board or responsibilities/functions of members of the the shareholders’ meeting, and which are prescribed by the LoC, the management body and what are perceived to be the company statute, resolutions of the general meeting and decisions of key, current challenges for the management body? the supervisory board. The company statute, resolution of the general meeting or a decision of the supervisory board, if the supervisory One-tier management: board is so authorised by the company statute, may limit some or all The board of directors has the following competences: 1) defining executive directors in representing the company by the co-signature business strategy and business objectives of the company; 2) of the procurator. An executive director may neither issue a power conducting the company’s operations and defining the internal

of attorney for representation, nor represent the company in a dispute Serbia organisation of the company; 3) performing internal supervision over in which he/she is the opposing party, and in case the company has the company’s operations; 4) establishing the company’s accounting no other executive director authorised to represent the company such policies and risk management policies; 5) being liable for accuracy of power of attorney is issued by the supervisory board. The executive the company’s ledgers; 6) being liable for accuracy of the company’s board: 1) manages the operations of the company and establishes the financial statements; 7) issuing and revoking a procuration; 8) internal organisation of the company; 2) is responsible for the accuracy convening the sessions of shareholders’ meeting of the company of the company’s ledgers; 3) is responsible for the accuracy of the and determining a proposal of the agenda with draft resolutions; 9) company’s financial statements; 4) prepares sessions of the general issuing authorised shares, if so empowered by the company statute meeting of the company and proposes the agenda to the supervisory or a resolution of the shareholders’ meeting; 10) determining the board; 5) calculates the amounts of dividend which, in accordance issue price of shares and other securities in accordance with the LoC; with the LoC, the company statute and a decision of the shareholders’ 11) establishing the market value of stocks in accordance with the meeting, belong to certain classes of shareholders, determines the LoC; 12) deciding on the acquisition of own shares in accordance day and procedure of their payment, and also determines the method with the LoC; 13) calculating the amounts of the dividends, of their payment within the scope of authorisations given to it by the which, in compliance with the LoC, the company statute and a company statute or a resolution of the general meeting; 6) executes resolution of the shareholders’ meeting, belong to certain classes of the decisions of the shareholders’ meeting; and 7) performs other shareholders, determining the day and procedure of their payment, tasks and makes decisions in accordance with the LoC, company and also determining the method of their payment within the scope statute, resolutions of the general meeting and decisions of the of authorisations given to the board under the company statute or a supervisory board. The issues falling within the scope of work of resolution of the shareholders’ meeting; 14) passing a decision on the the executive board may not be transferred to the supervisory board distribution of interim dividends to the stockholders, in accordance of the company. When managing the company’s operations, the with the LoC; 15) proposing to the general meeting a policy of executive board acts independently. remunerations for the directors, if this was not defined by the articles The scope of work of the supervisory board is as follows: 1) of association, and proposing employment contracts, i.e. contracts for determines the business strategy and business objectives of the hiring the directors on other grounds; 16) implementing the decisions company and oversees their fulfilment; 2) supervises the work of of the shareholders’ meeting; and 17) performing other duties and executive directors; 3) performs internal control of the company’s rendering decisions in compliance with the LoC, the company statute operations; 4) establishes accounting policies of the company and and resolutions of the shareholders’ meeting. The issues falling risk management policies; 5) determines financial statements of within the scope of competence of the board of directors: 1) may not the company and submits them to the shareholders’ meeting for be delegated to executive directors of the company; and 2) may be adoption; 6) grants and revokes a procuration; 7) convenes sessions transferred into the competence of the shareholders’ meeting only by of the shareholders’ meeting and determines the proposal of the a decision of the board of directors, unless otherwise prescribed by agenda; 8) issues authorised shares, if so empowered by the company the company statute. statute or a resolution of the shareholders’ meeting; 9) determines Two-tier management: the issue price of shares and other securities, in accordance with the The scope of work of the executive directors is generally the same LoC; 10) determines the market value of shares, in accordance with as discussed above in case of directors in a one-tier management the LoC; 11) renders a decision on the acquisition of own shares in structure. However, the performance, i.e. undertaking of the accordance with the LoC; 12) renders a decision on the distribution following tasks requires the consent of the supervisory board: 1) of interim dividends to shareholders, in the cases referred to in the acquisition, disposal and encumbrance of shares and stocks that the LoC; 13) proposes to the shareholders’ meeting of the company a company holds in other legal persons; 2) acquisition, disposal and policy of remuneration for the executive directors, if such policy is encumbrance of immovable property; 3) getting a credit facility, not prescribed by the company statute, and proposes employment i.e. getting and granting loans, creating security interest on the contracts, i.e. contracts for hiring executive directors; 14) grants company’s assets, as well as giving sureties and guarantees for third consent to the executive directors for entering into transactions or party liabilities; and 4) other transactions which fall, as prescribed undertaking actions in accordance with the LoC, company statute, by the LoC, in the scope of work of the supervisory board. The resolution of the general meeting and a decision of the supervisory company statute or a decision of the supervisory board may set board; and 15) performs other tasks and renders decisions in forth: 1) that the consent of the supervisory board is not necessary compliance with the LoC, company statute and resolutions of the for transactions referred to in items 1) to 3), if such transactions are shareholders’ meeting. The issues that fall within the scope of work undertaken within the scope of the company’s regular operations; of the supervisory board: 1) may not be transferred to the executive and 2) the value of transactions referred to in item 3) that may be directors of the company; and 2) may be transferred into the performed i.e. undertaken without the consent of the supervisory competence of the shareholders’ meeting of the company only by a board. The company statute or a decision of the supervisory board decision of the supervisory board, if not stipulated otherwise by the may also set forth other transactions for whose performance i.e. company statute. The supervisory board decides whether to grant undertaking consent of the supervisory board is needed. When approval in cases where there is a personal interest of a company’s managing the company’s operations, the executive directors shall executive director.

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protection of creditors in case of changes of corporate status; and 3.8 What public disclosures concerning management 10) protection of competitors in other specified situations, such as body practices are required? responsibility in situations where incorporation is null and void, responsibility of founders for obligations before incorporations, etc. A public joint-stock company shall publish the annual report on According to LEIA, the environmental impact assessments is operations and the consolidated annual report on operations, in elaborated for certain projects in the fields of industry, mining, accordance with the law governing the capital market, as well as energy production, transport, tourism, agriculture, forestry, water registering them in compliance with the registration act. management, waste management and utility services, as well The statement on application of the code of corporate management as for all the projects that are planned in areas with protected

Serbia is an integral part of the annual report on the operation of a public natural resources of special value and within the protected zones joint-stock company and includes in particular: 1) notification about of immobile cultural resources. A developer may not commence the code of corporate management applied by the company, as well the project implementation without having previously completed as the place where its text is publicly available; 2) all important the impact assessment procedure and obtained the approval of the notifications regarding the practice of corporate management environmental impact assessment study (“EIA study”) from the exercised by the company, in particular those that are not expressly competent authority. The public concerned is an active party in such prescribed by law; and 3) derogations from the rules of the code of impact assessment procedure. Public concerned includes the public corporate management, if such derogations exist and the explanation affected by or likely to be affected by the project, including non- of such derogations. governmental organisations that promote environmental protection and are registered with the competent authority. 3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others? 4.3 What, if any, is the law, regulation and practice concerning corporate social responsibility? According to Serbian law, it is possible to enter into an agreement with a golden parachute clause between the company and the It is up to each company to decide whether and to what extent it member of the management. Such clause would stipulate that the will incorporate corporate social responsibility in their business latter will receive certain significant benefits in cases of dismissal. strategy. There is a visible trend led by the local subsidiaries of large international companies in supporting social projects that are of the importance to local communities. 4 Other Stakeholders

5 Transparency and Reporting 4.1 What, if any, is the role of employees in corporate governance? 5.1 Who is responsible for disclosure and transparency? According to the LL, there is a possibility for employees who work for a company with over 50 employees to establish a council of According to the LoAcc, the accounting is carried out in accordance employees. The council of employees is entitled to render opinion with the Framework for the Preparation and Presentation of and participate in decision-making relating to economic and social Financial Statements, the International Accounting Standards – rights of employees, in the way and under the conditions specified IAS, International Financial Reporting Standards – IFRS, and by law and the Company General Labour Act. However, this legal related interpretations published by the International Financial institute is still only a theoretical option in most if not all Serbian Reporting Interpretations Committee – IFRIC, subsequent companies and it remains to be seen if it will be used more in the amendments to those standards and related interpretations, approved future. by the International Accounting Standards Board – IASB, the The other possibility for employees to influence corporate translation of which was determined and published by the ministry governance to a certain extent is to organise a trade union. The trade responsible for finance affairs. The LoAcc prescribes that the legal union is entitled to be notified by the employer regarding economic, representative, management body and supervisory body of a legal labour and social matters that are significant for the position of person in accordance with the law, or a sole proprietor, as well as employees, and/or trade union members. Trade unions are very the person responsible for keeping books of account and preparing active in Serbia. financial statements is responsible for a true and fair presentation of the financial position and operating performance of the legal person. The legal representative of a legal person or a sole proprietor shall 4.2 What, if any, is the role of other stakeholders in corporate governance? sign the financial statements.

Serbian law prescribes special rules which aim to protect the interests 5.2 What corporate governance related disclosures are of a company’s creditors: 1) the ban on a reduction of share capital required? of a company that is not aimed for covering losses (reduction in a regular procedure), unless the creditors have been offered adequate There are several corporate governance related disclosures collateral; 2) protection of interests of creditors in case of changes mandated by the Serbian law: 1) periodic publication of the financial in corporate status; 3) the obligation to maintain the amount of share statements; 2) notification on major shareholdings; and 3) prospectus capital of the company; 4) the ban on payments to shareholders if According to the LoCM, a public company shall prepare and make such payments would lead to the insolvency of the company; 5) the its full and exhaustive annual report public, communicate it to the possibility of “piercing of the corporate veil” of the company; 6) Securities Commission and the regulated market or multilateral upholding accounting and auditing standards; 7) a responsibility for trading facility (MTF), if its securities are admitted to trading, at the transparency; 8) provisions on responsibility of directors; 9) special latest four months after the end of each financial year and shall ensure

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that the annual financial report remains publicly available for at least EUR 4.4 million in dinar equivalent (statutory audit). In addition, five years after it has been made available to the public. The annual audit of the consolidated financial statements is mandatory for report contains: 1) annual financial statements, including auditors’ parent companies that prepare consolidated financial statements in reports; 2) annual reports of operations of the company; and 3) accordance with the law regulating accounting. responsibility statements made by persons responsible for the making The audit report is made in accordance with ISA and shall contain of the annual report. The mentioned annual report of operations of at least the following: 1) an introduction listing the financial a company must contain: 1) a fair review of the development and statements being audited, together with accounting policies used for performance of the business and especially the financial position their making; 2) a description of the purpose and scope of the audit, of the company, as well as the information important for the stating the auditing standards in accordance with which the audit was assessment of the company’s assets; 2) a description of the expected performed; 3) an opinion of a licensed certified auditor that clearly Serbia development of the company for the following period, changes in expresses whether the financial statements give a true and fair view business policies and the principal risks and threats to the company of the financial position of the legal entity in accordance with the operations; 3) all the significant business events that occurred after relevant legal framework, as well as whether the annual financial the end of the financial year for which the report has been prepared; statements are in accordance with special regulations governing the 4) all significant transactions with related parties; and 5) company operations of the legal person, if that is provided in these regulations. activities regarding research and development. The auditor’s opinion may be positive, reserved, negative, or In addition, public companies the securities of which are traded the certified auditor may refrain from expressing an opinion if on the regulated market shall compile their half-yearly financial he is not able to express it; 4) special warnings and problems to reports in accordance with the rules for the annual reports, as soon which the licensed certified auditor wishes to draw attention, but as possible and within two months following the completion of the without expressing a reserved opinion; and 5) an opinion on the first six-month period of the financial year, make it public and file conformity of the business report with the financial statements for it with the Securities Commission and the regulated market where the same financial year. The audit report is drawn up and published their securities are admitted to trading. The company shall ensure in the Serbian language and signed by a key audit partner. Financial that the report remains publicly available for at least five years after statements that were audited are attached to the audit report. it has been made available to the public. Finally, public companies A key audit partner as the auditor of the group is responsible for the securities of which are listed on the regulated market are the audit of consolidated financial statements. A licensed certified required to compile their quarterly reports, make them available to auditor as the auditor of the group shall review and safeguard the the public and file them with the Securities Commission and the working documentation that is part of audit work of another audit market operator, within 45 days following the end of each of the firm that audited the financial statements of legal persons within first three quarters of the current financial year, and it shall ensure the economic entity. If the audit of the financial statements of that the report remains available to the public for at least five years the subsidiary within the economic unit consisting of parent and after its publication. subsidiary legal persons is conducted by the third country auditor In cases when a natural or legal person directly or indirectly reaches, or third country audit firm, the key audit partner as the auditor of exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, the group is responsible for delivering the documentation on the 30%, 50% and 75% of voting rights of the same joint-stock company work of the third country auditor or third country audit firm for the the shares of which are traded on the regulated market or MTF, the purposes of quality control and supervision. person shall notify the Securities Commission, the company and The provisions of the LoAud secure independence of the auditors the regulated market or MTF on which the shares are admitted to and auditing companies through the ban on carrying out audits in trading about such event. The mentioned obligation applies also to certain situations. reaching, exceeding or falling below the stipulated thresholds in An auditing firm may not perform the audit of a legal person: 1) the joint-stock company, as a result of events in number of shares in which it has shares or stocks; 2) that owns the shares or stocks comprising the issuer’s core capital or a change in the number of of the audit firm; 3) if the audit firm, or any organisational unit in votes stemming from such shares. the Network to which it belongs, or an affiliated person with the audit firm, provided the legal person in the year for which the 5.3 What is the role of audit and auditors in such audit is performed, the following services (important services): disclosures? (i) bookkeeping and preparation of financial statements; (ii) evaluation of the value of equity, assets and/or liabilities that According to the LoAud, an audit is conducted in accordance with will be reflected in the financial statements, or where there isan the International Standards on Auditing (ISA) and the International obvious conflict of interest; (iii) representation in court proceedings Standard on Quality Control (ISQC) and related opinions and regarding tax matters; (iv) tax calculation and filing of tax returns standards that are published by the International Auditing and for individuals – managers in the finance sector in the company; Assurance Standards Board (IAASB) of the International Federation (v) advice on accounting entries of tax liabilities; (vi) creation of Accountants (IFAC), amendments to these standards, as well as of a system of internal audit and internal control, as well as their future standards issued or adopted by this body, the translation of implementation; (vii) creation and implementation of information which was determined and published by the ministry competent for systems in the accounting field; (viii) actuarial services; and (ix) finance affairs. other services, which, in specific circumstances, could compromise Pursuant to the LoAud, there are two instances in which the audit the independence of the licensed authorised auditor or the audit is mandatory. An audit is mandatory for regular annual financial firm and/or to influence the evaluation of items in the financial statements of large and medium-sized legal entities classified in statements; or 4) if it is affiliated with the legal person in any accordance with the law regulating accounting, public companies other way, so that such affiliation may affect the independence and in accordance with the law regulating the capital market regardless impartiality of the audit. of their size, as well as any legal person or sole proprietor whose Licensed certified auditors may not perform audits of the following business income earned in the preceding business year exceeds legal entities: 1) in which he is the owner of any shares or stocks; 2)

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in which he is a director or a member of the board of managers or the supervisory board, proxy or a legal representative; 3) in which 5.4 What corporate governance information should be a director or a member of the board of managers or the supervisory published on websites? board, or a proxy is his blood relative in the direct line, blood relative in the collateral line up to the third degree of consanguinity According to the LoCM, issuers the securities of which are admitted and spouse; 4) in which he/she provided the important services as to trading on a regulated market or MTF shall at least annually provide defined above for the year for which the audit is performed; and 5) a registration document that contains or refers to all information if other circumstances occur that may affect the independence of the that they have published or made available to the public over the licensed certified auditor. preceding 12 months in compliance with their obligations under the LoCM, respective bylaws and the law governing companies. The Serbia Audit firms shall, not later than every seven years since the start annual registration document about the published information is of their audit operations in the field of financial statements and the filed with the Securities Commission within 20 working days after same subject of audit, replace the licensed certified auditor who the publication of the issuer’s annual audited financial statements signs the audit report, or the key audit partner, unless a special law and made available to the public. Where the document refers to stipulates otherwise. They may again perform the audit for the same information, it is stated where the information can be obtained, subject of audit two years after the date of signing of the last audit and the document shall include a statement indicating that some report for that subject in accordance with the mentioned terms. information may be out-of-date, if such is the case. A key audit partner may not be appointed as a member of the The mentioned obligation shall not apply to issuers the only management body of the subject of audit the audit reports of which securities of which admitted to trading on a securities market are were signed by him, for at least two years after termination of debt securities the denomination of which per unit is at least EUR employment in the audit firm. 50,000 in dinar equivalent.

Dr. Gorana Kršikapa LL.M. Ljubica Tomić TSG Tomić Sinđelić Groza TSG Tomić Sinđelić Groza Carice Milice 3 Carice Milice 3 11000 Belgrade 11000 Belgrade Serbia Serbia

Tel: +381 11 3285 227 / 3285 208 / Tel: +381 11 3285 227 / 3285 208 / 3285 153 3285 153 Email: [email protected] Email: [email protected] URL: www.tsg.rs URL: www.tsg.rs

Dr. Gorana Kršikapa LL.M. is attorney at law at TSG Tomić Sinđelić Ljubica Tomic is a co-founder and managing partner at TSG Tomić Groza Law Office in Belgrade, Serbia. She has an international Sinđelić Groza Law Office in Belgrade, Serbia. She is head ofthe educational and professional background and specialises in particular firm’s corporate law team and corporate governance practice. She in corporate, commercial, competition and EU law. She works in has completed the Corporate Governance Specialization at the German, English and Serbian. Law Faculty in Belgrade, established within the IFC-World bank programme. Her 17 years of practice have largely been devoted to complex transactions, corporate governance and regulatory matters in Serbia. She works in German, English and Serbian.

TSG Law Office was founded in 2000 by a group of Serbian lawyers of international orientation. Today, a highly-efficient team of professionals renders legal services under the protected trademark, TSG, in German, English and Serbian. TSG’s practice areas include corporate law and corporate governance, mergers & acquisitions, foreign investments & state incentives, commercial law, franchising, intellectual property, antitrust, public procurement, employment law, real estate & construction, media law, litigation & enforcement, arbitration. TSG’s professional team has been described as “creating an atmosphere of mutual trust and co-operation with investors in a very volatile and challenging environment”, “very responsive and responsible, the TSG team takes an active role in representing its clients and offers personal and tailor-made advice”. “These lawyers find the time to understand client’s business, before giving advice. Their attentive approach is outstanding... they focus on relevant problems from an economic point of view”. (The Legal 500 2008, The Legal 500 2010, The Legal 500 2014 and 2016.) TSG Law Office was awarded the Corporate INTL annual legal award as the Corporate Governance Law Firm of the year in Serbia for 2015.

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Singapore Benjamin Choo

Edmond Pereira Law Corporation Kimberly Neo

penalties on companies for breaches of the Listing Rules, ranging 1 Setting the Scene – Sources and from public censure and reprimands to delisting. Where a reference Overview to Listing Rules is made in this Chapter, it refers to the Listing Rules of the Main Board. 1.1 What are the main corporate entities to be discussed? In addition, the Singapore Code on Take-overs and Mergers (the “TO Code”) issued by the MAS, is also relevant to the corporate This chapter focuses on public companies limited by shares, which governance of listed companies in situations of take-overs and are listed either on the Main Board or the junior board, Catalist, mergers. The TO Code is administered and enforced by the of the Singapore Exchange Securities Trading Limited (“SGX”). Securities Industry Council (“SIC”). While the TO Code is non- Where this chapter refers to companies, or shareholders or directors statutory in nature, the SIC has powers under law to investigate any of listed companies, it refers to companies listed on either the Main dealings in securities that are connected to a take-over or merger. Board or Catalist of SGX. Corporate governance is also relevant In the event of breach, the SIC has recourse to private reprimand or to other entities listed on SGX, including real estate investment public censure, or in flagrant cases, to further action as it deems fit. trusts (“REITs”) and business trusts (“BTs”), as well as private The constitution of the company (the “Constitution”), which companies limited by shares. However, these will not be discussed primarily governs the relationship between shareholders and the in this chapter. company inter se, would also prescribe the overarching rules for As at March 2017, there are 753 public companies with their shares the company including, for example, procedures for board and listed on either the Main Board or Catalist of SGX, with a total shareholders’ meetings, the powers of directors and other aspects market capitalisation of approximately S$1 trillion. There are also relating to governance. 41 REITs and BTs listed on SGX. This information was obtained from SGX’s website. 1.3 What are the current topical issues, developments, The information in this chapter is up to date as of 5 May 2017, trends and challenges in corporate governance? and only provides a general overview of the corporate governance framework in Singapore. On 27 February 2017, the MAS announced that it formed the Corporate Governance Council (“CGC”) to review the Code. The CGC will be considering how the “comply-or-explain” regime 1.2 What are the main legislative, regulatory and other under the Code can be made more effective and exploring ways to corporate governance sources? improve the quality of a company’s disclosure of their corporate governance practices and explanations of deviations from the The Singapore corporate governance framework comprises a Code. The CGC will also propose mechanisms for monitoring the balance of mandatory rules, captured mainly under the Companies progress made by listed companies in strengthening their corporate Act (Chapter 50) (the “CA”), the Securities and Futures Act (Chapter governance practices. 289) (the “SFA”), the listing rules of SGX for listed companies (“Listing Rules”), and best practice recommendations in the form In early 2016, the CA was amended to remove the one-share of the Code of Corporate Governance (the “Code”), issued by the one-vote restriction in public companies, effectively paving the Monetary Authority of Singapore (“MAS”). Under a “comply or way for SGX to permit the listing of companies with dual-class explain” regime, listed companies are required to comply with the shares (“DCS”) in Singapore. The envisaged DCS structure listing Code or provide an appropriate explanation for any deviations from framework is intended to enhance SGX’s attractiveness as a listing the guidelines of the Code. Failure to do so would amount to a venue. By giving certain shareholders voting power or other related breach of the Listing Rules. rights disproportionate to their shareholding, the DCS structure is commonly associated with certain corporate governance risks. The CA and the SFA, which are the principal legislative sources, These include entrenchment of the controlling shareholder and are administered by the Accounting and Corporate Regulatory expropriation, where the controlling shareholder can further his own Authority (“ACRA”) and MAS respectively. There is also relevant interest at the expense of other shareholders. The Listings Advisory subsidiary legislation which supplements both the CA and the SFA. Committee (“LAC”), established by SGX in 2015 to supplement its SGX, both a listed securities exchange and a regulator, is the main listings regulatory process and formulate listing policies, voted in body that administers, regulates and monitors compliance with the favour of permitting a company with DCS structure to list on SGX requirements of the Listing Rules. As a regulator, SGX can impose and made recommendations to safeguard the rights of shareholders.

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SGX conducted a public consultation, which ended on 17 April 2017, on whether DCS should be introduced, and the appropriate 2.3 What shareholder meetings are commonly held and safeguards that should be taken. At present, SGX is considering the what rights do shareholders have as regards them? feedback received and has not yet announced its decision. Companies must hold their AGM once every calendar year, and not The subject of independence of directors remains a hotly debated more than 15 months from the last preceding meeting, in accordance one. In particular, the Code provides that “a director who has served with the CA. Under the Listing Rules, the time between the end of on the board of a company for more than 9 years should be subject an issuer’s financial year and the date of its AGM must not exceed to particularly rigorous review in his re-appointment as independent four months. director”. This rule is controversial in its implementation, as there is lack of clarity on what is meant by “particularly rigorous review”. Routine business that is commonly dealt with at AGMs includes

Singapore Based on the Singapore Directorship Report 2016 complied by receiving and adopting directors’ statements and financial the Singapore Institute of Directors (“SID”) and the Institute of statements, re-election of directors, approval of directors’ fees Singapore Chartered Accountants, approximately 64% of the and re-appointment of auditors. In addition, companies may call entities surveyed had at least one independent director serving for shareholder meetings, also known as extraordinary general meeting more than nine years. It has been criticised that many boards simply (“EGM”), to consider specific business matters from time to time declared such directors’ independence without providing any details (including matters discussed in question 2.1). An EGM must be held of the review process undertaken. The effectiveness of this “nine- if requisitioned by shareholders holding 10% of the total number of year rule”, thus, remains largely unsatisfactory. paid-up shares in the company. Unless otherwise stated in the Constitution, EGMs are generally called by: (i) giving members not less than 14 days’ notice in 2 Shareholders writing; or (ii) if there are matters which need to be passed by special resolutions, giving not less than 21 days’ notice in writing. 2.1 What rights and powers do shareholders have in the The Listing Rules provides that all general meetings must be held operation and management of the corporate entity/ in Singapore, unless prohibited by the laws of the jurisdiction of entities? incorporation of the issuer. Further, all resolutions at general meetings of companies shall be voted by poll. Generally, voting While directors are responsible for the overall management of the at general meetings either requires an ordinary resolution (which company, there are certain matters under the CA, the Listing Rules requires a simple majority of those voting in person or by proxy), or and the Constitution, reserved for shareholders’ approval. Some special resolution (requiring a majority of not less than three-fourths examples under the CA are: (i) granting directors the power to issue of those voting in person or by proxy). new shares; (ii) alteration of the Constitution; and (iii) disposal of Shareholders who are unable to attend the general meetings are the whole or substantially the whole of the company’s undertaking entitled to appoint up to two proxies, unless otherwise stated in the or property. Constitution, to attend and vote on their behalf at the general meeting. Under the Listing Rules, matters which require shareholders’ With effect from 3 January 2016, the CA provides an exception for approval include, subject to certain thresholds and exceptions: “relevant intermediaries”, such as banks and capital market service (i) the entry by the company, its unlisted subsidiary or associated licence holders that provide custodial services for securities, to company that it controls, into a transaction with an interested person appoint more than two proxies to attend and vote at such meetings. (which includes a director, chief executive officer CEO(“ ”) and controlling shareholders) (“IPT”); and (ii) an acquisition or disposal 2.4 Can shareholders be liable for acts or omissions of of the company’s assets. the corporate entity/entities?

2.2 What responsibilities, if any, do shareholders have as A company has a separate legal personality and is distinct from regards the corporate governance of their corporate its shareholders. The liability of shareholders in a limited liability entity/entities? company is limited to the amount of their capital contribution on the shares that they have subscribed or agreed to subscribe. Shareholders do not have positive obligations with respect to Although there are exceptional circumstances where the “corporate corporate governance of the company. In a statement on the role veil” may be pierced to impose liability on shareholders (for of shareholders (which is annexed to, but does not form part of the example, where a person is a knowing party to the fraudulent trading Code), it is noted that shareholders’ input on governance matters is engaged in by the company), such circumstances are less likely to useful to strengthen the overall environment for good governance arise in respect of shareholders of a listed company. policies and practices, and convey shareholders’ expectations to the board of directors (the “Board”). Crucially, shareholders should exercise their right to attend general meetings and vote responsibly. 2.5 Can shareholders be disenfranchised? If they do not agree with any proposal tabled at a general meeting, shareholders are encouraged to communicate the reasons for the There are limited situations in which shareholders can be disagreement. disenfranchised. In recent years, the Securities Investors Association (Singapore) For example, in a take-over where the offeror has acquired 90% (“SIAS”), which represents minority retail investors, also helps of the shares which are the subject of the offer, the offeror can organise pre-annual general meeting (“AGM”) meetings with listed exercise its right under section 215(1) of the CA to compulsorily companies, at their members’ requests, to address critical issues acquire the remaining shares, subject to compliance with prescribed ahead of AGMs. procedures. In addition, where an arrangement has been proposed between a company and its shareholders, and a majority in number

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representing three-fourths in value of those present and voting other Commonwealth countries. Under the CA, the business of the approve the arrangement, this will be binding on all the shareholders company is “managed by, or under the direction or supervision of” once it has been approved by the court. the directors. Another example would be in relation to IPTs (referred to in question The Constitution often provides the minimum and maximum 2.1), where, to ensure objectivity, the interested person and his number of directors. The CA requires at least one director who is associates are not allowed to vote on the resolution approving the ordinarily resident in Singapore, while the Listing Rules require transaction. the listed company to have at least two non-executive directors In the event that a company with a DCS structure is allowed to list who are independent and free of any material business of financial on the SGX (discussed in question 1.3), there could be potential connection with the listed company. disenfranchisement of the common shareholders. SGX is exploring Generally, the Board comprises executive and non-executive safeguards to allay such concerns, including making certain directors. Executive directors take an active role in the management Singapore recommendations in the Code on board composition mandatory for of the company, and generally work for the company on a full-time an issuer with a DCS structure, and subjecting the appointment of basis, while non-executive directors perform a more supervisory independent directors to a vote where all shares are treated equally. role with strategic oversight of the company. The CA, however, does not draw a distinction between the duties and liabilities owed by executive and non-executive directors. 2.6 Can shareholders seek enforcement action against members of the management body? The Code stresses the role of independent directors to act as a check and balance on the Board and management of the company, by Generally, the duties of directors are owed to the company, and the requiring at least one-third, or in certain situations, half of the Board company is the proper body to bring a claim against the directors if to be made up of independent directors. An “independent” director those duties are breached. There are, however, limited exceptions to is defined as one who has no relationship with the company, its this. Section 216A of the CA confers the right on shareholders to related corporations, its 10% shareholders or its officers that could bring a derivative action, with the leave of court, against a defaulting interfere, or be reasonably perceived to interfere, with the exercise director in the name of the company in certain circumstances. of the director’s independent business judgment with a view to the Significantly, the application of section 216A was only recently best interests of the company. extended to listed companies pursuant to amendments to the CA. The Code further recommends that the Chairman and CEO should Minority shareholders may be able to seek recourse under section be separate persons to ensure an appropriate balance of power, 216 of the CA if their rights have been unfairly prejudiced in increased accountability and independent decision making. The specified circumstances. This would include a situation where the CEO representing management, has general executive responsibility powers of the directors are being exercised in a manner oppressive to for the conduct of the business and affairs of the company. The the minority shareholder. If such grounds are established, the courts Chairman, on the other hand, is charged with securing good have wide discretion to make orders, including one to regulate the corporate governance amongst other duties. conduct of affairs of the company in the future. The Code advocates the establishment of three board committees: ■ The Nominating Committee (“NC”), which is primarily 2.7 Are there any limitations on, and disclosures responsible for making recommendations to the Board on required, in relation to interests in securities held by board appointments and assessing the independence of shareholders in the corporate entity/entities? directors. ■ The Remuneration Committee (“RC”), which is principally While there are no statutory limits as to how and when a shareholder responsible for forming formal and transparent procedures may acquire shares in a company, a shareholder should be aware of for developing policy on executive remuneration and fixing the remuneration packages of directors. the thresholds under the TO Code. Briefly, a shareholder (referred to as the “Offeror”) incurs an obligation to make a mandatory offer ■ The Audit Committee (“AC”), which is responsible for, inter for all the shares in the company when: (i) the Offeror, together with alia, reviewing the financial reporting, internal audit and external audits and internal controls of the company. his concert parties, acquires shares amounting to 30% or more of the voting rights of the company; and (ii) the Offeror and his concert The Board may, without abdicating its responsibility, delegate the parties, hold not less than 30% but not more than 50% of the voting authority to make decisions to any board committee, and must make rights and any one of them, acquires additional shares carrying more disclosures in respect of such delegation. than 1% of the voting rights in any period of six months. A substantial shareholder (i.e. a shareholder who has an interest in 3.2 How are members of the management body appointed shares holding not less than 5% of the total voting rights) is required and removed? to inform the company, using prescribed forms, within two business days of him becoming aware that: (i) he is a substantial shareholder; The appointment and removal of directors is governed by the CA and (ii) there is a change in the level of percentage of his interest; and (iii) the Constitution, and are typically approved by ordinary resolutions he ceases to be a substantial shareholder. Thereafter, the company is of the shareholders. The Constitution would usually provide that in obliged to make certain regulatory announcements of this information. the event the directors exercise their powers to appoint a director, such person appointed shall hold office until the next AGM and will 3 Management Body and Management then have to stand for re-election. The Code recommends that all directors are required to submit themselves for re-nomination and re-appointment at least once 3.1 Who manages the corporate entity/entities and how? every three years. The Constitution usually provides that one-third of the directors for the time being is subject to retirement by rotation Companies in Singapore adopt a unitary board system, as in many and needs to stand for re-election at each AGM.

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To ensure a formal and transparent process for the appointment and that the Board meets regularly, and as and when deemed appropriate re-appointment of directors to the Board, the Code recommends by the Board members. The number of meetings of the Board disclosing the search process, nominating process and key and Board committees held in the year should be disclosed in the information regarding directors (for example, academic and company’s annual report. professional qualifications) in the company’s annual report.

3.6 What are the principal general legal duties and 3.3 What are the main legislative, regulatory and other liabilities of members of the management body? sources impacting on contracts and remuneration of members of the management body? As fiduciaries of the company, directors owe duties to the company to act in good faith and in the best interest of the company, the duty Singapore As stated in question 3.1, the RC reviews and recommends to to act for the proper purpose, and the duty to avoid conflicts of the Board a general framework of remuneration for the Board interest between his duty to the company and his personal interest. and key management personnel (including the CEO). The RC A director is also under the duty to exercise skill, care and diligence covers all aspects of remuneration, including directors’ fees, in discharging his responsibilities. The minimum objective standard bonuses, and share-based incentives. The Code provides that each is referenced to what is reasonably expected by a director in the company should disclose its remuneration policies, level and mix same position. of remuneration, and the procedure for setting remuneration in the Additionally, under section 157(1) of the CA, “a director shall at all company’s annual report. The remuneration of directors, the CEO times act honestly and use reasonable diligence in the discharge of and at least the top five key management personnel should also be his duties of his office”. Under section 157(2) of the CA, an officer disclosed. or agent of a company must not make improper use of his position Procedurally, the RC’s recommendations are submitted for as an officer or agent of the company or any information acquired endorsement by the entire Board. Thereafter, shareholders’ approval by virtue of his position as an officer or agent of the company to at a general meeting is required, in accordance with the CA, before gain, directly or indirectly, an advantage for himself or for any other emoluments can be made to directors of the company. person to cause detriment to the company. Breaches of directors’ duties under section 157 of the CA, in particular, renders a director 3.4 What are the limitations on, and what disclosure is liable both civilly and criminally. He will also be liable to account required in relation to, interests in securities held by for profits made or damage suffered by the company as a result of members of the management body in the corporate breach. entity/entities? Further, if in the course of the winding up of or proceedings against a company, it appears that a director: (i) knowingly caused the company There are no prohibitions on directors holding shares in the to enter into contracts for debts with no probable or reasonable company. With regards to dealing with securities, directors are expectation that the company will be able to repay the debt; or (ii) generally prohibited from insider trading. It is an offence under the knowingly carried on the business with intent to defraud creditors of SFA if directors, in possession of price-sensitive information, trade the company, the director may be liable for offences under the CA, (either directly or through a third party) or communicate such price- and may even be made personally liable for such debts. sensitive information to a third party who would or be likely to trade in the company’s securities. Price-sensitive information refers to information which is not generally available, and if it were generally 3.7 What are the main specific corporate governance responsibilities/functions of members of the available, might have a material effect on the price or value of the management body and what are perceived to be the shares of the company. key, current challenges for the management body? The Listing Rules further prescribe that directors should not deal in the company’s securities during the period commencing two The Board is collectively responsible for the long-term success of the weeks before the announcement of the quarterly results, and one company. The Code provides guidance on the Board’s role, which month before the announcement of the company’s half- or full-year is to: provide entrepreneurial leadership, set strategic objectives, financial statements. Companies also need to disclose in their annual and ensure that the necessary financial and human resources are in reports a statement as to whether and how it has complied with place for the company to meet its objectives; establish a framework the best practice of devising and adopting an internal compliance of prudent and effective controls which enable risks to be assessed code, which provides guidance to its officers regarding dealing of and managed, including safeguarding of shareholders’ interests and securities by directors. the company’s assets; review management performance; identify Under the SFA, directors need to make disclosures of their interests, the key stakeholder groups and recognise that their perceptions including in shares, debentures or rights to acquire shares in the affect the company’s reputation; set the company’s values and listed company or its related corporation, in the prescribed format standards (including ethical standards), and ensure that obligations within 2 business days of the director becoming aware of such to shareholders and other stakeholders are understood and met; and change or acquiring such interest. It should also be highlighted consider sustainability issues, as part of its strategic formulation. that directors are deemed interested in securities held by a family member (i.e. spouse or children under the age of 21 years). 3.8 What public disclosures concerning management body practices are required? 3.5 What is the process for meetings of members of the management body? Under the Code, specific disclosures that are required to be made in the annual reports of the company include: Board meetings are called by giving notice to all directors, in (i) names of members of, key terms of reference of, and accordance with the Constitution. While there is no set minimum explanation of the role of and the authority delegated to, each number of board meetings under the CA, the Code recommends committee;

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(ii) commentary on the adequacy and effectiveness of the internal placed under more rigorous scrutiny during such exercise. Save for controls, including financial, operational, compliance and the above, there is no ongoing requirement to engage these other information technology controls, and risk management stakeholders in the corporate governance of the company. systems; (iii) assessment of the Board, its Board committees and each director; and 4.3 What, if any, is the law, regulation and practice concerning corporate social responsibility? (iv) the identification of which directors it considers tobe independent. In 2016, the Listing Rules were amended to require all listed companies to issue an annual sustainability report describing 3.9 Are indemnities, or insurance, permitted in relation to the company’s sustainability practices with reference to the five members of the management body and others? primary components (as discussed below) on a “comply or explain” Singapore basis. The introduction of sustainability reporting is necessary, as It is common practice for listed companies to obtain D&O or it provides a more comprehensive picture of the listed company management liability insurance for the directors. The CA allows and allows added transparency in the assessment of the company’s the company to maintain such insurance in respect of liabilities in financial prospects and quality of management. connection with any negligence, default, breach of duty or breach of The five primary components of the sustainability report are (a) trust in relation to the company. identifying material environmental, social and governance (“ESG”) Companies are also allowed to indemnify the directors for liability factors, (b) describing policies, practices and performance in relation incurred to a person other than the company, except for certain to the identified material ESG factors, (c) setting out targets, (d) specified liability (for example, to pay a fine in criminal proceedings). selecting a sustainability reporting framework to report and disclose Save for the maintenance of insurance discussed above, companies the identified material ESG factors and (e) a board statement cannot provide any indemnity for liability attaching to the director stating that the board has considered sustainability issues as part of in connection with any negligence, default, breach of duty or breach its strategic formulation and overseen the sustainability reporting of trust in relation to the company. process. It bears mentioning that companies should identify all material ESG factors that will act as barriers or enablers to achieve business goals in the short, medium and long term. 4 Other Stakeholders Mandatory sustainability reporting only takes effect for any financial year ending on or after 31 December 2017 and companies have up to 4.1 What, if any, is the role of employees in corporate 12 months to prepare their first sustainability report. governance?

While there are no formal corporate governance responsibilities for 5 Transparency and Reporting employees, whistle-blowing by employees is increasingly seen as an important component of the corporate governance framework. 5.1 Who is responsible for disclosure and transparency? The Code recommends that the AC should review the policy by which employees may, in confidence, raise concerns about possible The Board is collectively responsible for managing the company’s improprieties in matters of financial reporting or other matters. disclosures and ensuring transparency. The Board’s role includes Arrangements should be in place for such concerns to be raised and establishing a framework of prudent and effective controls which independently investigated, and for follow-up action to be taken. enables risks to be assessed and managed. As fiduciaries of the The Code further recommends that the existence of a whistle- companies, all directors must objectively discharge their duties and blowing policy be disclosed in the company’s annual report, with responsibilities in the best interest of the company. appropriate disclosure of the procedures. At present, however, there are no overarching laws relating to the protection of whistle- Nevertheless, the Code emphasises the need for a “strong and blowing employees. independent element on the Board, which is able to exercise objective judgment on corporate affairs independently”. The independent directors should form the majority of members of the 4.2 What, if any, is the role of other stakeholders in board committees, which are each tasked with making the process of corporate governance? appointment and remuneration of directors more transparent, as well as ensuring that an annual review of all material controls is conducted. Companies listed on Catalist of SGX, operate under a sponsor regime, in which a sponsor takes on the role of supervisor to ensure the listed company’s compliance with Listing Rules. Continuing 5.2 What corporate governance related disclosures are sponsors are also required to advise the company on corporate required? governance matters or arrange for an appropriate adviser to do so. The listed company must announce its financial statements for the In addition, SIAS and SID are also stakeholders in corporate full financial year, and may, depending on its market capitalisation, governance. Both organisations are consulted for their views relating be required to announce financial statements for each of the first to regulatory changes which affect directors and investors. SIAS, three quarters of its financial year or on a half-yearly basis. In respect in particular, actively promotes corporate governance, and engages of interim financial statements, directors are required to provide listed companies on behalf of minority shareholders, in respect of a confirmation that to the best of their knowledge, nothing has the former’s corporate governance practices. come to the Board’s attention that may render the interim financial As part of the listing process, due diligence is conducted on the statements to be false or misleading in any material aspects. company and interviews may be held with major customers, The Listing Rules also prescribe certain continuous disclosure suppliers and the key management of the company to allow certain obligations aimed at ensuring transparency and accountability disclosures to be made in the prospectus. The company may be

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to shareholders. Under Rule 703 of the Listing Rules, a listed need to report the matter to ACRA immediately. Given that an company is required to, subject to certain limitations, promptly auditor’s independence is crucial, the Listing Rules prescribes that announce any information known to it that is necessary to avoid an audit partner must not be in charge of more than five consecutive the establishment of a false market or would be likely to materially audits for a full financial year, though he may return after two affect the price or value of its securities. Events which likely require years. Any change of auditors would also need to be approved by immediate disclosure include joint ventures, mergers or acquisitions the shareholders. The notice of meeting to approve such change and purchase or sale of a significant asset. The announcement needs would include prescribed information such as specific reasons for to be contain sufficient quantitative information to allow investors the change of auditors, and confirmation from the company as to to evaluate the importance of such event relative to the activities of whether it is aware of any circumstances relating to a change of the listed company. auditors which should be brought to the attention of the shareholders.

Singapore Rule 704 of the Listing Rules further requires the listed company Under section 201B of the CA, besides having to appoint auditors, to make immediate announcements in certain specified situations, listed companies also need to appoint an AC. The AC carries out key including the appointment or resignation of directors. functions, including reviewing significant financial reporting issues, and reviewing and reporting to the board on the adequacy of the company’s internal controls. The Listing Rules further supplements 5.3 What is the role of audit and auditors in such disclosures? that an independent audit may also be commissioned by the AC on the internal controls of the company. The Code further recommends that the AC should establish the practice of meeting with external and The audited financial statements of listed companies must be made internal auditors, without the presence of company’s management. up to a period not more than four months before the AGM, and need to be laid before the shareholders at the AGM together with the auditor’s report. In this regard, a listed company needs to appoint a 5.4 What corporate governance information should be suitable auditing firm that meets its audit obligations. published on websites? Auditors have a key role in uncovering any financial irregularities or defects. If in the course of performing his duties, the auditor is All announcements that need to be made and documents to satisfied that there is a breach or non-observance under the CA and shareholders, including those discussed above, should be first in his opinion, the circumstances are such that the matter has not or released via SGX’s portal SGXNET. The annual reports and will not be adequately dealt with by the comment in the auditors’ sustainability reports should also be made available both on report or by bringing the matter to the directors’ attention, he would SGXNET and on the company’s website. SGXNET is accessible by members of the public.

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Benjamin Choo Kimberly Neo Edmond Pereira Law Corporation Edmond Pereira Law Corporation 133 New Bridge Road 133 New Bridge Road #25-10 Chinatown Point #25-10 Chinatown Point Singapore 059413 Singapore 059413

Tel: +65 6533 7838 Tel: +65 6533 7220 Email: [email protected] Email: [email protected] URL: www.epplaw.com.sg URL: www.epplaw.com.sg

Benjamin currently heads the Corporate and Transactional practice Kimberly is a Senior Associate with the Corporate and Transactional Singapore at Edmond Pereira Law Corporation. His area of practice includes practice at Edmond Pereira Law Corporation. Her principal area of mergers and acquisitions, joint ventures, commercial contracts and practice includes mergers and acquisitions, public take-overs and general corporate advisory issues. general corporate work for both listed and unlisted companies. Benjamin has been involved in varied complex cross-border Kimberly graduated from the National University of Singapore with a transactions, some of which have been acknowledged in legal journals Bachelor of Laws (Honours) Degree and is admitted as an Advocate such as the Asia Pacific Legal 500. He is listed in Chambers Asia and Solicitor to the Supreme Court of Singapore. Pacific 2011 as a leading Individual (Investment Funds: Domestic Firms) and was “highly rated for his client service”. He was a Member of the Inquiry Panel constituted under the Legal Professional Act from 2011 to 2015 and a Member of the Complaints and Disciplinary Panel constituted under the Accounts Act from 2010 to 2014. Since 2010, Benjamin has been an ad-hoc referee of the Small Claims Tribunal in the State Courts of Singapore. He also sits as an independent director on a company listed on the SGX. Benjamin graduated from the National University of Singapore in 2001 and was called to the Singapore Bar in 2002.

Established in 1992, Edmond Pereira Law Corporation is a boutique law firm built on integrity and excellence. Our firm consists of lawyers who have had experience serving on the bench and the Attorney-General’s Chambers, and who are recognised industry experts. Our Corporate and Transactional team takes time to understand the concerns of our clients, which range from institutional clients to sophisticated individuals, to provide bespoke solutions for each client. The team is led by Mr. Benjamin Choo.

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Slovakia Katarína Čechová

Čechová & Partners Ivan Kolenič

1 Setting the Scene – Sources and 1.3 What are the current topical issues, developments, Overview trends and challenges in corporate governance?

Current topical issues in corporate governance in Slovakia include 1.1 What are the main corporate entities to be discussed? e.g. liability of members of Management Boards to joint stock companies, abuse of minority and majority shareholder rights, The main corporate entity to be discussed is the regular joint-stock enforcement and performance of, as well as damage claims from, company (the “Joint-Stock Company”), and a simple joint-stock members of Management Boards and limitations of mergers of company (the “Simple Joint-Stock Company”) newly introduced companies with negative net equity. as of 1 January 2017 to support start-up companies (both companies limited by shares). The Joint-Stock Company issues shares either in documentary or book-entered form. The Simple Joint-Stock 2 Shareholders Company issues shares only in book-entered form. The shares issued by a Joint-Stock Company may be offered and traded on regulated markets (subject to the satisfaction of conditions for 2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ their acceptance). The Simple Joint-Stock company cannot offer entities? subscription of shares publicly or become listed without prior transformation to a regular Joint-Stock Company. Both types The operation and management of joint-stock companies is carried of joint-stock companies are managed by a Management Board out by Management Boards. The competence of shareholders is and supervised by a Supervisory Board. The establishment of a limited to decisions on matters designated by the Commercial Code Supervisory Board is, however, not obligatory in a Simple Joint- and Articles to the General Meeting (see question 2.4 below). In Stock Company. principal (unless expressly provided by Articles) the General Meeting may not give any binding instructions to the Management 1.2 What are the main legislative, regulatory and other Board regarding the operation and management of the company. corporate governance sources?

2.2 What responsibilities, if any, do shareholders have as The main legislative source is Act No. 513/1991 Coll., Commercial regards the corporate governance of their corporate Code, as amended (the “Commercial Code”). The Commercial entity/entities? Code contains general provisions regarding the establishment, organisation, governance, corporate financing, functioning and Slovak law does not stipulate any responsibilities of shareholders dissolution of Slovak companies. with regards to the operation and management of corporate entities. The majority of the provisions of the Commercial Code regulating joint-stock companies are obligatory, however quite extensive scope of corporate governance regulation is delegated to the Articles of 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them? Association (the “Articles”) as the basic corporate document of every joint-stock company. The Articles are adopted by a general There are two main types of shareholder meetings: (i) ordinary assembly of shareholders (the “General Meeting”), meanwhile a General Meetings; and (ii) extraordinary General Meetings. qualified majority of shareholders is required to make amendments Ordinary General Meetings must be held at least once a year to (at least two-thirds of the present shareholders, unless the Articles approve financial statements and profit distribution/disposal of specify a higher percentage). loss. A Management Board shall convene an extraordinary General In certain limited respects Act No. 566/2001 Coll., on Securities Meeting upon request of the shareholders representing 5% of the and Investment Services, as amended, and Act No. 429/2002 Coll., registered capital, unless the Articles stipulate a lower threshold on Stock-Exchange, as amended, regulate some rights, duties and (the “Minority Shareholders”). Also, the Management Board in notification requirements of Management Boards and shareholders a Joint-Stock Company shall convene an extraordinary General of joint stock companies. Meeting if it found out that an accumulated loss of the company exceeded or may exceed one-third of its registered capital (in a

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Simple Joint-Stock company the Management Board only has the the General Meeting. Upon request of the Minority Shareholders an obligation to inform the shareholders). It is important to note that in agenda of the General Meeting shall be supplemented by the points the case of a Simple Joint-Stock Company, the Articles may provide proposed by them (subject to an on time request and notification of for per rollam adoption of resolutions (in writing or using other other shareholders of such supplement). communication means) outside of the General Meeting (i.e. it is not necessary to convene the General Meeting). 2.4 Can shareholders be liable for acts or omissions of The scope of powers of the General Meeting includes, in particular, the corporate entity/entities? the following: (i) amendments to the Articles; No, they cannot. Joint stock companies are fully liable for any breach of their obligations; whereas the shareholder bears no (ii) decisions on the increase or decrease of the registered capital, Slovakia an authorisation of the Management Board to increase the liability for obligations of the joint stock company. registered capital and issue priority bonds or convertible bonds; 2.5 Can shareholders be disenfranchised? (iii) the election and recall of members of the Management Board (unless the Articles provide their election and recall by the Supervisory Board); Shareholders can be disenfranchised exclusively in the case of failure to pay-up the issue rate of shares within the time period (iv) the election and recall of members of the Supervisory Board and other company bodies if stipulated in the Articles (other stipulated by law and the Articles, provided the shareholder was than the Supervisory Board member elected and recalled by delivered additional written notice from the Management Board to employees); pay-up the issue within another 60 days (or time period stipulated in (v) approval of financial statements, resolutions on distribution the Articles). In such a case the shareholder shall be excluded from of profits or coverage of losses and determining dividends; the company by resolution of the Management Board and its shares shall be transferred to the company. (vi) decisions on the replacing of documentary shares with book- entered shares and vice versa; (vii) decisions on the winding-up and change of legal form of the 2.6 Can shareholders seek enforcement action against company; members of the management body? (viii) decisions on terminating trading with company shares on regulated markets (stock exchanges), and decisions on the No, it is the company (not shareholders) who can enforce claims company ceasing to be a public Joint-Stock Company; against members of the Management Board. The company is (ix) approval of the rules for remuneration of members of bodies represented in such enforcement proceedings by a member of of the company (providing that the Articles do not stipulate the Supervisory Board. The Minority Shareholders may request that such rules shall be approved by the Supervisory Board); the Supervisory Board to claim damages or other claims against (x) decisions on the approval of contracts on the transfer of members of the Management Board. Only if the Supervisory Board enterprises or a part of an enterprise; and does not follow such request can the Minority Shareholders enforce (xi) decisions on other matters entrusted by the Commercial Code such claim for and on behalf of the company; such shareholders or the Articles to the authority of the General Meeting. shall bear the costs of such enforcement. Generally, voting at the General Meeting requires a simple majority Although not specified in the law and not settled by binding of votes of shareholders voting in person or by proxy. However, interpretation as the introduction of the Simple Joint-Stock Company a resolution concerning (i), (ii), (vii) and (viii) above requires a is very recent, in the case of a Simple Joint-Stock Company without qualified majority of not less than two thirds of votes of the voting/ an established Supervisory Board, the Minority Shareholders may present shareholders. In addition, in case of the Simple Joint-Stock enforce claims for and on behalf of the company directly. Company the resolution concerning a change of the Articles in respect of the rights associated to certain types of shares and limitation of 2.7 Are there any limitations on, and disclosures the transferability of shares requires a qualified majority of not less required, in relation to interests in securities held by than two-thirds of votes of the owners of the concerned shares. shareholders in the corporate entity/entities? The number of a shareholder’s votes is determined as a proportion between the nominal value of the shares held thereby and the total A legal entity (or an individual) acquiring an interest in voting rights amount of registered capital of the company. The voting procedure attached to shares traded on a regulated market equal to or exceeding is determined by the Articles. Voting at a General Meeting shall 5%, 10%, 15%, 20%, 25%, 30%, 50%, or 75% of all voting rights not take into account the shares with which the shareholder cannot attached to the shares of the Joint-Stock Company is required to exercise the voting right (e.g. priority shares). disclose to the Joint-Stock Company his/her/its interest in voting In its Articles, the company may allow voting at the General rights attached to such shares, as well as to notify the National Bank Meeting by correspondence or by electronic means. A change of the of Slovakia. Articles in this respect requires a three fifths majority of the votes Moreover, prior approval of the National Bank of Slovakia is of all shareholders. required for attaining or exceeding certain thresholds of shares in Shareholders may not directly call a General Meeting, they may specified types of joint stock companies (such as banks, insurance only initiate convocation of such meeting by request of the Minority companies, reinsurance companies, securities dealers, asset Shareholders. The Management Board is liable to convene the management companies or pension management companies) General Meeting upon such request; if the Management Board notwithstanding whether the shares of such companies are admitted does not comply with such demand, the Minority Shareholders may for trading on a regulated market or not. request the court to authorise them for such a call. As of 1 February 2017 access to funds from public resources has Each shareholder may submit proposals, including proposals for become subject to prior registration in the Register of Public Sector resolutions, exclusively regarding the matters put to the agenda of Partners. Such register mandatorily provides, among others, data on

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the ultimate beneficial owners/shareholders of company controlling Members of the Supervisory Board of a Simple Joint-Stock directly or indirectly at least a 25% share or 25% of the voting rights Company may be elected exclusively by the General Meeting. or who is entitled to appoint or remove members of the corporate Members of the Supervisory Board of a Joint-Stock Company may bodies or to at least 25% of the profits of the business or other be elected exclusively by the General Meeting save for one-third activities of the company. In the case of listed companies’ members elected by employees of the Joint-Stock Company provided there of the statutory body, a procurist and all managing employees of the are more than 50 full-time employees in the Joint-Stock Company company acting under a direct authority of the statutory body shall at the time of the election. The Articles of the Joint-Stock Company be registered as beneficial owners. may provide a higher number of members of the Supervisory Board to be elected by the company’s employees; however, such number may not be higher than the number of members to be elected by

Slovakia 3 Management Body and Management the General Meeting. The Articles of the Joint-Stock Company may also provide that even if the number of employees employed by 3.1 Who manages the corporate entity/entities and how? the company is less than 50, the employees shall elect a member (several members) of the Supervisory Board. The Management Board is the statutory body of joint-stock Members of the Supervisory Board shall be elected for the term companies fully authorised to manage its operations and act on its specified in the Articles; however, such term cannot be more than behalf. The Management Board makes decisions concerning any five years in a Joint-Stock Company. Although not specified in the matter of the company, unless such matter is reserved for the authority law and not settled by binding interpretation as the introduction of of the General Meeting or the Supervisory Board (or other body in the Simple Joint-Stock Company is very recent, there are opinions case of the Simple Joint-Stock Company) by the Commercial Code expressed in expert literature that in a Simple Joint-Stock Company or Articles. Unless the Articles provide otherwise, any member of the Articles may stipulate an unlimited period. Unless the Articles of the Management Board is authorised to act for and on behalf of Association provide otherwise, the election by the General Meeting the company. The Management Board shall consist of a number of shall be made en bloc (see above). members, as stated in the Articles. The minimum is one member.

The authority of the Management Board to act on behalf of the 3.3 What are the main legislative, regulatory and other company may be restricted by the Articles, resolutions of General sources impacting on contracts and remuneration of Meeting or Supervisory Board, however such restrictions are not members of the management body? effective vis-á-vis third parties. The Supervisory Board, which is only optional in Simple Joint- The relationship between the company and members of the Board Stock companies, is not a management body, it only supervises (either Management or Supervisory) is regulated by provisions of the the exercise of powers by the Management Board. Members of the Commercial Code on a mandate contract, unless a special agreement Supervisory Board are entitled to review any document and report on performance of function was executed between the company any activities of concern. The Supervisory Board also inspects and a specific Board member. The agreement on performance of whether accounting books are properly kept, whether business of the function must be approved by the General Meeting (or Supervisory company is performed in compliance with the law, the Articles and Board if the Articles so stipulate). Nonetheless, during their office resolutions of the General Meeting. Furthermore, the Supervisory the members of the Management Board can be also employed under Board reviews financial statements and proposals for distribution a separate employment contract with the company. This is quite of profits and coverage of losses, and shall submit its comments to common practice in Slovakia, where, e.g., the same individual the General Meeting. It consists of at minimum three members; in is the Chairman of the Management Board (under a contract on Joint-Stock Companies with more than 50 employees, one-third of performance of function or mandate contract) and General Manager members are elected by employees. of the company (under an employment contract). Remuneration of members of the Boards is not regulated in the 3.2 How are members of the management body appointed Commercial Code. It is under the competence of the General and removed? Meeting to approve an amount of remuneration directly or within the agreement on performance of function, unless the Articles delegate Under Slovak law, members of the Management Board are elected such competence to another body (e.g. the Supervisory Board). and removed by the General Meeting, unless the Articles devote the power to elect and remove members of the Management Board to 3.4 What are the limitations on, and what disclosure is the Supervisory Board. required in relation to, interests in securities held by The body which elects the members of the Management Board shall members of the management body in the corporate determine which member shall be the Chairman thereof. The period entity/entities? of office is a maximum of five years in a Joint-Stock Company. In a Simple Joint-Stock Company the Articles may stipulate an Slovak law does not stipulate limitations on members of Management unlimited period. Repeated election is possible, unless Articles Boards owning shares. As to disclosure duties on the acquisition of provide otherwise. shares of companies traded on the regulated market, the notification The Articles of Association may provide that election of members of requirements already mentioned in question 2.7 apply equally. the Management Board shall be made en bloc. A list of candidates shall be drawn out from all of the proposals and shareholders shall 3.5 What is the process for meetings of members of the elect the members by specifying the number of votes, out of their management body? aggregate votes, which they cast in favour of individual candidates while the maximum number of candidates to whom they may The regulation of processes for meetings of members of the Board give their votes shall be equal to the number of members of the is delegated by the Commercial Code to a company’s Articles. Management Board to be elected. The candidates who have been Unless the Articles provide otherwise, however, the Board may given most votes shall become members of the Management Board.

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pass resolutions if their meetings are attended by a majority of report specifying the fundamental strategy of management for the their members, while any such resolution requires the approval company for the upcoming period, as well as expected developments of a majority of members present. The Articles may provide for regarding property, finance and revenues of the company. The per rollam adoption of resolutions (in writing or using other Board also submits a written report detailing the business and any communication means). properties of the company, along with a summary of the future Minutes compiled from Board meetings shall include details of outlook. In addition, the Management Board must promptly inform resolutions passed thereby and shall be undersigned by the Chairman the Supervisory Board on any fact which may have a material of the Board and the minutes clerk. Each member of the Board is impact on the business or property of the company, including (but entitled to demand that his/her opinion (if in opposition to opinions not limited to) its liquidity. The Management Board is responsible of other board members) is recorded in the minutes. for convening an extraordinary General Meeting if it has found that accumulated loss of the company exceeded or may exceed one-third Slovakia of its registered capital. In such a case it shall submit to the General 3.6 What are the principal general legal duties and Meeting a proposal of steps to be taken. liabilities of members of the management body? The above-described responsibilities do not apply to the Management Board in a Simple Joint-Stock Company, however the shareholders of Members of the Management Board are obliged to perform their a Simple Joint-Stock Company without an established Supervisory function with due care. Such due care involves a duty to exercise Board have the right to request the Management Board at any time professional care and act in line with the interests of the company and to provide information on matters of the company. all of its shareholders. In particular, members of the Management Board have to collect and take into account all available information concerning their decisions. Moreover, they may not disclose any 3.8 What public disclosures concerning management confidential information to third parties if such disclosure could body practices are required? cause damage to the company or prejudice its interests or the interests of its shareholders. Also, they may not give priority to The practices of the Management Board are disclosed in annual their own interests or interests of certain shareholders or interests of reports. By approving the annual report, the General Meeting third parties over the interests of the company. confirms practices of the Management Board of the company. Unless the Articles provide for further restrictions, no member of the Management Board of a Joint-Stock Company may: 3.9 Are indemnities, or insurance, permitted in relation to (i) enter in his/her own name, or for his/her own account, into members of the management body and others? business deals inherent to the company’s business activities; (ii) intermediate deals of the company for other parties; Any agreement between the company and a member of the (iii) participate in the business of another entity as a member with Management Board which excludes or restricts his/her scope of unlimited liability; or liability is forbidden. In addition, it is not possible for such liability (iv) be a member of a statutory or similar body of another legal to be restricted or excluded by the Articles. The company may waive entity which has a similar scope of business, unless the its damage claims towards members of the Management Board or company (of whose statutory body he/she is a member) has make a settlement with them, however not earlier than three years a shareholding or other participation in the other company’s from the occurrence of the claim and provided such waiver was business. approved by the General Meeting and no objection against such The above-described restrictions do not apply to the Management resolution was raised by any Minority Shareholders. Board of a Simple Joint-Stock Company, however its members have Joint-stock companies cannot indemnify members of the an obligation to inform the company of such information. Management Board in respect of liabilities towards third parties. Members of the Management Board are responsible for: keeping Nonetheless, companies are permitted to maintain insurance in accurate accounting records; publishing annual reports and financial respect of liability of members of the Management Board. statements; and preparing proposals for the distribution of profits or coverage of losses to present to the General Meeting for approval in 4 Other Stakeholders accordance with the Articles. Members of the Management Board who have breached their obligations while exercising their powers mentioned above are 4.1 What, if any, is the role of employees in corporate jointly and severally liable without limitation for the damage caused governance? to the company by such breach. The member shall not be liable for damage if he can show that he performed his duties with due care and Employees have a specific, although limited role in corporate in good faith and that he acted in the company’s interests. Members governance. One third of Supervisory Board members of a Joint- of a Management Board should not pass a resolution of the General Stock Company are elected and removed by employees of the Meeting if such resolution is in conflict with the Commercial Code company, provided there are more than 50 full-time employees at or the Articles. Members of the Management Board are not relieved the time of election of members of the Supervisory Board. of liability if their conduct was approved by the Supervisory Board. Elections of employee nominees to the Supervisory Board are organised by the Management Board in cooperation with trade 3.7 What are the main specific corporate governance unions or employee representatives. If there are no employee responsibilities/functions of members of the representatives, the elections shall be organised by the Management management body and what are perceived to be the Board in cooperation with employees, who are authorised to elect key, current challenges for the management body? the members of the Supervisory Board. Act No. 311/2001 Coll., the Labour Code, as amended (the In case of a Joint-Stock Company at least once a year the “Labour Code”) stipulates that employees shall have the right to Management Board submits to the Supervisory Board a written

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the provision of information on the economic and financial situation of the employer and on the presumed development of its activities, 5.2 What corporate governance related disclosures are in an intelligible manner and in an appropriate time. The employer required? may deny disclosure of any information, which could prejudice the employer, or may request to treat such information as confidential. On 1 January 2014 a public Register of Financial Statements for Employees shall have the right to comment on such information and filing financial statements, annual reports and auditors’ reports submit their suggestions. was launched. Both types of joint-stock companies shall file these documents with the Register of Financial Statements within the statutory time limits. 4.2 What, if any, is the role of other stakeholders in corporate governance? In case of Joint-Stock Companies listed on regulated markets Slovakia a special financial report (containing not only audited financial statements, but also a declaration of responsible members of the There are no generally recognised aspects of law, regulation and Management Board that such report provides correct and complete practice concerning the role of other stakeholders in corporate information on the state of assets, liabilities and financial situation governance. of the company) and an interim semi-annual report containing information of important facts and trades, have to be published. 4.3 What, if any, is the law, regulation and practice concerning corporate social responsibility? 5.3 What is the role of audit and auditors in such disclosures? There is no law which directly regulates corporate social responsibility, however several additional disclosure requirements The role of an auditor is to verify data, reports, statements, the are regulated, by, e.g., the Labour Code, regarding informing conduct of accounting procedures, accounting systems, assessment, employees on corporate changes or reorganisation within companies. etc., within the scope requested by a company. Several other disclosure and notification duties are imposed on companies and issuers of shares traded on regulated markets. Such duties include interim reports on important events, trades with 5.4 What corporate governance information should be related persons, details on the company’s financial situation and published on websites? economic results of the company. The business name, registered seat, legal form, identification number, registration number and designation of the relevant registry 5 Transparency and Reporting court of the company are mandatorily required to be published on a company’s website; however, only if the company has a website. If 5.1 Who is responsible for disclosure and transparency? the company also specifies on its website the amount of its registered capital, it must indicate to what extent the registered capital has been paid up. It is members of the Management Board, individually and collectively, who are responsible for disclosure and transparency. Information on the Management Board or Supervisory Board is not required to be published on a company’s website, however such practice is common. In any event said information is publicly accessible via the website of the Slovak Commercial Registers.

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Katarína Čechová Ivan Kolenič Čechová & Partners Čechová & Partners Staromestska 3 Staromestska 3 811 03 Bratislava 811 03 Bratislava Slovakia Slovakia

Tel: +421 2 544 144 41 Tel: +421 2 544 144 41 Email: [email protected] Email: [email protected] URL: www.cechova.sk URL: www.cechova.sk Slovakia Katarína Čechová is a senior partner in Čechová & Partners. During Ivan Kolenič has studied law at the Charles University in Prague, and her 34 years of practice she has worked on a wide range of transactions is currently studying for his University degree at the Pan-European and has been instrumental mainly in M&A work, restructurings, University in Bratislava. Ivan joined Čechová & Partners in 2015 and corporate and project financing. Katarína graduated from the Law has been involved mainly in advising clients on corporate, employment Faculty of Comenius University, Bratislava, Slovakia and received and restructuring matters. He is a Slovak national and is fluent in her Dr. Jur. in 1984. In 1990 she was the founding partner of the English and Czech. firm. Katarína has served as the guest professor of commercial and financial law at the Law Faculty of Comenius University in Bratislava from 1996 to 1998. She has served as the arbitrator for international disputes of the Court of Arbitration of the Slovak Trade and Industry Chamber since 1997. Katarína is a recognised expert in the area of corporate law, particularly corporate finance and governance. She has also been involved in several equity financing deals and reorganisations of local companies.

Čechová & Partners is one of the leading and largest commercial law firms in Slovakia and has considerable international experience. It has provided its services to foreign as well as domestic clients since its establishment in 1990 and was one of the first law firms established in Slovakia after the commencement of the transformation to a free market economy. Čechová & Partners is an independent Slovak law firm and regularly ranks as top tier in most legal surveys of the Slovak legal market. The firm gained extensive experience not only in commercial, corporate, regulatory, competition and antitrust matters, but has also been involved in a number of M&A, project finance, securities and a wide variety of banking, financial and capital market transactions. The firm is a member of Lex Mundi and World Services Group.

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Slovenia

BGK Law Firm Luka Gaberščik

The Market Abuse Regulation (MAR) – Regulation: EU 596/2014 1 Setting the Scene – Sources and covers market abuse, i.e. insider dealing, unlawful disclosure of Overview inside information, market manipulation and public disclosure of inside information. 1.1 What are the main corporate entities to be discussed? 1.3 What are the current topical issues, developments, The main corporate entities to be discussed are as follows: trends and challenges in corporate governance? Limited Liability Company LLC (družba z omejeno odgovornostjo, d.o.o.). This is the legal entity used for small- or medium-sized In the wake of recent financial difficulties of regional retail companies and is limited to 50 shareholders. More than 90% of all businesses the government passed a controversial law called Slovene companies are LLCs. the “Act concerning the conditions of appointment of associate members of the Management Board of companies of systemic Joint Stock Company – JSC (delniška družba, d.d.). This is used for importance to the Republic of Slovenia”. The law was designed large companies, publicly traded stock companies, banks, insurance to appoint a governmental non-voting member to the management companies and similar. All of the answers provided bellow are board of the largest Slovene retailer (Mercator). Several practical based on JSC rules. issues, doubts on constitutional compliance and the political agenda Partnerships (družba z neomejeno odogovrnostjo, d.n.o.), Limited involved lead many to believe that the law may diminish investor partnerships (komanditna družba d.d.), Limited stock partnerships confidence in Slovene enterprises. (komanditna delniška družba k.d.d.) and Societas Europaea (SE) are rarely used. 2 Shareholders

1.2 What are the main legislative, regulatory and other corporate governance sources? 2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/ The Companies Act (ZGD-1) is based on German law. This governs entities? all business entities and relations between shareholders including the general shareholder assembly (skupščina), the management board In general terms shareholders have the voting right, the right to (uprava), the managing director (poslovodja) and the supervisory receive dividends and the right to the liquidated assets (in case of board (nadzorni svet) or the upravni odbor (board of directors). It liquidation). also governs the relationship of groups of companies to third parties In a more operational sense the influence of shareholders on the (koncerni). management of a company is limited to shareholder assembly The Takeovers Act (ZPre-1) governs the terms, conditions and resolutions, including: procedures relating to takeover bids. The Act applies to the ■ appointment and recall of supervisory board members or the acquisition of securities of listed companies or larger joint stock management board members; companies. Acquisitions are supervised by the Securities Market ■ amendments to the articles of association, including Agency (ATVP – http://www.a-tvp.si/Eng/Default.aspx). dissolution, registered capital changes, squeeze-outs, carve- The Financial Instruments Market Act (ZTFI) governs the outs, mergers, etc. (75% majority); conditions for the offering of securities to the public and the listing ■ adoption of the annual report; of securities, the disclosure of information related to the listed ■ appropriation of distributable profits; securities, the operation of investment firms, the rules of trading on ■ granting an annual confidence vote (discharge) to the regulated markets and prohibited acts of market abuse. Again, this members of the management or supervisory boards; is supervised by Securities Market Agency. ■ winding-up and restructuring of the company; The Worker Participation in Management Act (ZSDU) governs ■ appointment of the auditor; and the methods of and conditions for worker participation in the ■ other matters if so provided by the articles of association. management of commercial companies. Shareholder resolutions generally require a simple majority, unless a higher majority is required by law or by the articles of association.

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2.2 What responsibilities, if any, do shareholders have as 2.5 Can shareholders be disenfranchised? regards the corporate governance of their corporate entity/entities? At the proposal of a shareholder possessing at least 90% of the joint stock company’s share capital, the general meeting may The shareholders in general do not have any obligations towards the adopt a resolution to transfer the shares (squeeze-out) of the other company or third parties. They are not obliged to attend the general shareholders to the majority shareholder for cash consideration shareholders’ meetings or vote for proposals at such meetings. (call). In correlation, the majority shareholder has the obligation Shareholders of a LLC have a statutory but waivable non-compete to buy out any minority shareholder subject to the same cash clause, which may also be implemented in the articles of association compensation (put). The Takeovers Act simplifies the valuation of a joint stock company. of the appropriate compensation in squeeze-outs following public Slovenia Shareholders of a JSC have a notification duty when acquiring or tenders, linking it to the value of the latest public bid. disposing of a controlling share in the company. Voting rights may be temporarily revoked by the ATVP (Securities Controlling Companies in Company groups (Koncern) may be Market Agency) if public tender procedures are not applied when liable to compensate controlled companies for the loss incurred, controlling shares are acquired. subject to certain conditions. 2.6 Can shareholders seek enforcement action against members of the management body? 2.3 What shareholder meetings are commonly held and what rights do shareholders have as regards them? Shareholders may seek damages incurred by the management board Shareholders’ meetings must be convened by the management board through the company and not directly. annually with voting on the following decisions: annual report The general meeting may adopt a shareholder resolution to initiate confirmation (unless carried out by the supervisory board); use of a legal action against the members of the management bodies. For the balance sheet profit; and the discharge of the management board currently appointed members of management bodies a special members and the supervisory board members or board of directors. representative of the Company is nominated by the general meeting Shareholders holding at least 5% of the Company’s registered to file necessary legal actions. share capital may request the convening of a general meeting by indicating the purpose and reasons of such a general meeting. The 2.7 Are there any limitations on, and disclosures same percentage of shareholders may request additional topics to required, in relation to interests in securities held by the agenda of the shareholders’ meeting. shareholders in the corporate entity/entities? The general meeting may vote on the appointment of a special auditor (forensic audit) to review certain actions relating to the Company’s A company that has acquired more than 25% or 50% of the shares incorporation or its management. If the general meeting rejects the in a Slovene company must immediately communicate this to the proposal for the appointment of a special auditor, such auditor can Company. be appointed by the court on a proposal filed by shareholders whose In accordance with the Takeovers Act, anyone who reaches at least 1/3 holdings total at least one tenth of the share capital or whose share of voting rights in a listed company must proceed with a public offer capital amounts to at least EUR 400,000, if there is reason to believe to acquire all shares. This duty is renewed with every additional 10% that serious fraud or violations of the articles of association or of of acquired voting rights up to a total of 75% voting rights. A breach the law have occurred in the conduct of business and procedures. of this obligation may lead to revocation of voting rights by the ATVP. Similar rules apply in case there is reason to believe that parts Investors in banks and insurance companies need additional of the annual report are severely undervalued, in which case an approval by regulators for acquisitions of controlling shares. extraordinary auditor is appointed by the court. Shareholders have the right to speak at the general meeting and to receive information on company matters limited to topics on 3 Management Body and Management the agenda. Any shareholder opposition to a resolution must be registered in the minutes of the general meeting if eventual court 3.1 Who manages the corporate entity/entities and how? actions are planned by a shareholder against such resolution.

Slovene law offers an option to have either a dual board system 2.4 Can shareholders be liable for acts or omissions of consisting of a management board and a supervisory board, or a the corporate entity/entities? single tier board of directors. Most companies use the dual board system where the Company Theoretically the shareholders of a JSC may be liable for damages is managed by the management board. The management board is that they cause to the company, other shareholders or third parties as appointed by and supervised by the supervisory board. a result of intentional behaviour. The board of directors is a single tier managing body that consists of Please see the controlling company liability detailed in question 2.2 executive and non-executive directors. above. Persons who use their influence (including and especially 3.2 How are members of the management body appointed shareholders) to induce the members of the management or and removed? supervisory bodies, the procurator or proxy to act to the detriment of the company or its shareholders shall compensate the company The managing board is appointed by the supervisory board. The for the resulting damage. company’s articles of association may require that the managing

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board is appointed as a group. A single member of the managing board pass. In the event of an equal number of votes, the Chairman of the may be recalled due to severe breach of duties, incompetence, a non- management body shall have the decisive vote. A member may not confidence vote by the general assembly or other economic reasons. participate in decision making on matters relating to him. The later is a major reason for disputes in Slovene case law. For The management body may adopt decisions by correspondence, by companies with more than 500 workers, one worker representative telephone, through electronic media or otherwise if this is agreed by member of the managing board is elected by the workers’ council. all the members of the management body. The supervisory board members that are representatives of 2/3 of The management body may adopt rules of procedure with the the company’s capital are appointed by the general shareholders’ majority of votes cast by all its members. meeting. They may be recalled by means of a 75% majority vote. Persons who are not members of a management body shall not The rest (1/3) are appointed and recalled by the workers’ council.

Slovenia be allowed to attend the meetings of the management body The board of directors’ members that are representatives of the unless otherwise provided by the articles of association. Experts company’s capital are appointed by the general shareholders’ or rapporteurs may be invited to participate in the discussion of meeting. They may be recalled with a 3/4 majority vote. For every individual items on the agenda. three full members of the board, one of them must be appointed by Any member of the management body may request a meeting, the workers’ council and may be recalled by the same council. The stating the purpose and grounds for convening the meeting. Upon executive directors may be elected from non-members and may be such request, the Chairman must convene a meeting without delay recalled anytime. and the meeting must take place within the following two weeks. The above co-determination rules do not apply to small companies.

3.6 What are the principal general legal duties and 3.3 What are the main legislative, regulatory and other liabilities of members of the management body? sources impacting on contracts and remuneration of members of the management body? The members of the management board (or board of directors) are primarily responsible for the legality of the business operations of The compensation of the members of the management board is set by the Company. Naturally they are also responsible for the business the supervisory board resolution in proportion to the member’s duties operations of the company. and responsibilities. The general shareholders’ meeting may adopt a general remuneration policy which becomes obligatory, but may not They must show diligent performance of their duties according to vote on individual contracts with the management board members. a so-called “businessperson” standard, which is defined on a case- by-case basis. The business judgment rule is accepted by the courts The supervisory board members’ compensation is subject to as a theoretical guideline for assessing a board member’s liability. approval by the general shareholders’ meeting and may not include profit success or profit based remuneration. Members of the supervisory board are responsible for the supervision and appointment of the management board. Their main liability lies The company must disclose the total amount of remuneration paid in the final approval of the annual report and the proposed dividend to members of the management bodies in the annual report. pay-out. Their actions are considered according to the above- mentioned “businessperson” standard of diligence, which assumes a 3.4 What are the limitations on, and what disclosure is member is a highly skilled and knowledgeable person. required in relation to, interests in securities held by Members of the management bodies are jointly and severally liable members of the management body in the corporate to the Company for any damages resulting from their decisions or entity/entities? omissions, unless they can prove they applied an adequate level of personal diligence in the decision-making process. The members of the management bodies may own any number of shares. Several procedures need to be complied with, however, in order to ensure an arm’s-length deal if the shares are bought from 3.7 What are the main specific corporate governance the company itself. responsibilities/functions of members of the management body and what are perceived to be the Members of the management bodies of listed companies must key, current challenges for the management body? comply with the Market Abuse Regulation (MAR). They and their relatives may not acquire or dispose of company financial The main responsibility of the management board is to keep the instruments during the restricted period, which ends with the public company financially solvent. The management board is required to disclosing of the relevant inside information. act quickly and must provide measures for mitigation of financial Additionally, members of such management bodies shall notify difficulties. If such measures fail, the management board is required ATVP and the company of any transactions regarding financial to propose adequate insolvency or other liquidation procedures for instruments for their own account or a relative’s account. the Company. Should the management board fail to uphold these The use of insider information for any such transactions is strictly duties, the supervisory board is obliged to preform them. Currently, prohibited and constitutes a criminal offence. one of the main issues regarding the liability of a management board is the required pari-passu approach to creditors’ claims in situations of pre-insolvency financial distress. 3.5 What is the process for meetings of members of the management body? Other specific duties of the management board include the maintenance of proper books and records that accurately record the The management body shall convene at least once in each quarter company’s business, as well as keeping track of operating permits, or more frequently as provided by the articles of association. Each filing tax forms, keeping safe and healthy working conditions, being member shall have one vote with a quorum of at least one half of its compliant with labour law requirements, etc. members, unless otherwise provided by the articles of association, The management board may delegate and monitor the performance with a relevant majority of votes cast for the proposed resolution to of delegated responsibility.

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■ Being invited to discuss changes in a company’s status 3.8 What public disclosures concerning management (recaps, mergers, changes in control, divisions, etc.), changes body practices are required? in health and safety policies and human resource related policies. Companies who are required to audit their financial statements (mid- ■ Co-deciding on yearly leave of absence rules, worker sized and large) are required to provide a “Corporate governance promotion policy, workers’ innovation compensation policy statement” in their business report and shall include at least the and performance review policy, etc. following: The members of the workers’ council are elected by the employees’ ■ Reference to the corporate governance code of choice assembly. applicable to the company.

■ The information on the scope of deviations from corporate Slovenia 4.2 What, if any, is the role of other stakeholders in governance codes (comply or explain). corporate governance? ■ A description of the principal characteristics of internal control and corporate governance systems in the company about the financial reporting procedure. None, except for specific companies such as holders of state concessions (casinos) and several state-owned companies (DUTB, ■ Data on the activities of the company’s general meeting SDH, etc.), where a supervisory board member (usually just one) is and its key responsibilities and a description of the rights of shareholders and the method of exercise of such rights. appointed by the relevant ministry or the government. ■ Data on the structure and operation of the management and In case of a creditor compulsory settlement, which is a type of supervisory bodies and their commissions. insolvency procedure, a creditor board may act as a supervisory ■ A list of significant owners of the company’s securities. board to the company. ■ A list of holders of securities with special controlling rights. Additionally, please see question 1.3. ■ A statement on all restrictions on voting rights. ■ The company’s rules on the appointment or replacement 4.3 What, if any, is the law, regulation and practice of members of the management or supervisory bodies and concerning corporate social responsibility? amendments to the articles of association. ■ A list of authorisations sent to the management, particularly There is no mandatory law on corporate social responsibility, authorisations regarding the issuing or purchasing of shares. although a large percentage of the Slovene economy is state-owned, where corporate social responsibility is promoted through the 3.9 Are indemnities, or insurance, permitted in relation to choice of supervisory board members or boards of directors on a members of the management body and others? personal level.

Indemnification, as known in the common-law system, is not easily 5 Transparency and Reporting implemented in the Slovene legal system of tort law and should be considered as potentially null and void. That said, it is gaining some momentum in theoretical discussions (so-called “odškodovanje”). 5.1 Who is responsible for disclosure and transparency? Insurance, which is essentially the closest Slovene legal term to indemnification, is limited to insurance companies. The Companies The management board is responsible for the preparation of Act implicitly allows insurance for management bodies in terms of the annual report and financial statements in compliance with their liability to the company, but requires an insurance deductible international accounting standards. of at least 10% of the damages or loss and a maximum amount of 1.5 The supervisory board’s duty is to review and approve the statements times a member’s fixed yearly income. and the board is a guarantor for the accuracy of such statements. The supervisory board delegates most of financial reporting issues 4 Other Stakeholders to an Auditing commission of the supervisory board, which must be formed for listed companies, banks and insurance companies. The annual reports must be submitted, together with the auditor’s 4.1 What, if any, is the role of employees in corporate opinion, to the Agency of the Republic of Slovenia for Public and governance? Legal Records and Services (AJPES).

Co-determination of employees has a significant role in corporate governance. Worker Participation in the Management Act (ZSDU) 5.2 What corporate governance related disclosures are required? governs the following methods of worker participation in corporate governance: the Supervisory Board; the board of directors; and the worker’s director. Please see question 3.8 above. See further question 3.2. Workers’ council 5.3 What is the role of audit and auditors in such disclosures? The workers’ council is an elected body for workers’ representatives in management bodies and has co-determination and information The annual reports of large and medium-sized companies and the rights on various issues related to the Company, such as: annual reports of small listed companies must be examined by ■ Being informed beforehand on a change of scope of business, an auditor who shall also audit the financial report and examine a decrease in economic activity, a change of technology and the business report to an extent sufficient to ascertain whether its work process organisation or regarding the annual report. content is in conformity with the other elements of the annual report.

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The auditor has a limited duty to review some parts of the corporate governance statement (reference to question 3.8) and to provide an Luka Gaberščik auditor’s opinion as a part of the annual report. The audit of the BGK Law Firm annual report must be performed within six months of the end of Dunajska cesta 9 1000 Ljubljana the financial year. Slovenia

Tel: +386 41 724 880 5.4 What corporate governance information should be Email: [email protected] published on websites? URL: www.bgk.si

AJPES enables public web access to all annual reports and audit Slovenia statements of Slovene companies free of charge, therefore the Luka Gaberščik graduated with honours from the Faculty of Law in companies have no burden to publish their reports online, although Ljubljana in 2002. After having completed the programme of judicial traineeship at the Higher Court, he became employed at a major most do so. Slovene law firm, where he continued his career as a lawyer. He The Companies Act requires that companies which use a website began his career as an independent lawyer in 2008 and upgraded to communicate with shareholders publish online all the relevant it two years later with the establishment of the BGK law firm. He primarily deals with banking and finance law, deal structuring, data for a general shareholders meeting call, including the results corporate/M&A and insolvency law. His recent projects have mostly from voting. consisted of acting for Slovene and foreign financial institutions in The Ljubljana stock exchange rules also require listed companies to distressed/insolvency/restructuring situations. Mr. Gaberščik has extensive experience in dealing with corporate group structures, and publish all price sensitive information on their information platform regularly provides advice in relation to legal issues in project financing, “seo.net” for the avoidance of market abuse. insolvency and restructuring law, where corporate governance issues need to be addressed daily. He is also a Chairman of the Human Resource Committee of Slovene Sovereign Holding, nominated as a corporate governance expert to support nominations of officials in government owned companies. He is also the author of a contribution on Slovenian Lending and Secured Finance in the International Comparative Legal Guides in 2016.

BGK Law Firm is a team of legal experts covering all major business law fields. The core of the team is the partners: Luka Gaberščik and Damijan Brulc. Mr. Gaberščik mainly works on corporate governance issues, investment and banking issues, whereas Mr. Brulc supports pharmaceutical and chemistry-related companies and is an expert on real estate and property law. Apart from the cited specialisations, all attorneys cover labour, corporate and general business matters, with their services ranging from consulting and business support to litigation and transactions. The team is supported by two senior and four junior associates and offers services in a variety of languages, from English, German, Spanish and Italian to Croatian and Serbian.

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Switzerland Patrick Schleiffer

Lenz & Staehelin Andreas von Planta

reports certain information on the group and capital structure, 1 Setting the Scene – Sources and shareholders (including their participation rights), board of Overview directors and executive board (including their compensation as well as share and option plans), the control mechanisms and defence measures in the case of control changes, as well 1.1 What are the main corporate entities to be discussed? as auditors and information policy. ■ Directive on the Disclosure of Management Transactions The companies covered in the answers below are organised as stock (SIX-DMT) of the SIX Swiss Exchange which requires corporations. issuers whose equity securities have their primary listing on the SIX Swiss Exchange to disclose transactions in the company’s own shares and related instruments by members 1.2 What are the main legislative, regulatory and other of the board of directors and the executive board. corporate governance sources? ■ Swiss Code of Best Practice for Corporate Governance (SCBP) issued by economiesuisse, the largest umbrella The primary sources of law relating to corporate governance in organisation representing the Swiss economy in Switzerland, Switzerland are the following: which sets corporate governance standards in the form of ■ Swiss Federal Code of Obligations (CO), in particular Art. non-binding recommendations, primarily for public Swiss 620 et seq., which govern stock corporations. These rules are companies. in part mandatory and in part non-mandatory, and apply (with In addition, companies have articles of association and internal exceptions) to any Swiss corporation, whether privately held organisational regulations which, within the limits of the law, may or listed on a stock exchange. The provisions governing stock provide for additional rules in the area of corporate governance. corporations are currently being revised (see question 1.3). ■ Swiss Ordinance against Excessive Compensation with Special or different rules on corporate governance exist in respect to Listed Companies (OaEC), which implements Switzerland for banks and insurance companies as well as for provisions of the Swiss Federal Constitution resulting from investment companies with variable capital (SICAV) or fixed capital the affirmative vote of the Swiss people on 3 March 2013 (SICAF) within the meaning of the Swiss Federal Act on Collective on the so-called Minder Initiative. The OaEC entered into Investment Schemes (CISA). Particularly noteworthy is the Circular force on 1 January 2014 and will apply until the revised on Corporate Governance, Risk Management and Internal Controls provisions of the CO governing stock corporations which relating to Banks issued by the Swiss Financial Market Supervisory will incorporate the provisions of the OaEC enter into effect Authority (FINMA) that will enter into force on 1 July 2017. It (see question 1.3). contains rules on corporate governance, risk management, internal ■ Swiss Federal Act on Financial Market Infrastructures and control and audit in relation to banks, securities dealers, and group of Market Conduct in Securities and Derivatives Trading such entities. These rules were previously contained in other circulars (FMIA) and its implementing ordinances which contain, and FAQs issued by FINMA. In addition, FINMA revised its previous inter alia, rules regarding the disclosure of significant Circular on corporate governance, risk management and internal shareholdings, and public takeover offers with respect to Swiss companies listed on a stock exchange in Switzerland audit for insurance companies which entered in force on 1 January or non-Swiss companies having their primary listing in 2017. FINMA has also revised its Circular on Minimum Standards Switzerland. for Remuneration Schemes of Financial Institutions (the FINMA ■ Listing rules of the SIX Swiss Exchange (Listing Rules), Remuneration Circular). This circular defines minimum standards the most important trading venue in Switzerland, and the with respect to the remuneration principles within banks, securities implementing directives and circulars which contain, inter dealers, insurance companies, fund management companies, asset alia, periodic financial reporting and other continuing andad managers of collective investment schemes and other institutions hoc reporting rules applying to companies whose shares are requiring a licence from FINMA under the CISA (see question 3.3). listed on the SIX Swiss Exchange. The SIX Swiss Exchange holds the status of a self-regulatory trading venue under the FMIA. 1.3 What are the current topical issues, developments, trends and challenges in corporate governance? ■ Directive on Information relating to Corporate Governance (SIX-DCG) of the SIX Swiss Exchange which requires issuers whose equity securities have their primary or main The financial crisis and the subsequent economic downturn not listing on the SIX Swiss Exchange to disclose in their annual only fuelled public discussion on corporate governance topics like

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management compensation, transparency and shareholder rights, but also increased demand on the political and regulatory level for 2 Shareholders stricter rules for banks and other financial institutions in particular, in addition to other public companies. 2.1 What rights and powers do shareholders have in the In March 2013, the Swiss people and cantons accepted the Minder operation and management of the corporate entity/ Initiative, a popular initiative originally submitted in 2008. The entities? initiative introduces two new paragraphs in the Swiss Federal Constitution that provide for relatively general principles on the The operation and management of a corporation is by statutory law corporate governance regime applicable to Swiss listed companies. with the management body (board of directors and executive board), The new constitutional provisions do not contain a detailed and such power may not be withdrawn by way of a shareholders’ legislative framework and are not self-executing. Therefore, resolution (certain exceptions apply with respect to anti-takeover Switzerland implementing legislation must be drafted. In the meantime, the actions in the event of a public takeover). Accordingly, under Swiss Federal Council enacted the OaEC, which entered into force on 1 law, shareholders have no direct rights or powers in the operation January 2014 and provides for transitional implementing rules that and management of a Swiss company. However, shareholders are will remain in force until the Swiss Parliament has adopted the to vote on the appointment and the removal of the members of the actual legislative implementation of the initiative. board of directors whenever a shareholder meeting is held and its agenda provides for the appointment or removal of the members of The OaEC provides for, inter alia, the following new rules: the board of directors. Thus, shareholders may indirectly influence Mandatory and annual election by the shareholders of the ■ the course of action taken by the board of directors by threatening chairman and the members of the board of directors, the or bringing removal motions. There are additional corporate actions members of the compensation committee and the independent representative of shareholders (independent proxy). which may have an impact on the operation of a company and for which the shareholders’ approval is required, e.g. change of the ■ Annual binding shareholder vote on the aggregate company’s corporate purpose, approval of mergers, declaration of remuneration of the members of the board of directors, executive board and advisory boards (if any). dividends, and increase or decrease in the company’s share capital. In addition to the above, following the entry into force of the OaEC, ■ Prohibition of certain forms of compensation such as shareholders are entitled to vote in a binding way on the aggregate severance and “other” payments (golden parachutes), advance compensation payments and payments related to the amount of compensation for the members of the board of directors acquisition or disposal of companies. and the executive board. The vote may be organised in a prospective or a retrospective way, or a combination of both. ■ Obligation of companies to fix the maximum number of permissible external mandates (in the board of directors of other companies, being listed or not) of the members of the 2.2 What responsibilities, if any, do shareholders have as board of directors or the executive board (in the articles of regards the corporate governance of their corporate association). entity/entities? ■ Prohibition of corporate and custodian proxies. ■ Prohibition of delegation of management responsibilities to a Other than the disclosure obligations according to the CO and body corporate. FMIA, shareholders have no responsibilities as regards the corporate According to the OaEC, the articles of association also have to governance of their corporate entity (see also question 2.7). include rules for members of the board of directors and the executive board on loans, retirement benefits, or incentive and participations 2.3 What shareholder meetings are commonly held and plans. Further, the OaEC also provides for criminal prosecution what rights do shareholders have as regards them? in the case of a breach of the new requirements. While the new constitutional provisions and its implementing ordinance introduced Swiss corporations need to hold an annual shareholder meeting a number of restrictions on remuneration practices, they do not within six months after the close of the business year and may hold provide for or require a cap on executive pay. other (extraordinary) shareholder meetings as and when they need In November 2016, the Swiss Federal Council presented its revised to. All shareholders are entitled to be given notice of the shareholder draft of the corporate law reform along with the explanatory report meeting in the form provided for by the articles of association no and submitted it to the Swiss Parliament. The revised law is not later than 20 days prior to the day of the meeting. expected to be enacted before 2019. The main proposals are: The prevailing view in Switzerland is that companies whose shares ■ The incorporation of the OaEC into the CO. are in the form of registered shares may provide in their articles of ■ A target gender quota of 30% for the board of directors and association for the use of electronic communications to shareholders; 20% for the executive committee of major publicly listed accordingly, it should be possible to send out the relevant notice for companies subject to a “comply or explain” obligation. calling a shareholder meeting to the holders of registered shares in ■ An obligation for major companies in the exploitation of electronic form only. However, in practice, shareholders are given natural resources industry to disclose payments made to notice of the shareholders’ meeting by mail and publication in the public authorities which exceed CHF 100,000 per financial Swiss official gazette of commerce. year. Shareholders representing at least 10% of the share capital may ■ Numerous changes in “traditional” corporate law, such as request that a shareholder meeting be convened. Shareholders the permissibility of a share capital denominated in foreign representing at least 10% of the share capital or an aggregate par currency, a “capital band” to give companies more flexibility value of at least 1 million Swiss francs may request that a specific to increase and reduce their share capital, clarification of the requirements for distributions out of the capital reserves and item be put on the agenda irrespective of the board of directors’ interim dividends, the strengthening of shareholders’ rights backing. and remedies to improve corporate governance and the Shareholders may participate in the shareholder meeting personally enhancement of the organisation of shareholders’ meetings. or by proxy. The articles of association may limit proxy-

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representation to other shareholders. Pursuant to the OaEC, the board of directors had to ensure that, at the latest, in the 2015 annual 2.6 Can shareholders seek enforcement action against general meeting, the shareholders were able to give electronic members of the management body? proxies and voting instructions to the independent proxy. There is, however, no duty to provide for real-time “direct” electronic voting. In general, the members of the board of directors are liable to the Further, under the OaEC, corporate and custodian proxies are no shareholders for damage caused to them by any intentional or longer permissible. negligent violation of their duties (see question 3.6). Swiss corporate law does not provide for communication rights of Resolutions of the board of directors may not be challenged in court. dissident shareholders which would entitle them to require the board Exceptionally, however, resolutions of the board of directors which of directors to circulate their statements among the shareholders or are so defective as to be incompatible with the basic structure or to make available the name and address of the other shareholders organisation of the company may be declared void by the court Switzerland registered in the company’s share register to the dissident following a petition of shareholders. shareholders so that they can contact them. Thus, in practice, proxy fights are mainly fought by using the media to make the relevant 2.7 Are there any limitations on, and disclosures positions of a dissident shareholder known to the other shareholders. required, in relation to interests in securities held by The shareholder meeting may pass resolutions and carry out shareholders in the corporate entity/entities? elections by an absolute majority of the votes allocated to the shares represented. Certain specific resolutions, however, such Under Swiss corporate law, there are no statutory limitations on the as the change of a company’s corporate purpose, the creation of number of shares a shareholder may hold or the speed with which shares with privileged voting rights, restriction of the transferability he can build a stake in a company. To the extent provided in the of shares, the limitation or suspension of pre-emptive rights of articles of association, listed companies with registered shares may, shareholders in a capital increase and the merger of the company however, refuse to register shareholders in the company’s share by amalgamation require a qualified majority of at least two-thirds register with voting rights, if (i) a shareholder, or shareholders of the votes represented at the relevant shareholder meeting and an acting in concert, exceeds a certain defined percentage of registered absolute majority of the nominal value of the shares represented. shares 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 and for its own account. In addition, the articles of association 2.4 Can shareholders be liable for acts or omissions of may provide for voting restrictions so that a shareholder may only the corporate entity/entities? exercise its voting rights up to a certain percentage. Moreover, the articles of association may refuse the registration as a shareholder Shareholders may only be held responsible for acts and/or omissions with voting rights if such registration would prevent the company of the company where they acted as actual or constructive founder, from providing evidence of Swiss control as is required by certain organ or agent of the company. In exceptional cases, the corporate Swiss laws. Further limitations and restrictions apply with respect veil of a company may be pierced on the grounds of abuse of rights, to regulated industries (e.g. banks and insurance companies) and in particularly where a sole shareholder commingles its own funds the case of a public takeover. and those of the company, disregards corporate formalities, and where the company is severely undercapitalised. Also, controlling As regards disclosure, under the FMIA and its implementing shareholders owe no fiduciary duty to the company or minority ordinance, whoever, directly or indirectly or acting in concert with shareholders unless they act as an actual or constructive organ or others, acquires or sells shares in a Swiss company listed on a stock agent of the company. exchange in Switzerland and thereby reaches, exceeds or falls below the threshold percentages of three, five, 10, 15, 20, 25, 33 1/3, 50 and 66 2/3 % of the voting rights must notify the company, 2.5 Can shareholders be disenfranchised? as well as the stock exchange within four trading days. Under the new rules of the FMIA, persons who have the discretionary power The board of directors may cancel the entry in the share register to exercise voting rights (i.e. asset managers) are also subject of a shareholder and nominee with voting rights if the entry in the to these disclosure obligations. The company then has to make share register is based on false information. Further, upon a public regulatory announcements of this information by using the SIX takeover of a listed company where 98% of the shares have been Swiss Exchange’s electronic reporting platform. The disclosure acquired by the bidder, the remaining 2% may be cancelled by obligations are (inter alia) also triggered by put and call options the court, against remittance of the recover consideration. Upon and conversion rights. Under the FMIA, the duty to disclose a statutory merger, to the extent that the absorbing company holds significant shareholdings also applies with respect to non-Swiss 90% or more of the voting rights in the absorbed company, the companies with a main listing on a stock exchange in Switzerland. remaining 10% may be forced to accept cash or any other kind of Further, Swiss company law requires listed companies to disclose assets in exchange for their shares in the target company. As to in their annual report the identity of shareholders or organised the consequences of not complying with disclosure obligations, see groups of shareholders with an interest in shares of more than 5% question 2.7. (if the articles of association provide for a percentage restriction Under the rules of the FMIA, FINMA is given various enforcement of shareholders at less than 5%, it is this lower percentage which tools ranging from an order to provide information to a fine of up applies to this disclosure). As to dealing in shares of the company to 10 million Swiss francs. FINMA can also order a suspension by the members of the board of directors or the executive board, see of the voting rights or prohibit additional purchases of shares as question 3.4. a provisional measure to enforce compliance with the disclosure In the course of implementing the revised Financial Action Task rules. Further, the Swiss Takeover Board is given the power to take Force (FATF) recommendations of 2012, new provisions have the same provisional measures, if there are indications that a person been incorporated into the CO, according to which any person who does not comply with the duty to make a public tender offer. acquires bearer shares in a company whose shares are neither listed nor organised as intermediated securities must give notice of the

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acquisition to the company within one month. Additionally, any compensation committee. Further, the articles of association of a person who, alone or by agreement with third parties, acquires bearer listed company must provide for principle-based rules regarding the or registered shares in a company whose shares are neither listed nor powers and responsibilities of the compensation committee (which organised as intermediated securities, and as a consequence of the may also be given additional duties, such as nomination of members acquisition reaches or exceeds the threshold of 25% of the share of the board of directors or the executive board). capital or votes, must within one month give notice to the company about the beneficial owner of the acquired shares. For as long as the 3.2 How are members of the management body appointed shareholder fails to comply with his obligations to give notice, the and removed? membership and property rights conferred by the shares in respect of which notice of acquisition must be given are suspended. The shareholder meeting appoints and removes the members of the

Switzerland board of directors (see question 2.1). Removal is possible at any 3 Management Body and Management time, irrespective of terms of office which may still be running. The OaEC provides for mandatory and annual election by the shareholders of the chairman and the members of the board of 3.1 Who manages the corporate entity/entities and how? directors, the members of the compensation committee and the independent representative of shareholders (independent proxy) (see In principle, Swiss corporate law provides for a one-tier board structure. also question 1.3). However, the board of directors is granted considerable organisational discretion. Save for non-transferable core competences, such as strategic management, appointment and removal of the members of 3.3 What are the main legislative, regulatory and other sources impacting on contracts and remuneration of the management, the supervision of the management and the setup members of the management body? of a sufficient internal controlling and reporting system, the board of directors may delegate the management to an individual or to an With the acceptance of the Minder Initiative, the Swiss Constitution executive board. In listed companies, the day-to-day management has been amended with a number of new provisions that aim to is typically delegated to the chief executive officer or the executive increase transparency and introduce stricter rules with respect to board, resulting in a two-tier board structure. Special rules apply to the remuneration of the board of directors and the executive board banks and security dealers which must establish a two-tier structure of listed companies. As discussed above, these new constitutional with a functional and personal separation of operative management provisions are currently being put into law as they are not directly and supervision. applicable (see question 1.3). Until this legislative implementation Swiss law does not require that the functions of the chairman of the has been approved by the Swiss Parliament, the transitional rules board of directors and the CEO be separated (except for banks and as set out in the OaEC apply to all Swiss listed companies. As security dealers). To the extent that the board of directors decides discussed in more detail below, the new rules of the OaEC prohibit that a single individual should assume the functions of the chairman various forms of compensation and require listed companies to of the board of directors and the CEO, the SCBP recommends that amend their articles of association with new compensation-related the board of directors provides for adequate control mechanisms, provisions. Further, the OaEC provides for detailed rules regarding e.g. by appointing a non-executive member of the board of directors the compensation report that listed companies are required to prepare (lead director) responsible for such control. for each financial year. Under these rules, listed companies are Under Swiss law, there is no required minimum number of non- obliged to disclose the total aggregate amount of all remunerations executive or independent directors. The SCBP recommends that to members of the board of directors and the executive board. In the majority of the board of directors be composed of non-executive addition, compensations and loans of persons close to the members directors, i.e. members who do not perform any line management of the board of directors or the executive board have to be disclosed. function within the company. In practice, this recommendation Compensations and loans granted to every member of the board of is widely followed (and always has been) by all listed companies. directors have to be disclosed individually, comprising the name Further, with respect to licensed banks and securities dealers, and function of the member. With respect to the members of the FINMA expects that a substantial number of the members of executive board, only the highest compensation awarded, indicating the board of directors – at least a third – should be independent. the recipient and his/her function, has to be disclosed. In addition, Further, all members of the board of directors of licensed banks and the SIX-DCG requires the disclosure of information on the basic securities dealers must be non-executive directors. principles and elements of compensation and election, the number Other than as set out below, neither Swiss corporate law, nor the of permitted activities of the members of the board of directors and Listing Rules or any other rules of the SIX Swiss Exchange explicitly the executive committee as well as any share and option plans in the provide for mandatory board committees (special rules apply to annual report. banks and insurance companies). The SCBP recommends that an Even before the entry into force of the OaEC, the SCBP already audit, compensation and nomination committee be established. The provided for detailed recommendations pursuant to which the members of the audit committee should be non-executive, preferably board of directors has to implement a compensation system for independent directors and the majority of the members (including the the members of the board of directors and the executive board chairman) should be experienced in accounting matters. The members and to prepare a compensation report for the annual shareholder of the compensation committee should be independent directors. The meeting describing the remuneration system and its application SCBP defines “independent director” as a non-executive member of in the business year under review. It was further recommended the board of directors who has not been a member of the executive that the board of directors either brings the compensation report management in the past three years and who has no, or only into the discussion during the agenda items “approval of the comparatively minor, business relations with the company. annual financial statements” or “discharge to the board” (so that With respect to listed companies, the OaEC provides for a mandatory the resolution to approve the annual financial statements and the and annual election by the shareholders of the members of the resolution of discharge, respectively, are taken by the shareholders

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in knowledge of the content of the compensation report), or puts the the company’s own shares, conversion and share acquisition rights, compensation report to a consultative vote at the annual shareholder as well as in financial instruments, the price of which is influenced meeting in question. In practice, many listed companies accepted primarily by the company’s own shares, no later than the second the alternative of a consultative vote. Following the implementation trading day after the reportable transaction has been concluded. of the Minder Initiative, Swiss listed companies are required by The companies then have to report such transactions within another law to submit the aggregate compensation of the members of the three trading days to the SIX Swiss Exchange. Transactions by board of directors, executive board and advisory committees to a related parties which are made under the significant influence of binding vote of the shareholders. The first mandatory votes on the a person who is subject to a reporting obligation under the SIX- aggregate compensation of the board of directors and the group DMT are also to be reported to the SIX Swiss Exchange. The executive board occurred on the occasion of the 2015 annual general relevant notifications to the SIX Swiss Exchange,inter alia, have to meeting (see questions 1.3 and 2.1). With respect to such a vote, include the name and function of the person subject to the reporting companies may choose to have the shareholders prospectively obligations, number and type of instruments, as well as the total Switzerland or retrospectively approve the aggregate compensation of the value of the transaction. The SIX Swiss Exchange has to publish the members of the board of directors and the executive board. They content of such reports (except for the name of the person subject may also choose a combination of the two systems by submitting to the reporting obligation and the date on which such a person has fixed compensation to a prospective and variable compensation to a reported the relevant transaction to the company) by making such retrospective vote. As for the compensation report, the OaEC does information accessible on the website of SIX Exchange Regulation not require listed companies to submit their compensation report to for a period of three years. a vote of the shareholders.

Under the OaEC, certain forms of compensation are prohibited. 3.5 What is the process for meetings of members of the This includes severance payments, advance payments, payments management body? related to the acquisition or disposal of businesses, loans, credit, pension benefits or performance-based remuneration not provided Swiss company law requires that at least one board meeting be held for in the articles of association and the allocation of shares, other per year for the purpose of preparing the annual general shareholder equity securities and options or conversion rights not provided for meeting. In addition, each member of the board of directors may in the articles of association (also see question 1.3). request that a board meeting be convened at any time. The SCBP The revised FINMA Remuneration Circular supplements the above recommends that at least four meetings of the board of directors be rules for banks, insurance companies and other financial institutions held annually according to the requirements of the company and that (see question 1.2). Its provisions are only mandatorily applicable its members convene at short notice if necessary. for large banks and large insurance companies. Generally speaking, the FINMA Remuneration Circular places the responsibility for 3.6 What are the principal general legal duties and the compensation system of financial institutions on the board of liabilities of members of the management body? directors, puts the emphasis on the sustainability of remuneration practices, in particular with respect to variable remuneration In fulfilling their responsibilities, the members of the board of and the prevention of incentive distortions, and also increases directors have to comply with the duties of care and loyalty, as transparency with respect to the remuneration practices. Further, well as the duty to treat shareholders equally. The duty of care the FINMA Remuneration Circular defines minimum standards for requires the members of the board of directors to comply in their the design, implementation and disclosure of remuneration schemes actions with standards of care as usual in a given professional or of banks, insurance companies, securities traders and other financial functional context. The duty of loyalty requires a director not to institutions supervised by FINMA, as well as their consolidated pursue his interests to the disadvantage of the company’s interests. domestic and foreign subsidiaries and branches, and covers the Under Swiss law, the duties of care and loyalty are owed to the salaries of all employees including the executive board and the company rather than towards the shareholders. The duty of equal board of directors (the only exceptions being the remuneration of treatment requires the board of directors to treat shareholders under partners with unlimited liability and persons holding an interest of the same circumstances equally. Deviations from equal treatment at least 10% in the company). are permitted if such deviations are in the company’s interests and justified by a valid reason. 3.4 What are the limitations on, and what disclosure is In fulfilling its responsibilities, the board of directors hasto required in relation to, interests in securities held by safeguard the company’s interests. The company’s interests as members of the management body in the corporate commonly defined in Switzerland encompass not only the interests entity/entities? of the shareholders but also the interests of other stakeholders such as the company’s employees. Directors may own shares in their companies. Upon breach of the board of directors’ duties, which has the As to disclosure, the significant shareholding notification requirements consequence of damage to the company, the company or each of the of the FMIA apply equally to director shareholders (see question shareholders may sue the directors; creditors are only entitled to sue 2.7). Further, Swiss corporate law requires that any shares, as well as the directors for damages incurred by the company if the company option and conversion rights of the members of the board of directors, is bankrupt. If the board of directors has delegated the management the executive board and persons close to them be disclosed on an of the company in compliance with the statutory requirements, individual basis in the notes to the annual financial statements of the and the damage has been caused by the management, the board of company. directors is exempt from liability if careful selection, instruction and As regards dealing in the company’s own shares, companies with supervision of the management can be demonstrated. a primary listing on the SIX Swiss Exchange are, under the SIX- DMT, obliged to ensure that the members of their board of directors and their executive committee report all transactions conducted in

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In spring 2016, the SIX Swiss Exchange carried out a consultation 3.7 What are the main specific corporate governance proceeding on sustainability reporting of companies with a primary responsibilities/functions of members of the listing of equity securities on the Swiss Exchange. Under the management body and what are perceived to be the proposed rules any sustainability reporting will remain voluntary; key, current challenges for the management body? however, if a company decides to publish a sustainability report, it must comply with an internationally recognised standard. The SIX According to the SCBP, the board of directors is to provide leadership Swiss Exchange has so far not implemented these proposed rules. and control to the company. It is responsible for the strategic direction of the company and should ensure that strategy and finances are in harmony. Further, the board of directors should ensure that 5 Transparency and Reporting management and control functions are allocated appropriately. Switzerland 5.1 Who is responsible for disclosure and transparency? 3.8 What public disclosures concerning management body practices are required? The ultimate responsibility for disclosure and transparency rests upon the board of directors. In general, Swiss law does not require the disclosure of board practices. For listed companies, the SIX-DCG requires that they disclose information on its internal organisational structure and on 5.2 What corporate governance related disclosures are basic principles regarding the allocation of responsibilities between required? the board of directors and the executive board. Such disclosure is to be made in the annual report (see question 5.2). As regards financial reporting, companies listed according to the main standard of the SIX Swiss Exchange must publish audited annual financial statements and unaudited half-year interim 3.9 Are indemnities, or insurance, permitted in relation to financial statements in accordance with either IFRS or US GAAP members of the management body and others? and in line with the Listing Rules and the relevant directives. The Listing Rules further require the company to submit a corporate The general view in Switzerland is that companies are permitted to calendar containing the dates of important corporate events such maintain insurance in respect of directors’ and officers’ liability to as the date of shareholder meetings and the publication date of the the company and to pay for the premium. annual financial statements or the half-year financial statements to An undertaking of the company to indemnify directors and officers the SIX Swiss Exchange and keep such information up-to-date. for liabilities is likely to be held invalid, except for costs incurred in SIX Exchange Regulation, responsible for the enforcement of connection with lawsuits unsuccessfully brought against a director the issuer and participant regulation, introduced a new regulatory or officer. standard concept in October 2014 with the aim to streamline the current structure, clearly position Swiss GAAP FER as one of the 4 Other Stakeholders relevant accounting standards and amend the admission criteria to meet market requirements. The new regulatory standard concept is based on a Standard for Equity Securities (broken down into a Sub- 4.1 What, if any, is the role of employees in corporate Standard for International Reporting and Sub-Standard for Swiss governance? Reporting). IFRS or US GAAP must be used on the International Reporting Standard, whereas issuers who opt for Swiss GAAP FER Although unions have contributed to some extent to the recent are allocated to the Swiss Reporting Standard. The new regulatory discussion in Switzerland of corporate governance-related issues, standard concept entered into force as of 1 July 2015. in particular with respect to board of directors and management As regards other information, listed companies have a duty to remuneration, employees do not play a prominent role in corporate disclose potentially price-sensitive facts (ad hoc information) and governance. In particular, Swiss law does not require that employees to disclose in a separate section of their annual report information, be represented on the board of a company (irrespective of whether inter alia, on the group and capital structure, shareholders, the privately held or listed on a stock exchange). board of directors and the executive board, basic principles and elements of compensation as well as the share and option plans, 4.2 What, if any, is the role of other stakeholders in changes of control and defence measures, and on information corporate governance? policy. With respect to such information, the principle of “comply or explain” applies, i.e. the company must give specific reasons Other stakeholders do not play a prominent role in corporate for each instance of non-disclosure to the extent that it decides not governance (see also questions 4.1 and 4.3). to disclose certain information. Further, listed companies have to prepare a compensation report that discloses, inter alia, the amount of compensation paid to the members of the board of directors and 4.3 What, if any, is the law, regulation and practice the executive board and the shares in the company held by them (see concerning corporate social responsibility? questions 3.3 and 3.4). Neither Swiss company law, nor the Listing Rules (and its Copies of the articles of association may be requested from the implementing directives or circulars enacted thereunder), nor the relevant commercial register with which the articles of association SCBP provide for specific rules with regard to corporate social must be filed. The SCBP recommends that the articles of association responsibility. However, the board of directors, in determining be made available from the company in writing or in electronic form the company’s best interests, has to take into account not only the at any time. The company’s organisational regulations do not need interests of the shareholders but also those of other stakeholders, to be made publicly available. However, the company must inform such as the employees of the company (see question 3.6). the shareholders upon their request about the organisation of the

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management (see question 3.8). Often, the articles of association, as well as the organisational regulations, can be downloaded from 5.4 What corporate governance information should be the company’s website. published on websites?

Listed companies are required to make the published annual and 5.3 What is the role of audit and auditors in such interim financial reports available in electronic form on their disclosures? website. They must also make available any ad hoc information on the company’s website at the same time as it is distributed to the The company’s auditors have to audit the annual financial statements SIX Swiss Exchange and electronic information systems such as (but not the interim financial statements) and, since the adoption of Bloomberg, Reuters or SIX Financial Information, and keep such the OaEC, the compensation report. In addition, as the information information posted on the website for at least two years. Finally, on remuneration and the shareholding interests of the board of listed companies must maintain a so-called “push system”, a service Switzerland directors and the executive board must be disclosed in the notes to that allows investors wishing to receive ad hoc information from the annual financial statements, such disclosures in the notes must the company directly to sign up for future distributions on the be verified by the company’s auditors in the course of their ordinary company’s website. audit activities. Furthermore, the company’s auditors have to verify whether an internal control system exists.

Patrick Schleiffer Andreas von Planta Lenz & Staehelin Lenz & Staehelin Brandschenkestrasse 24 Route de Chêne 30 CH-8027 Zurich CH-1211 Geneva 6 Switzerland Switzerland

Tel: +41 58 450 80 00 Tel: +41 58 450 70 00 Email: [email protected] Email: [email protected] URL: www.lenzstaehelin.com URL: www.lenzstaehelin.com

Patrick Schleiffer has been a partner with Lenz & Staehelin since Andreas von Planta has been a partner with Lenz & Staehelin since 2002 and is co-head of the capital markets group in Zurich and a 1988. He is a leading expert in corporate law, stock exchange leading expert on financial market law, particularly capital markets, regulation and one of the most experienced M&A practitioners in stock exchange and securities law, investment fund law, financial Switzerland. Andreas von Planta holds lic. iur. and Ph.D. degrees from services regulation, corporate law and corporate governance. Patrick the University of Basel and an LL.M. from the Columbia University Schleiffer holds lic. iur. and Ph.D. degrees from the University of School of Law, New York. He specialises in corporate law, corporate Zurich and an MCJ degree from the New York University School of finance, company reorganisations and M&A. He is a member of Law, New York. He was admitted to the Zurich Bar in 1995 and to the governing or supervisory bodies of several Swiss listed companies New York Bar in 1997. Patrick Schleiffer is admitted as a recognised such as Helvetia Holding AG and Novartis AG. Furthermore, he representative for the listing of securities on the SIX Swiss Exchange. has been admitted as a recognised representative for the listing of He lectures capital markets and securities law in the LL.M. Program of securities on the SIX Swiss Exchange. Since 2008, Andreas von the University of Zurich and is a regular speaker at conferences and Planta chairs the Regulatory Board of the SIX Swiss Exchange, its co-editor of the Swiss internet-based law journal CapLaw. independent body entrusted with the adoption of self-regulation.

While Lenz & Staehelin is acknowledged by most as Switzerland’s leading law firm, its connections and expertise span the globe. With over 200 lawyers, its ability to innovate and adapt to the ever-changing complexities of legal and regulatory environments in Switzerland and beyond has attracted many of the world’s top corporations as well as private individuals. Continuity, stability and a pragmatic understanding of the big picture have all played a significant part in the firm’s development and success – and in its ability to attract the best young talent. Swiss-orientated but globally attuned, Lenz & Staehelin is rightly recognised in Switzerland and abroad as ‘The world’s Swiss law firm’.

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United Kingdom Bruce Hanton

Ashurst LLP Vanessa Marrison

on matters where they conflict, an exception to this rule is found in 1 Setting the Scene – Sources and situations where the 2006 Act specifically provides that a particular Overview section has effect subject to any provision of the company’s articles. Also relevant to all companies will be non-statutory, common law 1.1 What are the main corporate entities to be discussed? principles, such as those concerning the fiduciary duties of directors, although these will not be discussed in this chapter. Although corporate governance is relevant to all types of companies Listed companies must additionally adhere to a number of further and no less so to private companies, the companies covered in the rules and regulations. These include directly applicable Regulations below answers are: (i) officially listed public limited companies from the EU and the various rules of the independent body that whose securities are admitted to listing on the Official List of the regulates the financial services industry in the UK – the Financial Financial Conduct Authority and to trading on the Main Market of Conduct Authority (the “FCA”), as well as further best practice the London Stock Exchange (“listed companies”); and (ii) AIM codes and guidance issued by other bodies and groups. These quoted public limited companies whose securities are admitted to include: trading on AIM (“AIM companies”). (That said, there are currently ■ the EU Market Abuse Regulation (2014/596/EU) (“MAR”) suggestions from the Government that it may be time to introduce a which is directly applicable in the UK as from 3 July 2016 corporate governance code for the UK’s largest private companies, and contains prohibitions on conduct amounting to market but at this stage it is just a discussion option.) abuse and manipulation and insider dealing; Where this chapter simply refers to a company or companies or ■ the FCA Disclosure Guidance and Transparency Rules shareholders or directors of a company or companies, it is referring containing guidance on disclosure and rules on, amongst other to both listed and AIM companies. Where there is a distinction to be things, periodic financial reporting, corporate governance issues and some other continuing obligations (the “DTRs”); made between the treatment of a listed company, as opposed to an AIM company, each will then be referred to in turn. ■ the FCA Listing Rules containing, amongst other things, six overarching “Listing Principles” as well as detailed The London Stock Exchange’s (“LSE”) Main Market is its flagship continuing obligation rules in areas such as regulatory international market for established companies across all sectors, notifications, annual financial reports, corporate governance home to over 1,400 companies representing some 40 sectors and and transactions requiring shareholder approval (the “Listing 60 countries, and underpinned by globally-respected standards of Rules”). regulation and corporate governance. AIM is LSE’s more lightly Note that there are two listing categories within the general regulated market for smaller, growing companies, home to over 1,200 concept of a listed company in the Listing Rules. Different companies, some 20 per cent of which are incorporated overseas. regulatory standards apply to each category. A “standard listing” requires the company only to comply with EU minimum standards. A “premium listing” additionally 1.2 What are the main legislative, regulatory and other requires the company to comply with more super-equivalent corporate governance sources? standards; for example, more stringent eligibility for listing criteria and more stringent continuing obligations, including The law is as stated at 1 May 2017. as to corporate governance. This distinction between a All companies must abide by the primary corporate legislation in standard and premium listing is only relevant as regards the Listing Rules and also the UK Corporate Governance Code the Companies Act 2006 (the “2006 Act”). mentioned below, and is not relevant to any other law or Also relevant for all companies is their principal constitutional regulation including the 2006 Act and the DTRs which do governing document known as the articles of association, which not make this distinction. Accordingly, this chapter will prescribe regulations for the company. These reflect the contract generally talk about a “listed company” as defined above in and relationship between shareholders and contain the overarching question 1.1, except where it is discussing the Listing Rules rules for the company, including rules on, for example, shareholder or the UK Corporate Governance Code; in which case, it meetings, borrowing powers, powers and duties of directors and will deal with the position for premium listed companies only (and only incidentally will the chapter mention standard many other aspects relating to the governance, in its widest sense, of listed companies, which are far fewer in number and for the company. Articles of association should be consulted in relation which the obligations are fewer); to all governance issues, as they may contain relevant details and also because, whilst the 2006 Act will generally prevail over articles

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■ the UK Corporate Governance Code (the “Corporate ■ as regards the DTRs, DTRs 1-3 and 5 apply (see the answer Governance Code”), issued and regularly reviewed by the to question 2.7 for more on DTRs). independent regulator responsible for promoting confidence As regards AIM companies and the Corporate Governance Code, in corporate reporting and governance – the Financial whilst it is only strictly applicable to premium listed companies, Reporting Council (the “FRC”). The current version of the Corporate Governance Code is the April 2016 version AIM companies may choose to comply with it, or at least parts of effective for accounting periods beginning on or after 17 it, voluntarily, for a variety of reasons. This may be because their June 2016. The Corporate Governance Code is the principal nominated advisers require them to, perhaps because they wish to regulation on corporate governance for premium listed be seen to observe best practice and, more recently, with pressure companies (including overseas incorporated companies with from institutional investors to do so. There is also another corporate a premium listing). It covers a very wide range of areas, governance code based on the Corporate Governance Code but including board balance, independence and remuneration, adjusted to be more relevant for smaller quoted companies which relations with shareholders and the need to maintain a has been published by the Quoted Companies Alliance (“QCA”)

sound system of internal control including effective risk United Kingdom management systems. and is known as the Corporate Governance Code for Small and Mid- size Quoted Companies (2013) (the “QCA Code”). Many AIM The Corporate Governance Code is voluntary. However, the Listing Rules require premium listed companies, in their companies seek to follow the QCA Code or a combination of the annual accounts, to (i) report on how they apply its main QCA Code and the Corporate Governance Code. principles, and (ii) either confirm that they comply with its As regards AIM companies and guidelines from investor detailed provisions or explain their non-compliance (the latter representative groups, whilst AIM companies are not generally being known as “comply or explain”). (A listed company required to adhere to these guidelines in the same way as listed with a standard listing is not subject to this requirement, but companies, they are often encouraged to. Some of them (perhaps will still need to publish a corporate governance statement detailing its approach to corporate governance.) The strength the larger ones with shareholder bases that include some institutional of the Corporate Governance Code is considered to be that, investors) may try to adhere to the guidelines of these groups (or whilst voluntary and so flexible, it nonetheless represents best engage with them where they propose not to). practice and most premium listed companies will endeavour Corporate governance regulation and practice is deeply-rooted in to comply with it, in order that they do not have to explain the UK. Many of the sources mentioned above, or their precursors, non-compliance publicly. When they cannot comply, they have been in existence for a very long time. The first mainstream should produce detailed explanation as to why they are not complying, which investors should carefully evaluate. (See best practice corporate governance codes were published in the question 1.3 for more on recent developments in relation to early 1990s. Key aspects of corporate governance in the UK, which the Corporate Governance Code.); and will be discussed in more detail below, are typified by: ■ guidelines and pronouncements of investor representative ■ a single board with checks and balances; groups, such as the Investment Association (“IA”) and the ■ effective rights for shareholders; Pre-emption Group, which whilst not having force of law, are ■ transparency; and generally adhered to by listed companies because such groups represent large institutional investors. For example, there are ■ a best practice code on corporate governance, operating on a guidelines that companies are expected to abide by concerning comply or explain basis. the remuneration of directors and share capital management. Some of these investor representative groups will highlight to their members where the Corporate Governance Code and 1.3 What are the current topical issues, developments, their own guidelines are being ignored by a company and trends and challenges in corporate governance? may, although generally as a last resort, recommend that their investor members vote against resolutions being proposed by Many aspects of corporate governance in the UK, while having a company which is not complying. Most listed companies been in existence for some time, remain topical and important. As can be expected to adhere to such investor representative a result of the global financial crisis of 2008 to 2009, many aspects group guidelines (or engage with them, where they propose of corporate governance such as the effectiveness of boards, risk not to). management, financial and narrative reporting, the role of the Increasingly, there is an expectation that not only UK auditors and the audit committee, the need for shareholders to hold incorporated but also non-UK incorporated companies, if boards more to account and the role of executive remuneration they have a premium listing, should abide by these investor generally and as regards risk-taking, in all companies, but especially representative guidelines and pronouncements. For example, the 2015 Statement of Principles for the disapplication of pre- those in the financial sector, are highly topical and in many cases emption rights issued by the influential Pre-Emption Group have been the subject of recent reform, at a national and EU level. clarified that the principles apply to both UK and non-UK Many companies in the UK may well have wished for a period of incorporated premium listed companies. respite from corporate governance developments given the pace of AIM companies are more lightly regulated than listed companies recent change. However, during the course of 2016 and into 2017, a although they too have some additional rules to comply with. These number of failings and issues have again come to the fore meaning include: change is likely to continue apace. These include: ■ the EU Market Abuse Regulation (2014/596/EU) (“MAR”) ■ perceived corporate governance failings at some large which is directly applicable in the UK as from 3 July 2016 companies; and contains prohibitions on conduct amounting to market ■ lack of trust in business by the general public fuelled by these abuse and manipulation and insider dealing; high profile failings; ■ the AIM Rules for Companies (“AIM Rules”), which, though ■ high pay levels where it is increasingly difficult to see a considerably less onerous than the Listing Rules contain credible link between remuneration and performance; and provisions, for example, on the need to appoint a nominated adviser, disclosure requirements and restrictions on dealings ■ rising expectations from society and stakeholders for in shares; and improved corporate behaviour.

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In September 2016, the House of Commons Business, Energy and contributes to more pressure on companies to deliver shareholders Industrial Strategy Committee launched an inquiry into corporate short-term financial gains rather than invest for their long-term governance, looking at areas including executive pay, directors benefit. duties and board composition. In April 2017, the Committee issued its report and whilst it sees no need for a radical overhaul of corporate governance, it considers there is scope for significant 2 Shareholders improvements. It makes a large number of recommendations aimed at fostering a healthy culture in which to do business particularly 2.1 What rights and powers do shareholders have in the in terms of governance and accountability. Whether or not the operation and management of the corporate entity/ Government will take all or some of these recommendations on entities? board remains to be seen, but in light of the below development, it is likely to give the Committee report close consideration. Whilst shareholders are the owners of companies, and control United Kingdom The biggest recent development is the publication, in November the composition of the board (see question 3.2 below), generally 2016, by the Government of a Green Paper on corporate governance, shareholders, through the articles of association, entrust and delegate designed to frame a discussion of options for a significant updating the day-to-day operation and management of their companies to the of the corporate governance framework. It centres on three key areas board of directors, thereby limiting their own day-to-day role. of: executive pay; strengthening the employee, customer and wider However, law and regulation reserve certain key rights and powers stakeholder voice in the board room; and corporate governance in to shareholders by requiring shareholder approval through the the largest privately-held businesses. Many of the Green Paper’s passing of shareholders’ resolutions or within articles of association. aims chime with the new Prime Minister’s much-stated themes of For example, the 2006 Act requires shareholder approval for building an economy that works for everyone and restoring faith in substantial property transactions or loans over a certain value capitalism and free markets. The consultation period has now ended involving companies and their directors and/or connected persons. and a Government response is awaited. Several other matters cannot happen other than with shareholder A separate but clearly related development is that in February 2017, approval, for example, altering a company’s articles of association the FRC announced that it will be conducting a fundamental review and allotting shares. These and other issues requiring shareholder of the Corporate Governance Code, which will take into account: approval are often dealt with at the annual general meeting (see its own work on culture and succession planning; the outcome of question 2.3) or at specially convened general meetings, where the Green Paper; and the outcome of the BEIS Committee Inquiry. either specific or general shareholder authority may be given. Following its review, it will then commence a consultation on its Additionally, for premium listed companies, examples of where proposals later in 2017. shareholders must approve specific transactions before they can Finally, a particular matter that the FRC is calling for is that the proceed are set out in the Listing Rules and include acquisitions and Government extend the FRC’s own enforcement powers to ensure disposals of a certain size by reference to pre-set calculation methods that the FRC can take disciplinary action against all directors where (commonly referred to as the “class tests”), as well as transactions there have been reporting breaches. It remains to be seen how the with related parties including directors and their associates. (These Government responds to this, but the idea does seem to have support rules do not apply to standard listed companies.) from various quarters. For AIM companies, the AIM Rules provide that companies are Another area of challenge is the concern that short termism is typically required to notify certain details of transactions to the a problem in UK equity markets and how to better ensure that market rather than seek shareholder approval, although there are just the equity markets support their core purpose of enhancing the a few examples that require shareholder approval (reverse takeovers performance of UK companies and providing returns to savers. That and disposals resulting in a fundamental change of business). is, how to encourage long-term value creation rather than short-term Following the financial crisis of 2008/9 and the ensuing economic profit. In July 2012, Professor John Kay issued his final report on crisis, one of several areas of debate has been the role of shareholders “UK equity markets and long-term decision-making”. In the report, and how to encourage/empower them to hold investee companies he makes a number of recommendations, aimed at a range of bodies more to account. As already mentioned and as dealt with in more including regulators, the Government, companies and participants detail in question 3.3, one example of how shareholders have been in the equity markets. These recommendations are wide-ranging, empowered is the 2006 Act amendments to enhance the voting going further than just corporate governance and listed companies. rights of shareholders of listed companies as regards directors’ They include changing the culture of market participants to promote remuneration, principally by giving shareholders a regular, binding long-term decision-making as well as restoring confidence in the vote on their companies’ remuneration policies. investment chain by applying fiduciary standards. In October 2014, the Government published its progress report on the implementation of the Kay Review on building a culture of long-term equity 2.2 What responsibilities, if any, do shareholders have as regards the corporate governance of their corporate investment. The report reviews progress to date, as well as setting entity/entities? out the next steps, acknowledging that more needs to be done. Some of what has been done so far has related directly to companies (e.g. The UK Stewardship Code aims to promote better dialogue and directors’ remuneration reforms, removal of quarterly reporting, and engagement between shareholders and company boards to help the 2014 UK Corporate Governance Code and associated guidance). improve long-term returns to shareholders and the efficient exercise Despite some initiatives aimed at the short-termism conundrum, of governance responsibilities (the “Stewardship Code”). It this area remains a challenge. The BEIS Committee Inquiry into operates on a “comply or explain” basis and is aimed particularly at Corporate Governance, mentioned above, talks about the problem institutional investors. in terms of changing business ownership in a globalised economy In terms of encouraging shareholder engagement with companies, leading to the rise of “ownerless companies” with no one investor developments such as the Stewardship Code, whilst not mandating with a sufficient stake to act as a responsible owner which in turn legal rights, powers or responsibilities to shareholders, are aimed at

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enhancing the quality of engagement between institutional investors numbers or percentage of voting rights. These include the right for and their investee companies. They serve to remind us that, on such shareholders to: key issues, shareholders may, in addition to, or before, using their ■ require circulation of resolutions or other matters at the strict legal powers and rights, choose to engage with their investee AGM; companies in an effort to influence perhaps general strategy or ■ require the company to circulate a statement of up to 1,000 particular issues in accordance with their views. This engagement words; and can range from private correspondence and meetings through to ■ require the directors to call a general meeting. public activism. Generally, these requisition rights tend to be used by activist The Stewardship Code sets out good practice on engagement with shareholders when consensual engagement with the company has investee companies to which institutional investors should aspire. It broken down. requires firms, such as asset managers and owners who sign up to One other development worth briefly noting in the area of shareholder it (and note that UK-authorised asset managers are required by the

meetings is a recent change in the Corporate Governance Code which United Kingdom FCA Conduct of Business Rules to sign up to it), to annually publish is aimed at promoting better shareholder engagement by companies. on their website a statement of how they have complied (or not, as A provision of the Corporate Governance Code now provides that the case might be) with the Stewardship Code. It covers areas such where a significant proportion of votes have been cast against a as how investors discharge their stewardship responsibilities and the resolution (what is significant is decided by the board), the company need to disclose their policy on this, how they monitor their investee must, when announcing the results of the voting at that meeting, companies and how they will escalate their stewardship activities if also explain what actions it intends to take to understand the reasons the need arises. behind that vote result. The FRC has said that while it still expects Other shareholder engagement-type initiatives worth mentioning engagement ahead of shareholder meetings to remain a key element here include: of good stewardship, with this change they are hoping to change ■ the setting-up of the independent “Investor Forum” in behaviour so that companies also think about and disclose how they October 2014. This is a group which comprises investor intend to engage with shareholders to address their concerns. industry professionals and company representatives, with the objectives of making the case for long-term investment approaches and creating an effective model for collective, 2.4 Can shareholders be liable for acts or omissions of co-ordinated engagement and enhanced shareholder the corporate entity/entities? stewardship; and ■ various IA shareholder engagement initiatives which can The basic premise of limited liability companies is that the liability include engagement initiatives initiated by the IA itself or by of shareholders is limited to the amount of their capital contribution its members and then supported by the IA. on the shares for which they have subscribed or agreed to subscribe. This, allied with the principle of separate corporate personality, 2.3 What shareholder meetings are commonly held and i.e. that a company has its own legal identity and is distinct from, what rights do shareholders have as regards them? and not (subject to very few exceptions) agent for its shareholders, means that only in exceptional circumstances will the English courts Shareholder meetings are known as “general meetings”. seek to “pierce the corporate veil” and hold shareholders liable. Whilst none of these exceptional circumstances are likely in respect The 2006 Act requires that companies hold a specified annual of shareholders of a listed or AIM company, they include certain general meeting (“AGM”) within six months of each year-end. For instances provided for in statute; for example, a company engaging listed companies, the DTRs also require annual financial reports in fraudulent trading with intent to defraud creditors where the and accounts to be made public within four months of their year shareholder is knowingly party to that, as well as instances provided end. The interplay of these requirements and the fact that invariably for in case law, such as involving fraud. listed companies will send out their annual reports and accounts together with their AGM notices mean that many will hold the AGM On a related note, if a shareholder were found to be acting as well within the six-month deadline. a shadow director (that is, a person in accordance with whose directions or instructions the directors of a company are accustomed AGMs commonly include the following routine business to be voted to act), then he or she could have the same liability as a director on on by shareholders – laying and receiving of accounts, declaring certain issues including potential personal liability. of dividends, appointing/reappointing of auditors and directors, approving of directors’ remuneration reports (see question 3.3 for details on this), authorising of political donations, allotments and 2.5 Can shareholders be disenfranchised? buybacks of shares and amending articles of association. Companies may hold other general meetings as and when they need Shareholders can be disenfranchised only in very limited and to (e.g. to approve specific non-routine corporate actions), subject specific circumstances. to complying with relevant provisions of the 2006 Act and their For example, under the 2006 Act, upon a takeover of a company, articles of association, e.g. as to notice, etc. where 90 per cent of the shares to which the offer relates have been Voting at general meetings either requires an ordinary resolution acquired by a bidder, the remaining 10 per cent may be compulsorily (requiring a simple majority of those voting in person or by proxy), purchased by that bidder, subject to compliance with prescribed or a special resolution (requiring a majority of no less than 75 per procedures. Also, on a court-approved scheme of arrangement where cent of those voting in person or by proxy). an arrangement is proposed between a company and its shareholders or creditors, if a majority in number representing 75 per cent in value Although the default position is for the board to call shareholder of those present and voting approve the scheme, then the scheme, meetings and determine the content, shareholders have a limited subject to approval by the court, will be binding on all shareholders. number of requisition rights in this regard set out in the 2006 Act, Also, where registered shareholders fail to respond to specific notices subject to meeting certain thresholds in terms of either shareholder from the company asking for details of ultimate ownership of their

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shares, the company can ask a court to impose restrictions on their ability to transfer and vote the shares in question. 3 Management Body and Management A further example for premium listed companies is where the Listing Rules provide that transactions between premium listed 3.1 Who manages the corporate entity/entities and how? companies and related parties (e.g. shareholders) must (unless de minimis) be approved by shareholders; in which case, the related All companies are managed by a single, one-tier board of directors party shareholder in question (and its associates) may not participate (the “board”). The 2006 Act provides that listed and AIM companies in the vote. (There is no such disenfranchisement for shareholders of must have at least two directors, but does not provide for a maximum. standard listed or AIM companies, although they do have disclosure The company’s articles of association often provide for a minimum requirements.) and maximum number of directors. Articles of association should be consulted on all board/director questions as they will contain provisions relevant to directors and their procedures.

United Kingdom 2.6 Can shareholders seek enforcement action against members of the management body? The Corporate Governance Code distinguishes two categories of director – executive directors performing executive functions The basic premise is that the proper claimant in an action in respect concerned with the day-to-day running and operation of the company, of a wrong done to a company is the company (not the shareholders) and also, as a key part of the checks and balances designed to ensure and, linked to this, that courts will not generally interfere with the boards operate well, non-executive directors performing more of internal management of companies. a supervisory, constructive challenge and strategic oversight role. There are, however, limited exceptions to this. For example, the Whilst executive and non-executive directors perform different 2006 Act contains a derivative claim procedure which confers on functions within the board as set out in the Corporate Governance shareholders the right to bring an action on behalf of the company Code, the 2006 Act does not use the distinction and simply refers (with any damages payable to the company) against directors for generally to directors. breach of duty (including negligence) in certain circumstances. To The Corporate Governance Code provides that boards should prevent abusive claims, the 2006 Act provides that the approval of contain an appropriate combination of executive and non-executive the court must be sought to continue such a derivative claim. Other directors (including independent (as defined) non-executive instances where shareholders may seek enforcement action may directors) so that no single individual or group can dominate include where there has been unfairly prejudicial conduct against board decisions. In particular (except for smaller companies), members or some of them, and where there has been a “fraud on at least half the board (excluding the chairman) should comprise the minority”, although these are unlikely as regards listed or AIM independent non-executive directors, one of whom should be companies. designated as a “senior independent director” having certain prescribed duties. The Corporate Governance Code stresses that the board and its committees should have the appropriate balance of 2.7 Are there any limitations on, and disclosures skills, experience, independence and knowledge of the company to required, in relation to interests in securities held by shareholders in the corporate entity/entities? enable them to discharge their respective duties and responsibilities effectively. There are no statutory limitations on the number of securities a Generally, companies are headed by a non-executive chairman who shareholder can hold, or the speed with which he or she can build a is responsible for leadership of the board and ensuring the board’s stake in their company. (However, takeover rules, which are beyond effectiveness, together with a chief executive who is responsible for the scope of this publication, must be considered, and, if triggered, day-to-day business operations. The Corporate Governance Code have crucial repercussions including requirements to make a provides that the roles of chairman and chief executive should not mandatory bid for all the shares of the company, or the requirement be combined, other than in exceptional cases. to offer a minimum price and also as to disclosure of shareholdings Committees which boards are required, by the Corporate Governance and dealings by relevant shareholders with interests of one per cent Code, to establish (although it is the board that remains responsible or more.) for ultimate decisions) are: Articles of association should be consulted. Although very rare, a ■ a nomination committee, to lead the process for board few companies in certain industries (for example, where the grant appointments; of licences is needed and is dependent on its level of UK or EU ■ a remuneration committee, responsible for setting shareholders) may have limitations on share ownership in their remuneration for executive directors and the chairman and articles. recommending and monitoring remuneration for senior management; and As regards disclosure of substantial shareholdings, briefly, as set out in DTR 5 (vote holder and issuer notification rules), a shareholder ■ an audit committee, with wide responsibilities including monitoring the integrity of the company’s financial in both a listed and an AIM company must notify the company of statements, reviewing internal financial controls and broader the percentage of voting rights held as shareholder or through direct internal controls and risk management systems (unless this is or indirect holdings of certain qualifying financial instruments, if expressly addressed by a separate risk committee), as well as that percentage reaches, exceeds or falls below, in the case of a UK the company’s relationship with its auditors. issuer, three per cent and each one per cent thereafter, and must do In addition, the FCA has included in its rules provisions that all FCA- so on prescribed Form TR1 within two trading days of the event regulated firms (financial services firms such as banks, insurers, or knowledge of it. The company itself is then obliged to make etc.) should, taking account of their size, complexity and nature, regulatory announcements of this information to the market. (Note consider whether their risk control arrangements should include a there are different thresholds and timings for non-UK incorporated chief risk officer and a governing body risk committee. The FCA companies.) considers that FTSE 100 banks and insurers at least should have such additional risk control measures.

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of more than a two-year fixed period are rare for premium listed 3.2 How are members of the management body appointed companies as the Corporate Governance Code suggests that notice and removed? periods be set at one year or less. The 2006 Act also sets out, in regulations, detailed provisions as Shareholders ultimately control board appointments. That said, to what information concerning the remuneration and benefits of board appointments during the year are made by the board itself directors must be disclosed in annual accounts for listed companies, (upon the recommendation of the nomination committee (see more by way of its annual directors’ remuneration report. below) and often after prior consultation with key shareholders). The Corporate Governance Code provides that shareholders must As mentioned in question 1.3, the 2006 Act was amended in 2013 to then have the opportunity at the next AGM, by way of ordinary bolster the rights of shareholders as regards directors’ remuneration resolution, to vote for, or against, the election of any director newly and payments on loss of office. The key change to the 2006 Act appointed by the board during the course of the preceding year. In is that a listed company faces a prohibition and will not legally be able to make a payment of remuneration or a payment for loss addition, the Corporate Governance Code contains a requirement for United Kingdom annual re-elections of all directors of FTSE 350 listed companies, of office to a director unless it is consistent with the most recent which is reported to have been taken up by almost 100 per cent of shareholder-approved remuneration policy (or it is specifically such companies now. For other companies below the FTSE 350, approved by shareholders, or it is subject to a limited exemption for each director has to be re-elected at regular intervals of no more pre-27 June 2012 agreements or obligations). Linked to this, the than three years and non-executive directors who have served more format of the directors’ remuneration report, which listed companies than nine years should be subject to annual re-election from then on. have to publish as part of their Annual Report, has changed. It is Note, however, that even some companies below the FTSE 350 have now split into three parts: an “annual statement” by the chair of the chosen to voluntarily move to annual re-elections for all directors. remuneration committee; a forward-looking “directors’ remuneration policy” setting out future policy on directors’ remuneration; and a The Corporate Governance Code also contains general provisions backward-looking “annual report on remuneration” showing how designed to ensure formal, rigorous and transparent procedures for the remuneration policy was implemented in the financial year elections and re-elections of directors. These include requirements under review. The “annual statement” and the “annual report on for a nomination committee, whose role it is to lead the process for remuneration” continue to be subject to an annual, advisory vote board appointments and make recommendations to the board. by shareholders at the AGM, but many more disclosures are now In a recent change to the Listing Rules for listed (not AIM) required in the annual report including a single, comparable figure companies with a controlling shareholder or shareholders (meaning for each individual directors’ remuneration and also a statement a shareholder holding 30 per cent or more of the votes), when of how shareholder views have been taken into account. The key independent directors are to be elected or re-elected to the board of new voting aspect of the amended legislation is that the policy such a company, commonly for FTSE 350 companies at each AGM section of the directors’ remuneration report, which contains many as mentioned above, additional procedures, principally involving a significant new disclosures (including policy on clawback and vote by shareholders independent of the controlling shareholder/s maximum possible percentage pay increases), is subject to a new, and additional disclosures that enable such independent shareholders separate, binding shareholder vote at the AGM, by way of ordinary to have the information they need for an informed vote, must be resolution, which vote is to be held at least every three years (but followed. more often in some circumstances) and, as stated above, only There are no nationality restrictions on who may be appointed as payments to directors in line with this shareholder-approved policy a director. The 2006 Act contains a minimum age restriction of 16 may then be made. for all directors. The Corporate Governance Code also contains a section on As to removal of directors, whilst articles of association commonly remuneration based on principles such as avoidance of excessive provide for situations when the office of director must be vacated remuneration, linking rewards to performance and promoting the which may include where a director’s resignation is requested long-term success of the company. Additionally, amongst others, the in writing by all other directors, the power to remove directors IA has published and annually updates its executive remuneration generally lies with shareholders who may, subject to giving the principles for listed companies, which deal with such things as: requisite notice, by ordinary resolution at a general meeting remove base pay; bonuses; pensions; contracts; severance; and share-based a director of a company. In practice, if enough key shareholders incentive schemes. come together expressing dissatisfaction with a director and request AIM companies are required by the AIM Rules to include, in their his removal, any company will have to consider this, and may take annual accounts, limited details of remuneration earned by each a board decision to ask the director to resign, so that a formal and director in the financial year in question. Although they are not public shareholder vote on a resolution is avoided. If, on the other required by the 2006 Act to prepare a directors’ remuneration report, hand, the board supports the director and is not willing to remove some nonetheless choose to, although it is not currently expected him or her, the shareholders seeking his or her removal will need that many, if any, will put it to a binding vote, as they are not legally to requisition a resolution or meeting using their requisition rights required to. (mentioned above in question 2.3) in the hope that such resolution In addition, regulated financial sector firms (such as banks, insurers, will secure the necessary shareholder votes in favour of removal. etc.) are also subject to one or more of a number of Remuneration Codes issued by the PRA and the FCA. These Codes aim to ensure 3.3 What are the main legislative, regulatory and other remuneration policies, procedures and practices that are consistent sources impacting on contracts and remuneration of with, and promote, effective risk management. Certain provisions members of the management body? of the Codes apply to all staff but the majority apply to staff who fall within the category of “material risk-takers”. For banks and credit The 2006 Act provides in respect of all companies that directors’ institutions, the relevant Remuneration Code includes provisions on service contracts with a fixed term of over two years must be the capping of bonuses for, amongst others, senior management. approved by shareholders. In practice, directors’ service contracts

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As mentioned in question 1.3 and despite the relatively recent reforms in this area in 2013, executive pay is yet again on the agenda 3.5 What is the process for meetings of members of the for reform and features in the 2016 Government Green Paper. The management body? Government is considering a number of aspects and within them a number of options. Areas for possible reform, to further strengthen Board meetings are called whenever required, by giving notice to the hand of shareholders and other stakeholders, include: all directors as required by the company’s articles of association. ■ Shareholder voting and other rights. There is no statutory minimum number of board meetings. The Corporate Governance Code requires that the board of a premium ■ Shareholder engagement. listed company should meet with sufficient regularity to discharge ■ Remuneration committees. its duties effectively and that the company’s annual report should set ■ Transparency. out the number of board meetings (and committee meetings) held, ■ Long-term incentive plans. as well as individual attendance by directors. United Kingdom

3.4 What are the limitations on, and what disclosure is 3.6 What are the principal general legal duties and required in relation to, interests in securities held by liabilities of members of the management body? members of the management body in the corporate entity/entities? As regards general legal duties, directors of companies incorporated in England and Wales are subject to overarching fiduciary duties that Directors are permitted to own shares in their companies. There they owe to their companies. These duties are the same for, and apply are no statutory or regulatory provisions requiring them to hold to both, executive and non-executive directors, whether of listed or shares. However, the IA and other shareholder representative AIM companies. These duties derive from longstanding common bodies encourage directors to hold shares in the companies that law, but recently the 2006 Act codified the main general duties which they manage. Many directors will hold shares in their companies directors owe to the company. These codified general duties are: through the operation of incentive or bonus plans. ■ to act within their powers; As regards disclosure of amounts of shareholdings in listed and ■ to promote the success of the company; AIM companies, the major shareholder notification requirements of ■ to exercise independent judgment; DTR 5 already mentioned in question 2.7 apply equally to director shareholders of such companies if they meet the relevant thresholds. ■ to exercise reasonable care, skill and diligence; ■ to avoid conflicts of interest; As regards disclosure of dealings in shares, directors’ dealings are governed by MAR which, along with instruments and guidance, ■ not to accept benefits from third parties; and requires that directors of listed and AIM companies may not deal at ■ to declare interests in proposed transactions or arrangements. all in their company’s shares during certain periods known as closed It is not possible, within the confines of this chapter, to look in any periods. Additionally, if and when they deal outside of closed periods, detail at all these general duties, so we will outline just one of them. they must make prescribed disclosures within a given time to their The duty to promote the success of the company requires that a company which must in turn disclose to the markets. Companies director of a company must act in the way that he considers, in good must make their directors aware of their obligations under MAR. faith, would be most likely to promote the success of the company The former Model Code on share dealings in the Listing Rules for the benefit of its members as a whole, and in doing so,have has been removed as it was considered incompatible with MAR. regard (amongst other matters) to a number of factors, including: However, it was felt that many companies governed by MAR still ■ the likely long-term consequences of any decision; wanted a code to govern directors’ dealings. A coalition led by the ■ the interests of the company’s employees; Institute of Chartered Secretaries and Administrators (ICSA) have ■ the company’s business relationships with suppliers, customers drafted a dealing code which imposes restrictions on dealings by and others; directors and their related persons (and some other senior employees ■ impact on the community and the environment; may also be covered). The code covers, among other things, (i) dealing restrictions for longer closed periods than the MAR periods ■ maintaining a reputation for high standards of business conduct; and that companies may voluntarily chose for their directors to adhere to; (ii) dealing restrictions when directors are in possession of inside ■ the need to act fairly as between members of the company. information; and (iii) clearance procedures for when dealings may This duty enshrines the concept of “enlightened shareholder value” take place. Directors (and others) covered by their company code – meaning that directors should first act in the way they consider (whether the ICSA Code, a variant of it or another code) will be in good faith would promote the success of the company, and that expected to observe it. directors are more likely to achieve long-term sustainable success For AIM companies, as well as their being governed by MAR, the if they pay attention to a wider range of matters. “Success” is not AIM Rules also apply, so their directors need to be mindful of both. defined, but it is considered that, for a commercial company, it is a It is also now a requirement of the AIM Rules that AIM companies long-term increase in value. have a reasonable and effective dealing policy and the AIM Rules The above are the directors’ principal general duties. Directors of set out the minimum provisions for such a policy, so AIM companies all companies have many other specific duties, whether under health may well choose to adopt the ICSA Code or a variant of it (given the and safety legislation, employee rights legislation, bribery laws, demise of the Model Code which many had tended to voluntarily corporate manslaughter laws, insolvency laws, as well as under the follow). Listing Rules, the AIM Rules, the DTRs, the 2006 Act and much Other areas of law which will affect the ability of all directors to other law and regulation. deal legally in their securities, but which are beyond the scope of As regards liabilities of directors, these can include: this chapter, include insider dealing prohibitions under the Criminal ■ action for breach of the general duties under the 2006 Act Justice Act 1993. mentioned above, as well as other common law fiduciary

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duties to which directors are subject, which would most ■ directors explaining how they have assessed the prospects commonly give rise to the payment of damages; of the company, over what period and why, and a statement ■ action for breach of statutory duty (e.g. for breach of specific that they have a reasonable expectation that the company requirements under the 2006 Act and other legislation) for will be able to continue in operation and meet its liabilities which penalties may range from fines (e.g. for default in as they fall due over that period, expected by the FRC to be filing accounts) through to imprisonment (e.g. for up to 10 “significantly longer” than 12 months. years for an individual guilty of offences under the Bribery Changes resulting in the current Corporate Governance Code of Act 2010); April 2016, as mentioned in the answer to question 1.2 above, ■ dismissal by his/her company, subject to employment law, were modest in nature and principally relate to audit committees for non-fulfilment of duties or dismissal by shareholders (see including their composition, their reporting and their need to give question 3.2 for more); and advance notice of audit re-tending proposals. ■ disqualification under the Company Directors’

Disqualification Act 1986 (e.g. for fraudulent trading, United Kingdom conviction of certain offences or for being held unfit to be 3.8 What public disclosures concerning management involved in company management). body practices are required?

Briefly, specific areas of board practice on which the Corporate 3.7 What are the main specific corporate governance Governance Code requires disclosures in the annual reports of responsibilities/functions of members of the premium listed companies include, but are not limited to, the management body and what are perceived to be the key, current challenges for the management body? following: ■ how the board operates, including which decisions the board As regards corporate governance, the following are some (but by takes and which are delegated; no means all) of the responsibilities of directors of premium listed ■ identification of the chairman, deputy chairman, chief companies as set out in the Corporate Governance Code: executive, senior independent director and members of the committees and any director considered to be independent (as ■ collective responsibility for the long-term success of the defined); company, by providing entrepreneurial leadership within a framework of prudent and effective controls; ■ a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for ■ setting the company’s strategic aims, values and standards; implementing the policy and progress on achieving the ■ being responsible for determining the nature and extent of objectives; the principal risks the company should take in achieving ■ how performance evaluation has been conducted on the its strategic objectives and for maintaining sound risk board, its committees and individual directors and where an management and internal control systems; external facilitator has been used, his/her identity; and ■ financial reporting, by presenting a fair, balanced and ■ descriptions of the work of the nomination, audit and understandable assessment of the company’s position and remuneration committees. prospects which provides the information necessary for shareholders to assess the company’s performance, business Also, as mentioned further in the answer to question 5.2, since the model and strategy; Listing Rules require premium listed companies to state how they ■ devising appropriate remuneration, by setting executive have applied the main principles of the Corporate Governance Code, remuneration levels which are not excessive, and which are such companies tend to have fairly lengthy narrative corporate linked to corporate and individual performance; and governance sections in their annual reports. As regards board ■ relationships with shareholders, by maintaining dialogue practices, these will often cover, for example, structure and role with shareholders based on the mutual understanding of of the board, the division of responsibilities between running the objectives. board and running the company’s business, director appointments, See also question 3.6 as regards principal general duties of directors. induction, ongoing training and regular evaluation of the board and its committees. As regards challenges for boards, in recent years we have seen a focus on, amongst other things, directors’ remuneration, narrative There are also regulatory notification requirements under both reporting and shareholder engagement. There has been new the Listing and AIM Rules, for example, whenever there are legislation and/or increased regulation in all of these areas, and they appointments to, or resignations and dismissals from, the board. continue to be a concern to regulators, companies and investors. (For a standard listed company, whilst it does not need to comply See also the answer to question 1.3 on the Government’s proposals with the Corporate Governance Code, it must comply with the for further reforms and related developments. DTRs and disclosures will include the governance code to which The last substantial set of changes to the Corporate Governance it is subject or which it chooses to comply with and other specific Code in 2014 focused particularly on risk management and internal details including a description of the composition and operation of control by boards. The aim of the changes was to significantly its management body and its committees.) enhance the quality of information that investors receive about the long-term health and strategy of the companies they invest in and 3.9 Are indemnities, or insurance, permitted in relation to to raise the bar for risk management. As well as the longstanding members of the management body and others? disclosures that boards have had to make in this area which are centred around explaining how the board maintains a sound system Yes. However, a company cannot indemnify its directors in respect of risk management and internal control, key changes for listed of negligence or breaches of their duties to the company itself. It can companies and their management include: indemnify its directors in respect of liability to third parties (other ■ directors confirming that they have carried out a robust than liability for criminal fines and regulatory penalties). Also, assessment of the principal risks facing the company and also defence costs incurred by directors can be indemnified, regardless explaining how they are being managed or mitigated; and of whether the action is by the company or a third party, subject to

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certain exceptions (for example, where the action is by the company and judgment is given against the director, the costs must be repaid). 4.3 What, if any, is the law, regulation and practice Companies are also permitted to, and usually do, maintain insurance concerning corporate social responsibility? for directors in respect of liability to the company. From a national standpoint, as regards corporate social responsibility (“CSR”) also known as “corporate responsibility”, 4 Other Stakeholders the UK Government has defined this as “the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the 4.1 What, if any, is the role of employees in corporate interests of wider society”. Taking this into account, a mixture governance? of law, regulation, guidance and voluntary, ethical conduct is envisaged. Employees do not have a general role in corporate governance. There United Kingdom is, for example, no requirement to have employee representatives on Whilst there is no single piece of legislation or regulation that deals the boards of UK companies or for works councils. Absent specific with corporate social responsibility, a starting point is the 2006 Act employment-related situations (e.g. large redundancy programmes) which enshrined in law the concept of “enlightened shareholder where employees may have information and consultation rights value” which recognises that directors will be more likely to achieve (which is beyond the scope of this publication), there is no general long-term sustainable success if their companies pay regard to wider role for employees in corporate governance. However, best practice matters, such as impact on the community and environment (see would be for companies to have whistle-blowing policies and also the other matters listed in question 3.6). Allied with this is the procedures in place, so that employees can raise issues on all aspects preparation and submission to shareholders, as part of the annual of the business. Also, the Corporate Governance Code provides that reports, of a strategic report, which, for listed companies requires companies’ audit committees should review arrangements by which them, to the extent necessary for an understanding of the company’s staff may, in confidence, raise concerns about possible improprieties business, to disclose information on environmental, employee, in matters concerning financial matters or other matters within social and community matters amongst others. their companies, and should ensure proportionate and independent Many pieces of legislation, whilst on specific issues, do arguably investigation of such issues raised and appropriate follow-up action. contain elements guided by sentiments associated with corporate As mentioned in the answer to question 1.3, the Government Green social responsibility. For example, the Bribery Act 2010 which Paper for reform of corporate governance has as one of its main came into force on 1 July 2011, is aimed at facilitating more effective areas – how to strengthen the voice of stakeholders, including prosecution of bribery and also, by the creation of a corporate employees, in the boardroom. Although the Government has offence of failure to prevent bribery, at encouraging commercial confirmed that it will not mandate having employee representatives organisations actively to take steps to eradicate bribery. Another on boards, it is considering a number of options including: (i) example is the Modern Slavery Act 2015 which whilst largely aimed stakeholder advisory panels; (ii) designated non-executive directors at the crimes of slavery and human trafficking (modern slavery), with responsibility for a particular group of stakeholders; (iii) how to prosecute perpetrators and how to help victims, also contains individual representatives on board (although as stated this will not a provision aimed at large businesses doing business in the UK be mandatory); and (iv) strengthened reporting on how companies requiring them to state what steps if any they are taking to eradicate engage with stakeholders. It remains to be seen what options the modern slavery from their businesses and their supply chains. The Government decides to pursue, and whether companies perhaps Act aims to use disclosure to achieve a race to the top in terms of decide to adopt any voluntarily before the Government decides. how businesses try to ensure they are not part of modern slavery. As regards human rights in particular, in May 2016 the Government updated one of its key document in this area – “Good Business – 4.2 What, if any, is the role of other stakeholders in implementing the UN Guiding Principles on Business and Human corporate governance? Rights”, which is predicated on the UK’s “National Action Plan to implement the UNGPs”. The Good Business document, among As mentioned in the answer to question 3.6, one of the general other things, sets out: the business case for respecting human rights; duties of directors is to promote the success of the company for the Government’s expectations of business; and actions that have been benefit of members, at the same time having regard to a number of and are being taken to support business implementation of the factors including the interests of employees; the company’s business UNGPs (including, for example, ensuring the human rights reporting relationships with suppliers, customers and others; and impact on and other aspects of the EU Directive on non-financial disclosure the community and the environment (section 172 of the 2006 Act). (see more below) are implemented; supporting a corporate human Although shareholder primacy is paramount, other stakeholders rights benchmarking initiative; and guidance from the Equality and should be considered. However, as the developments mentioned Human Rights Commission to help company boards). in the answer to question 1.3 elude to, there is currently doubt on a number of fronts as to whether the voice of stakeholders is In practice, many of the larger listed companies have been being sufficiently taken into account. The options currently being voluntarily acting, and reporting, on CSR issues for some time, considered in the Government Green Paper to address this are often in accordance with internationally agreed codes or standards. mentioned in the answer to question 4.1 above. This can be seen in many different ways. For example, by signing up to internationally recognised codes, inserting ethical labour The BEIS Committee report (also mentioned in the answer to and supply chain clauses into their contracts with suppliers or question 1.3) also includes recommendations in this area including establishing formal structures to promote CSR issues within the more disclosure of how companies have considered the interest of business, such as a CSR committee and CSR champions. As regards stakeholders and for the FRC to engage with companies to promote reporting, certain companies publish environmental and sustainable engagement with stakeholders and ultimately initiate legal action development reports, and reports concerning CSR matters including, for breach of section 172 if it sees fit. for example, effect on and integration with communities, sourcing products and response to climate change.

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From an EU standpoint, although the European Commission and a variety of other disclosures to the extent necessary for an published an EU Strategy for corporate social responsibility 2011– understanding of the development, performance and position of the 2014, the proposed strategy for 2015–2020 is still awaited. company’s business. Accordingly, the disclosures in a company’s What has been finalised is the EU Directive on non-financial annual reports and accounts tend to start with the narrative strategic information and diversity information by large companies report and end with the financial statements. In between these can and groups (2014/95/EU) which will apply for financial years be found the corporate governance statements and a variety of other commencing on or after 1 January 2017, so reporting on this should regulatory information. feature in 2017 Annual Reports published in 2018. Key elements The Listing Rules, IDTRs and the Corporate Governance Code are include increasing disclosures in the accounts of large companies on the key drivers of corporate governance disclosures. The Listing non-financial matters such as environmental, social and employee- Rules require that a company’s annual reports and accounts must related matters, respect for human rights, anti-corruption and bribery include a statement of how it has applied the main principles of the issues and diversity. It remains to be seen what additional reporting Corporate Governance Code in a manner that allows shareholders this may require from listed companies as many of these areas are to evaluate how the principles have been applied. The corporate United Kingdom already covered in UK law. Key areas where we may see more governance disclosures to meet this Listing Rules disclosure reporting are on human rights and anti-corruption and anti-bribery. requirement are often done by way of a specific narrative corporate Guidance from the European Commission is expected shortly, as is a governance section within the annual reports and accounts, which consultation from the FRC on its strategic report guidance. is generally quite lengthy. This corporate governance section will cover both the Listing Rules requirement for an explanation of how the company has applied the Corporate Governance Code’s main 5 Transparency and Reporting principles and also specific requirements for disclosure set out in the Corporate Governance Code. Many of these specific disclosure requirements are disclosures on board practices (see question 3.8 for 5.1 Who is responsible for disclosure and transparency? some of these), but there are also risk disclosures (see question 3.7 for detail on risk disclosures required by the Corporate Governance Transparency and disclosure are key features of corporate governance Code), and there are also business-related disclosures centred best practice, allowing shareholders access to relevant information around an explanation of the basis on which a company generates or so that they can assess whether or not they are satisfied with the preserves value over the longer term (the business model) and the way that their investee company’s affairs are being conducted strategy for delivering the objectives of the company. by the board. In accordance with the principle of collective responsibility, it is the board as a whole, not any one individual In addition, as already mentioned, the Listing Rules require a director, that is responsible for transparency and disclosure. For comply or explain statement, detailing compliance with the detailed example, the annual reports and accounts of companies are a key provisions of the Corporate Governance Code or explaining any non- component of a company’s communications with shareholders compliance. These comply or explain statements are much shorter and the market (see the answer to question 5.2 for more), and the than the corporate governance disclosures mentioned above and DTRs require a responsibility statement to be included within them simply tend to state that all provisions of the Corporate Governance by “persons responsible within the issuer”. All directors of the Code have been complied with other than any (generally very few) company will make the necessary confirmations that make up the that have not; in which case, explanation is given in relation to the responsibility statement that appears in the company’s accounts. specific areas where a company has elected for non-compliance. Some listed companies have a disclosure committee with delegated The Listing Rules and the AIM Rules also require regulatory responsibilities for disclosure-related matters who will assist the announcements in specific corporate governance-related situations, board, although the existence of such a committee will not alter the for example, where articles of association are amended and where fact that the board remains ultimately responsible. changes are made to the board.

5.2 What corporate governance related disclosures are 5.3 What is the role of audit and auditors in such required? disclosures?

The annual reports and accounts is the key document in which Under the 2006 Act, all companies must have their annual financial annual disclosures concerning companies are made. Its contents are accounts audited by auditors unless they are exempt as a very in part governed by the 2006 Act and relevant regulations. Clearly, small or dormant company, and must appoint auditors on an annual the largest part of the disclosures in the annual reports and accounts basis to prepare an audit report to accompany these accounts. relate to financial matters which are not covered in this chapter. The auditors’ report must cover amongst other things: (i) the way However, there are also significant related narrative parts. in which the accounts have been prepared; (ii) whether, in the For example, the 2006 Act requires all companies (other than opinion of the auditors, the annual accounts give a “true and fair” very small ones) to prepare a strategic report which must contain, view of the state of affairs of the company in question; and (iii) amongst other things, a fair review of the company’s business and certain of the company’s corporate governance statements under a description of the principal risks and uncertainties facing the the Corporate Governance Code. The role of the audit and the company. This fair review must be a balanced and comprehensive auditors is to enhance confidence in financial reporting and the role analysis of the development and performance of the business during of an independent auditor, in objectively assessing the company’s the financial year and the position of the business at the endof accounts, is seen by many as crucial to the accuracy and reliability the financial year consistent with the size and complexity ofthe of accounts. business. The 2006 Act sets out further detail of what the strategic A recent development in this area is the coming into force of the report must contain and, for a listed company, it must include Competition and Markets Authority’s (“CMA”) Order relating a description of the company’s strategy and its business model to statutory audit services for large companies and in particular

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mandatory use of competitive tender processes and audit committee responsibilities (the “Order”). Broadly, the Order requires 5.4 What corporate governance information should be companies listed in the FTSE 350 (i.e. not AIM companies and published on websites? not small listed companies outside the FTSE 350) to put their audit contract out to tender at least every 10 years, and the Order also Premium listed companies need, by virtue of a combination primarily enhances the responsibilities of audit committees of such companies of the Corporate Governance Code and the 2006 Act, to publish on their including their reporting responsibilities. The Order came into force websites: (i) the terms of reference of their nomination, remuneration on 1 January 2015 for financial years beginning on or after that date, and audit committees; (ii) the terms and conditions of appointment although it is subject to complex transitional provisions in relation of their non-executive directors; and (iii) for all resolutions after a to its competitive tendering provisions, which are outside the scope vote has been taken, prescribed information about the results of the of this chapter. voting. The DTRs also require certain information to be publicly available, for example annual reports need to be publicly available The most recent developments in this area are EU reforms to enhance

United Kingdom for 10 years. Many listed companies, in fact, vol untarily publish the quality of audits and restore confidence in financial statements much more, often in the “investor” section of their websites, which, of public-interest entities (e.g. banks, building societies, insurance for the larger listed companies, may include past trading statements companies and listed companies, but not AIM companies). These and regulatory announcements, AGM materials, governance reports EU reforms comprise a new EU Statutory Audit Directive (2014/56/ and corporate social responsibility statements/reports (see question EU) and a new EU Statutory Audit Regulation (537/2014). They 4.3 above for more). took effect in June 2016 by way of amendments to the 2006 Act amongst other changes. Key areas covered include: mandatory, In relation to the Stewardship Code (see the answer to question 2.2), regular changing of audit firms used by companies (i.e. requirements the FRC expects firms who manage assets on behalf of institutional to actually switch the auditor (as opposed to just holding a tender shareholders to disclose on their websites how they have applied the under the CMA Order at which the same auditor could be re- relevant provisions (and they strongly encourage all institutional appointed)) with a maximum audit term of 20 years subject to a re- investors to report compliance with the Stewardship Code on their tender at least every 10 years; a prohibition on audit firms providing websites). certain non-audit services to their audit clients together with a AIM companies too, by virtue of the AIM Rules, have to maintain a cooling-off period in respect of some non-audit services; and a cap website on which prescribed information should be available including on the total fees for permitted non-audit services. a description of the business, names of directors, a description of the The fact that both national and EU regulators are regulating to board’s responsibilities and any committees, copies of constitutional enhance the effectiveness of audits, auditors and audit committees documents and most recent annual and half-yearly reports. shows the importance attributed to their role. A final point worth briefly noting is that in a number of areas recently there has been a move to website reporting by companies. For example, the relatively new statement on steps taken to ensure that modern slavery is not occurring within the business or its supply chains (see answer to question 4.3 for more) and the new requirement to report twice-yearly on payment practices and performance by certain large companies are both to feature on relevant company websites.

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Bruce Hanton Vanessa Marrison Ashurst LLP Ashurst LLP Broadwalk House, 5 Appold Street Broadwalk House, 5 Appold Street London, EC2A 2HA London, EC2A 2HA United Kingdom United Kingdom

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

Bruce Hanton is a partner in the corporate department in London. Vanessa Marrison is a counsel, professional development in the He acts on a broad range of corporate matters for listed and private corporate department in London. As part of the professional

companies and private equity funds. He has been a partner at Ashurst development team supporting and developing technical excellence United Kingdom since 1996. within the firm, Vanessa works on internal and client facing documents, is involved in training and also helps generally on technical legal matters, all across a wide-range of public company related areas, including corporate governance, 2006 Act and others.

Ashurst is a leading global law firm with a rich history spanning almost 200 years. Our in-depth understanding of our clients and commitment to providing exceptional standards of service have seen us become a trusted adviser to local and global corporates, financial institutions and governments on all areas of commercial law. Our people are our greatest asset. We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need. We currently have 25 offices in 15 countries that enable us to offer the reach and insight of a global network, combined with the knowledge and understanding of local markets. With 1,600 partners and lawyers working across 10 different time zones, we are able to respond to our clients wherever and whenever they need us. Our clients value us for being approachable, astute and commercially minded. As a global team we have a reputation for successfully managing large and complex multi-jurisdictional transactions, disputes and projects, and delivering outstanding outcomes for clients.

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USA Robert A. Rosenbaum

Dorsey & Whitney LLP Cam C. Hoang

The Securities Act of 1933 regulates the offer and sale of securities, 1 Setting the Scene – Sources and as well as the form and content of disclosure accompanying such Overview sales to the public. The Jumpstart Our Business Startups Act (“JOBS Act”), enacted in 2012, eased certain compliance burdens associated with securities offerings, and provided more cost- 1.1 What are the main corporate entities to be discussed? effective access to capital, for emerging growth companies (i.e., companies with less than $1 billion (U.S) annual revenue). This chapter addresses the governance of U.S. companies whose stock is publicly traded on the New York Stock Exchange (“NYSE”) The SEC issues rules and regulations under all of these Acts. or the NASDAQ Stock Market (“NASDAQ”). U.S. corporate law 3. Organisational documents varies from state to state. Because Delaware is the most common Each Delaware corporation files a certificate of incorporation state of incorporation for U.S. public companies, this chapter focuses (or “charter”) with the state, and adopts a set of bylaws. These on the Delaware General Corporation Law (“DGCL”) and related organisational documents are also exhibits to the corporation’s case law. This chapter does not address companies that are listed on annual report filed with the SEC. These documents contain important a U.S. stock exchange, but incorporated in a foreign country. provisions regarding mechanics of board and shareholder meetings, officer duties, and other corporate governance matters, to which 1.2 What are the main legislative, regulatory and other the DGCL will frequently defer. Corporations may also provide corporate governance sources? for rights and obligations of shareholders through other instruments, such as a certificate of designation for a class of securities. Such U.S. public companies are primarily governed by state corporate certificates are filed with the corporation’s state of incorporation. laws, federal securities laws, the company’s organisational 4. Stock exchange listing standards documents, and the listing standards of the stock exchanges on The NYSE and NASDAQ require listed companies to comply which their securities are traded. with their listing standards, which include certain governance 1. State corporate law mandates. For example, a majority of the directors on most U.S. Each U.S. corporation is subject to the laws of its state of public company boards must meet the independence requirements incorporation. While corporate laws will vary from state to state, established by the applicable stock exchange. Public company the DGCL and Delaware case law frequently influence the drafting boards generally are required to establish audit, compensation and and interpretation of other states’ corporate laws. nominating/corporate governance committees composed entirely of independent directors. Furthermore, certain corporate actions 2. Federal securities laws require shareholder approval, including the adoption of equity The U.S. Securities and Exchange Commission (“SEC”) regulates compensation plans and the issuance of shares representing more U.S. public companies pursuant to a number of federal statutes. than 20% of a public company’s voting power. The Securities and Exchange Act of 1934 (“Exchange Act”) requires 5. Proxy advisory firms and proxy voting guidelines annual and quarterly financial reporting, as well as interim reporting Proxy advisory firms, which analyse a broad spectrum of of certain corporate events that may be material to investors. The corporate governance issues, make voting recommendations to Exchange Act also imposes requirements on the shareholder meeting their institutional investor clients. While having no legislative and voting process. The Sarbanes-Oxley Act of 2002 (“Sarbanes- authority, these firms have gained significant influence regarding Oxley Act”), which amended the Exchange Act, and the Dodd- director elections, “say on pay” and other proposals presented at Frank Wall Street Reform and Consumer Protection Act of 2010 annual shareholder meetings. Congress is considering legislation (“Dodd-Frank Act”) impose significant, additional disclosure and that would require proxy advisory firms, among other things, to compliance obligations on U.S. public companies. The Sarbanes- register with the SEC and impose new disclosure and compliance Oxley Act focused on improving financial reporting and preventing obligations. In addition, most large institutional investors publish accounting fraud, while the Dodd-Frank Act mandated additional proxy voting guidelines that can influence corporate governance executive compensation disclosure, as part of a broader array of practices at their portfolio companies. investor and consumer protection measures. While not enacted into law, the proposed Financial CHOICE Act (“Financial CHOICE Act”) would repeal or amend certain executive compensation and corporate governance provisions of the Dodd-Frank Act.

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average board tenure, they are paying more attention to individual 1.3 What are the current topical issues, developments, director tenure, which may lead to renewed interest in imposing trends and challenges in corporate governance? director term limits. Term limits have been unpopular, because they lead to arbitrary retirements without regard to an individual Recent notable trends and developments in U.S. corporate director’s skills or contributions. governance include: While some European countries have gender equity quotas 1. Legislative and regulatory uncertainty for company boards, U.S. companies are not bound by such U.S. businesses are expecting the Trump administration to ease requirements. Nevertheless, there have been more concerted efforts regulatory compliance obligations, but are uncertain how far or in recent years to diversify U.S. boards, especially among S&P 500 how quickly the administration will act. For example, the Financial companies. USA CHOICE Act would, among other things, repeal multiple executive compensation-related disclosures (including the CEO pay ratio disclosure), and limit shareholders’ ability to offer proposals at 2 Shareholders annual meetings. 2. Risk management trends 2.1 What rights and powers do shareholders have in the Boards of directors find themselves charged with the oversight of a operation and management of the corporate entity/ broad array of internal and external risks, including cybersecurity entities? threats to consumer data and sensitive business information, Brexit-related risks, executive compensation programs that may Pursuant to the DGCL, the business and affairs of a corporation create risky incentives, and public relations fallouts from corporate are managed by or under the direction of the board of directors. practices. These issues have recently created significant liability Management of a corporation’s daily operations is the responsibility for certain U.S. companies, and their executive officers, and will of its officers, not the shareholders. Shareholders primarily continue to test the diligence and the independence of boards. influence the operation and management of a corporation through 3. Debate over dual class voting structures their ability, typically annually, to elect directors. Shareholders can also nominate their own director candidates, a tactic that is more Institutional investors have objected to multiple classes of common common at underperforming companies. Activist shareholders will stock that enable holders, usually founders, to maintain voting often nominate multiple candidates as a way to exert pressure on control over public companies far in excess of their economic stake the board and management to make significant changes within the in those companies. The recent IPO of Snap, Inc., which offered only company. While much less common, activists have also successfully non-voting shares to the public, has only increased the drumbeat for nominated candidates for a majority or 100% of director seats. regulations to prohibit such dual class structures. Apart from the rights to nominate and elect directors, the DGCL 4. Shareholder activism provides certain other rights to shareholders. Some of these may Shareholder activists, particularly activist hedge funds, pursue be exercised without prior board action, while others require the operational, governance and financial objectives, often through the board to initiate and recommend an action for shareholder approval. acquisition of board seats. There does not appear to be any sign of These include: a reduction in this activity, and boards must be ever-mindful of a ■ the right to remove one or more directors, which may possibility of an activist attack. generally be done with or without cause; 5. Proxy access and related matters ■ the right to approve amendments to the bylaws (e.g., to Shareholders have strengthened their influence over the company’s permit shareholders to act by non-unanimous written consent annual meeting proxy statement, which has historically been or to authorise proxy access (as described in question 1.3)); controlled by boards and management. As of March 31, 2017, more ■ the right, if authorised in the charter or bylaws, to call a than 400 companies, including 58% of the S&P 500, had adopted special meeting of shareholders; proxy access bylaws, many in response to shareholder demands. ■ the right to approve amendments to the charter (e.g., to These bylaws permit certain shareholders to nominate a minority of change the amount of the corporation’s authorised capital director candidates for inclusion in the company proxy statement. stock); and Despite this, to date, no shareholders have successfully presented a ■ the right to approve a merger or consolidation involving the candidate for a vote using proxy access. corporation, or a sale of all, or substantially all, of its assets. In addition, the SEC has made it considerably more difficult for The NYSE and NASDAQ listing rules also require shareholder companies to exclude shareholder proposals at annual meetings, approval of certain corporate actions, including the issuance of leading to an increase in the number of proposals focused on a securities representing 20% or more of the outstanding voting power variety of issues, including corporate governance matters. of the corporation (with certain identified exceptions). 6. Shareholder engagement The primary sources of shareholder rights are the incorporating More than ever, companies, through management and, in some state’s law (e.g., DGCL) and a corporation’s charter or bylaws. U.S. cases, directors, are engaging with shareholders about shareholders’ federal securities laws are focused more on company disclosure concerns, the value of board and management contributions to the obligations and, therefore, do not provide many substantive rights business, and the alignment of executive pay with performance. to shareholders. Nonetheless, the Exchange Act does provide 7. Board refreshment and diversity shareholders meeting certain minimum ownership thresholds with the right to submit proposals to the company for inclusion Large institutional investors are becoming more assertive about in the company’s annual proxy statement. Unless the company is board refreshment, due to their concern that above-average board successful in convincing the SEC to permit exclusion of a proposal, tenure leads to outdated skills and perspectives on the board, limits shareholders are able to advance their policy interests on a very a board’s ability to add new directors without increasing its size, and cost-effective basis. diminishes director independence. While investors have focused on

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2.2 What responsibilities, if any, do shareholders have as 2.6 Can shareholders seek enforcement action against regards the corporate governance of their corporate members of the management body? entity/entities? Shareholders may sue the board or management either through a Generally, none. In the U.S., directors and officers generally owe derivative or a direct lawsuit. fiduciary duties to shareholders. However, shareholders who have Derivative actions are filed on behalf of the corporation by the ability to exercise control (through share ownership, control shareholders against directors and/or officers. If the corporation of the board or contractual means) do owe fiduciary duties to the is not initially willing to file the suit, a shareholder may first

USA corporation and its minority shareholders. Delaware courts have make a demand on the board to do so. If that demand fails, the not extended these duties to require controlling shareholders to act shareholder may file on behalf of the corporation. If the derivative against their own economic interests. action is successful, defendants will pay monetary judgments to While not strictly a governance matter, public company shareholders the corporation and not to the plaintiff shareholders. If successful, holding more than 5% of the corporation’s outstanding shares, however, plaintiffs will often be entitled to be reimbursed for at least as well as all directors and executive officers, have certain SEC a portion of their litigation expenses. reporting requirements (see question 3.4). A shareholder may file a direct suit, on the shareholder’s own behalf, against the corporation and its board and officers to enforce that 2.3 What shareholder meetings are commonly held and shareholder’s rights as a shareholder. These claims, when filed what rights do shareholders have as regards them? against public companies, are often brought in the form of class actions, on behalf of all similarly situated shareholders. The DGCL requires all Delaware corporations to hold an annual meeting for the election of directors; if not held within 13 months 2.7 Are there any limitations on, and disclosures of the prior year’s annual meeting, shareholders may petition a required, in relation to interests in securities held by Delaware court to order such a meeting. Unless a corporation’s shareholders in the corporate entity/entities? charter or bylaws specifically authorises shareholders to do so, however, shareholders are not entitled to call special meetings of Yes. Section 203 of the DGCL restricts an acquirer of 15% or more shareholders. Shareholders owning in excess of a specified threshold of a corporation’s outstanding stock from engaging in a business possess the statutory right to call special meetings in certain U.S. combination with the corporation for three years from the date of states (other than Delaware). As noted above, shareholders may acquisition, unless (1) the share acquisition is authorised by the offer proposals at annual meetings for a variety of matters, including board in advance of the purchase, (2) the acquisition will result in requesting the board to authorise the right for shareholders to call the acquirer owning at least 85% of the outstanding shares, (3) 2/3 special meetings, and these proposals have received strong support of the outstanding shares not controlled by the acquirer are voted in recent proxy seasons. to approve the acquisition, or (4) the corporation’s certificate of Shareholders have rights to attend annual and special meetings and incorporation contains a provision expressly “opting out” of Section to vote their shares or, more commonly, to appoint a proxy to vote 203. their shares for them. In addition, U.S. federal competition laws require persons seeking to purchase publicly traded shares in excess of prescribed dollar values 2.4 Can shareholders be liable for acts or omissions of or percentage thresholds to notify the Federal Trade Commission the corporate entity/entities? and the U.S. Department of Justice of the proposed acquisition. These agencies review the notification filing to determine whether Yes, but only in relatively rare circumstances. These usually involve such an acquisition, in their view, is likely substantially to lessen smaller, privately held companies and usually occur where the competition in the U.S. If, in their view, it does, the agencies will shareholders have not observed proper corporate formalities when seek to block the proposed purchase, and may go to court to do operating those companies. In the U.S., limited liability of owners so. Investments by non-U.S. citizens in certain regulated industries, is a fundamental tenet of corporate law. Therefore, a shareholder’s such as financial services, aircraft and mass communications media, personal liability for a corporation’s actions will most often be for example, are also subject to statutory prohibitions or limitations limited to the amount invested by that shareholder. on the acquisition of more than a specified percentage of company stock. The Exchange Act has two separate filing requirements for 2.5 Can shareholders be disenfranchised? shareholders of public companies: so-called “Williams Act” filings (using Schedules 13D/G); and Section 16 filings. The Williams Act Generally, no. Corporations generally cannot eliminate voting applies to any person (or group, acting in concert) who acquires, rights embedded in outstanding securities without the approval of whether directly or indirectly, beneficial ownership of more than 5% the holders of such securities. However, common stock voting of a class of publicly traded equity securities (or derivative securities rights can be significantly diluted through a variety of legal means, convertible into or exchangeable for such class). Such persons must including by the board authorising the issuance of super voting file, within 10 calendar days of crossing the 5% threshold, a Schedule (i.e., multiple votes per share) securities, such as preferred stock 13D with the SEC, unless the person qualifies for the shorter or a separate class of common stock. In addition, corporations form “passive investor” Schedule 13G. Schedule 13G is limited may issue publicly traded low vote or non-voting stock. In recent primarily to index funds and other types of institutional investors years, such “dual class” issuances have become popular, particularly acquiring shares with no designs on control of the public company. with founder-led tech companies going public, in order to preserve A Schedule 13D filer must disclose its purpose for the acquisition, founders’ control. Most recently, and most controversially, Snap including whether the filer has any plans or proposals that are Inc. went public selling non-voting shares that were listed on the intended to or would result in material changes to the company’s NYSE.

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outstanding securities, board composition, or charter documents, it is otherwise permitted in the charter. Furthermore, once elected or an extraordinary corporate transaction. Material developments by the shareholders, a director may not be removed by the board or changes to those stated purposes, or to the filer’s shareholdings, prior to the expiration of that director’s term. require prompt filing of an amendment to the Schedule 13D.

Under Section 16 of the Exchange Act, directors and executive 3.3 What are the main legislative, regulatory and other officers of a public company, and any shareholders (or groups) sources impacting on contracts and remuneration of who beneficially own more than 10% of the company’s stock members of the management body? must, within two business days, report the acquisition of, and any subsequent transactions in, the company’s publicly traded Under Delaware law, the board establishes the terms of director equity securities to the SEC and the company. Public companies compensation. This authority may be limited in the charter or USA are required to disclose, in their annual proxy statements, share bylaws. While there are no limits under federal or state law ownership percentages of director and executive officers, and more on director compensation, Delaware courts have been strongly than 5% holders, as noted in question 3.4, as well as the names of encouraging boards to demonstrate that there are “meaningful any directors or executive officers who have made any late Section limits” on director compensation packages, due to the inherent 16 filings during the preceding year. conflict of interest boards have in approving their own pay. Many The individuals and entities who are subject to Section 16 must also companies have responded by including specific limitations in their disgorge profits from short-swing“ ” trading in the company’s stock director equity compensation plans, which Delaware courts have (see question 3.4). approved. Under current Exchange Act rules, at least once every three years, public company shareholders may cast a non-binding advisory vote 3 Management Body and Management on executive compensation (“say-on-pay” votes), and shareholders may cast a “say-on-frequency” vote at least once every six years, to 3.1 Who manages the corporate entity/entities and how? determine how frequently the say-on-pay votes should occur. The rules also give shareholders a separate vote on “golden parachute arrangements” when they are being asked to approve a merger or The board oversees the business of the corporation on behalf of the other change in control transaction. shareholders. The board appoints officers who act at its direction and who manage the business on a day-to-day basis. Also, under Exchange Act rules, director and executive officer compensation must be disclosed in detail in the annual proxy U.S. public company boards generally consist of a majority of statement. “independent directors,” whose judgment is not compromised by conflicts of interest and who do not otherwise have relationships Pursuant to the Dodd-Frank Act, each public company will be (whether professional, business or personal) with the company or its required to disclose the ratio between its CEO’s total compensation management that could interfere with their independent judgment. and the total compensation of its median employee, beginning with Director independence standards are established by the stock the 2018 proxy season. This requirement may be repealed by the exchanges, and may be supplemented by categorical standards adopted Financial CHOICE Act (see question 1.3). by companies. Additionally, boards of listed U.S. public companies must have audit, nominating/corporate governance and compensation 3.4 What are the limitations on, and what disclosure is committees which are composed entirely of independent directors. required in relation to, interests in securities held by members of the management body in the corporate entity/entities? 3.2 How are members of the management body appointed and removed? The Exchange Act requires public companies to disclose each director’s and executive officer’s beneficial ownership in the Shareholders elect the board at the company’s annual meeting. company’s stock, as well as any stock awards and options that Prior to the annual meeting, shareholders receive a notice and proxy vest within 60 days, in the proxy statement. Disclosure of the total statement describing the director candidates, their independence and number of shares held by directors and executive officers as a group their qualifications. is also required by the Exchange Act. For most large U.S. public companies, directors are elected for Section 16 of the Exchange Act also requires directors, officers and one-year terms. However, the DGCL permits classified boards, beneficial owners of more than 10% of a public company’s stock which typically divide directors into three classes. Directors to report transactions in the company’s securities to the SEC and to serve for staggered terms of three years, so that it is impossible post the reports on the company website within two business days for shareholders to replace the majority of the board at one annual following the transactions. They must also disgorge any “short-swing meeting. Classified boards have fallen out of favour, as many profits” realised from a purchase and sale (or a sale and purchase) of investors associate the practice with board entrenchment. As of the company’s securities within a six-month period. These insiders are June 30 2016, only 8% of S&P 500 companies maintained classified also prohibited from transacting short sales in the company’s securities. boards. If a director resigns or is removed, the charter or bylaws will often provide that the existing board may name replacement directors to 3.5 What is the process for meetings of members of the serve until the next annual meeting. The organisational documents management body? may also authorise a board to expand or reduce the size of the board, and to appoint directors to fill newly created positions. The DGCL provides that a majority of the total number of directors constitutes a quorum for transacting business, unless the charter or Directors may be removed, with or without cause, by a vote of a bylaws require a greater number. However, a quorum cannot be less majority of shares entitled to be voted at an election. Directors than 1/3 of the total number of directors. The vote of the majority serving on a classified board may only be removed for cause, unless of the directors present at a meeting at which a quorum is present

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constitutes the act of the board, unless the charter or bylaws require meetings held in the last fiscal year, the committees’ functions and a vote of a greater number. Notice requirements are typically their written charters. Furthermore, public companies must identify established in the bylaws, but notice may be waived in writing, each member of such committees who is not independent under by electronic transmission or by attendance at the meeting. Board that committee’s independence standards. For the compensation action may be taken without a meeting, but the written consent or committee, its processes and procedures for determining executive consent by electronic transmission must be unanimous. and director compensation must be described, as well as interlocking relationships at other companies that may compromise a committee member’s independence. 3.6 What are the principal general legal duties and liabilities of members of the management body? The SEC requires public companies to describe their board USA leadership structure, and the board’s role in overseeing risk at the Directors of Delaware corporations are charged with fiduciary company. duties to the corporation and its shareholders, primarily, a duty of Each public company must disclose certain information about its care and a duty of loyalty. Other obligations derive from these director nomination process and, with regard to each nominated duties, including, in certain situations, a duty to provide full and director candidate, the identity of the person or entity who fair disclosure. With limited exceptions, Delaware courts will recommended that candidate. evaluate director conduct under a deferential “business judgment Public companies must also disclose the total number of board and rule” standard. This standard creates a presumption that, in making committees meetings held during the prior fiscal year, and attendance a business decision, the directors of a corporation fulfilled their by each director at those meetings and at the annual meeting. fiduciary duties and acted on an informed basis, in good faith and Public companies must also disclose information regarding certain in the honest belief that the action taken was in the best interests of transactions between the company, on the one hand, and its directors the company. However, if it is found that the directors breached and officers (and their family members), on the other. the duty of care or the duty of loyalty, they must prove that the Public companies are also required to disclose whether the board challenged decision satisfies more burdensome standards, including provides for a process for shareholders to communicate with the board. the “entire fairness” standard, meaning that the decision was both procedurally and substantively fair under the circumstances. Outside of the proxy statement, public companies are also required to make ongoing public disclosures with respect to the board and Directors may have additional duties under Delaware law. For senior executives. These disclosures include the appointment or example, when directors have determined that a sale of control or resignation of directors and certain executive officers, as well as a break-up of the company is “inevitable,” their duty is “to obtain the brief description of material compensatory arrangements for these best price reasonably attainable” for the shareholders’ benefit under individuals. the leading line of Delaware M&A cases.

3.9 Are indemnities, or insurance, permitted in relation to 3.7 What are the main specific corporate governance members of the management body and others? responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body? Under Delaware law, current and former directors and officers may be indemnified by the corporation if they are, or they are threatened The board is charged with oversight of the business of the corporation. to be made, a party to legal proceedings because of their service as More specific responsibilities include management succession a director or officer. They may be indemnified against expenses, planning, overseeing business strategy, monitoring performance judgments, fines and amounts paid in settlement actually and and ensuring the integrity of financial results, managing enterprise reasonably incurred in connection with the action. risk, and representing shareholder interests. Key challenges facing If the person acted in good faith and in a manner the person reasonably U.S. public company boards include: balancing long-term strategy believed to be in or not opposed to the best interests of the corporation, against investors’ more immediate expectations for financial results; the corporation may indemnify the person. Further, with respect to understanding the changing landscape of regulatory requirements; any criminal action, the indemnity is available if the person had no and managing a broader range of enterprise risks, including cyber reasonable cause to believe the person’s conduct was unlawful. security risks and those that are difficult to quantify and may have A corporation may advance expenses incurred by an officer or an indefinite time horizon. director in defending a legal proceeding, if the corporation receives an undertaking from that individual to repay the expenses if it is 3.8 What public disclosures concerning management ultimately determined that the individual was not entitled to be body practices are required? indemnified by the corporation. Also, the corporation may purchase insurance on behalf of a person It is typical for public companies to disclose corporate governance who is, or was, a director or officer, regardless of whether or not the guidelines on their websites. For NYSE-listed companies, this corporation would be entitled to indemnify such person. disclosure is required. In their annual meeting proxy statements, public companies must identify each director and each director candidate who is 4 Other Stakeholders independent under the applicable independence standards. If the company has adopted its own categorical standards for director 4.1 What, if any, is the role of employees in corporate independence, they must be disclosed on the company’s website or governance? attached to the proxy statement. Public companies also must disclose whether or not they have Generally, none. Neither U.S. federal nor Delaware corporate law standing audit, nominating/governance and compensation mandates any particular corporate governance role for employees. committees, as well as the committees’ members, the number of In recent years, however, more and more rank-and-file employees

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are coming forward with “tips” under the SEC’s whistleblower The CEO and CFO are obligated, pursuant to the Sarbanes- programme. These tips may lead to enforcement actions against Oxley Act, to include a written certification in every periodic companies for violations of U.S. securities laws, and whistleblowers report containing financial statements filed with the SEC. This may receive a percentage of the proceeds recovered. certification, which subjects such officers to potential fines and criminal penalties, states that the report fully complies with the Exchange Act and that all information contained in the report fairly 4.2 What, if any, is the role of other stakeholders in corporate governance? presents, in all material respects, the financial condition and results of operations of the company. In addition to shareholders and employees, other stakeholders who Further, the Exchange Act mandates that, as of the end of each fiscal USA may be impacted by a corporation’s policies and operations include quarter, management, with the participation of the CEO and CFO, its creditors, customers, suppliers and local communities in which evaluate the effectiveness of the company’s disclosure controls and the company sources its materials, manufactures or sells its products procedures. A separate certification of the CEO and CFO, which or has its headquarters. While these stakeholders have no formal subjects them to potential civil fines and penalties and contains their rights over a corporation’s corporate governance, unless they have evaluation conclusions, must also be filed with the SEC. bargained for contractual rights, they may leverage the force of Public companies are required, under the Sarbanes-Oxley Act, to public opinion in order to engage a corporation on sustainability make quarterly disclosures with respect to their evaluation of any practices, labour rights or other social responsibility issues. They material changes to their internal controls over financial reporting may also submit shareholder proposals to be presented at annual occurring during that quarter. meetings, by acting as proxies for existing shareholders or by owning nominal amounts of a corporation’s voting stock in order to 5.2 What corporate governance related disclosures are qualify to submit the proposals. required?

4.3 What, if any, is the law, regulation and practice See question 3.8. concerning corporate social responsibility?

5.3 What is the role of audit and auditors in such The Dodd-Frank Act required the SEC to adopt “conflict minerals disclosures? rules,” requiring all public companies to make annual filings, after conducting specialised due diligence, regarding a list of specific Pursuant to the Sarbanes-Oxley Act, auditors of public companies minerals used in companies’ products or production that originate with sufficiently large market capitalisation must provide an annual from certain countries that are deemed to be in “conflict zones,” attestation of the adequacy and effectiveness of the internal controls in an effort to reduce the funding of militias operating in those over financial reporting of the public company. Furthermore, while countries. However, after a court held that part of these rules very infrequent, auditors may be required to disclose the nature of violates the First Amendment of the U.S. Constitution,” the SEC unresolved, material disputes over accounting matters directly to the significantly reduced the disclosure mandate. Companies no longer public. need to conduct specialised due diligence on the source and chain of custody of conflict minerals; prepare and file a conflict minerals Effective in 2017, the Public Company Accounting Oversight Board report; or have an audit performed. (“PCAOB”) requires each firm conducting an audit of a public company’s annual financial statements to name its engagement Congress also voted to nullify the “resource extraction” rules under partner for the audit in a form filed with the PCAOB. In addition, the Dodd-Frank Act, which would have required publicly traded the PCAOB is studying whether, and how, to expand auditor mining companies to disclose payments made by them to U.S. communications with audit committees of public companies, which federal or foreign governments for the commercial development of may lead to additional public disclosure of those communications. oil, nature gas or minerals. Nonetheless, shareholders continue to present proposals at annual meetings seeking reports of, and changes in, corporate policies 5.4 What corporate governance information should be published on websites? regarding environmental and social matters deemed to be significant to the general public. Many corporations have responded to investor and consumer interest in these matters by voluntarily preparing The following corporate governance materials must be published annual social responsibility reports and posting them on their on the websites of publicly traded companies with shares listed on websites. In some circumstances, these reports have led to lawsuits either the NYSE or NASDAQ: challenging companies’ disclosures as false and misleading under ■ Charters of the nominating/governance, compensation and various state consumer protection laws. audit committees, as well as, in the case of NYSE-listed companies, their corporate governance guidelines. ■ Their proxy materials. 5 Transparency and Reporting ■ Section 16 filings reporting trades in company shares made by directors and certain executive officers. 5.1 Who is responsible for disclosure and transparency? In addition, listed companies may disclose their required code of business conduct and ethics, and changes to and waivers of the code, Senior management and the board of U.S. public companies are either on their websites or in SEC filings. primarily responsible for disclosure and transparency. Generally, the role of senior officers includes the preparation and filing with the SEC of the company’s annual, quarterly and other periodic reports, under board oversight.

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Bob is a Partner in Dorsey’s Minneapolis office. He helps both publicly Cam is a Partner in Dorsey’s Minneapolis office. Cam helps clients and privately held companies achieve their strategic business goals with a variety of corporate matters, including governance and SEC through mergers and acquisitions, including cross-border transactions. compliance, equity plans and executive compensation, securities He also regularly advises clients with respect to corporate governance offerings, and mergers and acquisitions. Prior to her return to Dorsey, matters, public company disclosures, SEC compliance and executive Cam was Senior Counsel and Assistant Secretary at General Mills, compensation. He is a member of the firm’s Management Committee Inc., where she helped the company achieve its corporate governance and is the Head of the firm’s Corporate Group. He has also previously and SEC compliance objectives, worked on securities offerings and served as Head of the firm’s Minneapolis office (2008–2012) and M&A transactions, risk management, foundation governance, and as Co-chair of the firm’s Corporate Group (2002–2005). Bob isa general corporate and commercial matters. frequent lecturer at legal seminars on topics related to mergers and Before joining General Mills in 2005, Cam was an associate for five acquisitions, corporate governance and public company securities law years in the Dorsey Corporate Group in Minneapolis. Cam is a co- compliance. editor of Dorsey’s corporate governance and compliance blog, http:// governancecomplianceinsider.com/.

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