Table of Contents

Getting the Deal Through - Corporate Governance 2018

Australia

Bermuda

Brazil

Chile

France

Germany

Hungary

India

Italy

Japan

Kenya

Luxembourg

Macedonia

Malaysia

Mexico

Nigeria

Norway

Romania

Singapore

Spain

Switzerland

Thailand

Turkey

Ukraine

United Kingdom

United States

Vietnam

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Corporate Governance 2018

Contributing editor:

Holly Gregory

Sidley Austin LLP

Getting the Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.

Throughout this edition, and following the unique Getting the Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Australia, Bermuda, Hungary, Kenya, Malaysia, Mexico, Norway, Spain and Thailand.

Getting the Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.gettingthedealthrough.com.

Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise. We also extend special thanks to the contributing editor, Holly Gregory, of Sidley Austin LLP, for her continued assistance with this volume.

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First published 2002

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Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The primary sources of law and regulation regarding corporate governance in Australia are the Corporations Act 2001 (Cth) (Corporations Act) and its subsidiary regulations. As a common law jurisdiction, corporate governance is also subject to common law principles within the Australian court system.

The Corporations Act governs every aspect of a company’s existence and operation extending from formation to deregistration. The Corporations Act also regulates director and officer duties, takeovers and fundraising, shareholder rights and remedies and financial reporting requirements. The Australian Securities Exchange’s (ASX) Listing Rules (Listing Rules) apply to listed entities admitted to official quotation on ASX. The Listing Rules govern the admission and removal of entities to the official list, quotation and suspension of securities for trade, disclosure and some conduct requirements (among other things). The Listing Rules are enforceable under the Corporations Act and entities agree to be bound by them upon admission.

Beyond regulatory requirements, corporate governance standards are also driven by the ASX Corporate Governance Council (Governance Council). Listed entities are required to benchmark their own governance practices against the Governance Council’s Recommendations (the Recommendations) and to disclose the comparison to the public within their annual report. The Recommendations operate on a ‘comply or explain’ basis, designed to encourage, but not force, entities to improve their governance standards. While the Recommendations do not apply to unlisted companies or other corporate entities, they remain the accepted aspirational standard for the governance functions of any entity (whether listed or otherwise).

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The key regulatory bodies engaged in making and enforcing governance standards in Australia are the Australian Securities and Investments Commission (ASIC) and the ASX.

With regard to listed companies, Australia operates a dual regulatory system established by the Corporations Act. ASIC is an independent Commonwealth government body and acts as Australia’s corporate regulator. ASIC is responsible for administration and enforcement of the Corporations Act generally. ASIC also publishes regulatory guidance and information statements on a vast variety of topics, including corporate governance.

The ASX is a publicly listed company tasked to function as a market operator, oversee compliance of the Listing Rules and promote governance standards. ASIC and the ASX share a collaborative and open relationship to effectively discharge their respective roles and responsibilities.

Both the Takeovers Panel (providing a forum for the resolution of disputes arising in respect of control transactions) and the Australian Prudential Regulatory Authority (APRA) (the regulation of the Australian financial service industry) have discrete functions. However, in exercising their functions, both bodies set standards in relation to corporate governance standards in Australia.

Some of the key shareholder groups or proxy advisory firms that operate in Australia include the following:

• Australian Shareholders Association, being the peak representative body for retail shareholders in Australia;

• the Australian Council of Superannuation Investors (ACSI), a membership body consisting of asset owners and institutional investors with a remit to respond to environmental, social and governance issues in the interest of limiting materially negative impacts on investment; and

• proxy advisory firms including Institutional Shareholder Services, CGI Glass Lewis and Ownership Matters.

These groups regularly conduct research and make submissions to ASIC or the Australian government in relation to governance matters. Perhaps more importantly, they engage with listed companies and various stakeholders and often drive governance initiatives (for example, gender diversity on boards of ASX-listed companies) through this engagement process.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders in public companies have a statutory right to remove directors under section 203D of the Corporations Act by an ordinary resolution requiring 50 per cent of the company’s shareholders (in attendance and voting at the relevant meeting) to approve the resolution to remove a director. There are onerous notice requirements that must be complied with in order for this statutory right to be validly exercised.

This right to remove directors is frequently used in conjunction with the right of members controlling 5 per cent of the voting shares (section 249D of the Corporations Act) to call (or require the company to call) a general meeting.

This statutory right is not an exclusive method of director removal. While the section operates despite any other method prescribed, it does not limit the creation of alternative methods for director removal within a shareholders’ agreement or a company’s constitution.

For private companies the process is much simpler. Section 203C of the Corporations Act is a replaceable rule that allows companies, by ordinary resolution, to remove a director from office. The notice requirements contained within section 203D do not apply. However, if a private company’s constitution provides otherwise, the replaceable rules will not apply. Accordingly, private companies may establish alternative methods or limits on director removal within the company’s constitution.

The power to manage the affairs of Australian companies vests in the board. Shareholders do not have a general right to require that a board pursue (or not pursue) a particular course of action.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The directors of a company have the power to manage the business of the company generally and may exercise all the powers of the company except for certain actions that require shareholder approval, or any actions limited by the company’s constitution. Decisions that are reserved for shareholder approval include:

• constitutional amendments: a company may only amend its constitution by a special resolution of members passed with at least 75 per cent approval. The process is the same for changing a company’s name;

• election of directors: where a company is required to elect directors, either in accordance with its constitution or pursuant to Listing Rule 14.4, the director must be elected by ordinary resolution;

• related party transactions: chapter 2E of the Corporations Act prohibits a public company from giving a financial benefit to a related party without first obtaining shareholder approval. For listed companies, the Listing Rules also require that shareholders approve transactions with specified persons of interest (which includes directors, substantial holders and any of their associates);

• capital alterations: the Corporations Act requires various share capital alterations including capital reductions, selective buy backs and share buy backs to be approved by shareholders. In some circumstances, such as selective buy backs, shareholder approval must be sought by special resolution; and

• major changes to company activities or the disposal of main undertaking: the ASX may require listed companies to seek shareholder approval to make a significant change to the nature and scale of its activities under Listing Rule 11.1. If the significant change involves the company disposing of its ‘main undertaking’, which is a term generally understood to be its main business activity, shareholder approval is mandatory.

Shareholder approval is required under the Corporations Act in a variety of further instances including appointing auditors, financial assistance, issuing incentive options or performance rights to directors, or applying for a company to be wound up.

As addressed further in question 28, shareholders have a non-binding vote on the company’s remuneration report.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Listed companies are required by Listing Rule 6.9 to allocate one vote for each fully paid ordinary share in the capital of the company. The ASX does not usually trade alternative voting right shares such as non-voting shares, ‘golden’ shares or super voting shares. However, preference shares and partly paid shares are quoted by the ASX. Preference shareholders have voting rights restricted to particular circumstances prescribed by Listing Rule 6.3 and holders of partly paid shares are entitled to vote in proportion to the amount paid on the share (except for a vote by show of hands).

Unlisted companies have more flexibility in their share class structure and may provide for shares with disproportionate or limited voting rights in shareholder agreements or the company’s constitution.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The procedures for general meetings of a company are prescribed by Part 2G.2 of the Corporations Act. Company shareholders must receive written notice of a general meeting of the company and may attend and vote, or vote by proxy. Listed companies must give shareholders notice of a general meeting with at least 28 ‘clear’ days’ notice prior to the meeting. This notice period is reduced to 21 ‘clear’ days for non-listed companies.

Owing to advancements in the functionality and reliability of technology, some major corporations around the world have held virtual general meetings online. While there have been some examples of general meetings held virtually within Australia, such as the 2017 AGM of the a2 Milk Company Limited, uptake of virtual AGMs is not widespread. Section 249S of the Corporations Act allows companies to hold a meeting of its members at two or more venues using technology, such as video conference, that allows members a reasonable opportunity to participate. At this point in time, ‘hybrid’ AGMs occurring in person at a particular place and via video conference or web conference externally are more common than truly ‘virtual’ AGMs occurring entirely online via technology.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The Corporations Act contains a variety of avenues for shareholder-driven company actions: shareholders may move resolutions against the wishes of the board, including the removal of directors (as outlined further in question 3 above) and issue dissident statements to be considered by other shareholders.

Shareholders with at least 5 per cent of the votes in the company may initiate a general meeting of the company by either: requisitioning the directors to call and hold a meeting under section 249D; or calling and arranging to hold a general meeting themselves under section 249F.

The procedure established by section 249D is generally preferred by companies, as directors retain elements of control that are absent under meetings held solely by members. While shareholders requisitioning the board must provide any resolutions proposed to be considered at the meeting in their notice to the company, the directors may include explanatory statements and recommendations prior to providing the notice to all members. In contrast, under the procedure established by section 249F, the members have complete autonomy in calling and holding the meeting, but are burdened with the corresponding expense. Alternatively, shareholders consisting of at least 5 per cent of the votes in the company, or at least 100 members entitled to vote, may give a company notice of a resolution to be considered at the next general meeting. The company must give notice to all shareholders in its next notice of meeting.

In addition to calling meetings and proposing resolutions, shareholders may request the company to circulate member statements addressing a proposed resolution or any other matter that may properly be considered at a general meeting, provided the request is made by members with at least 5 per cent of the vote in the company, or 100 members entitled to vote.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Shareholders, even major shareholders, are not fiduciaries owing duties to the company. However, in certain circumstances the actions of a company, which can extend to the actions of major shareholders, may be found to be oppressive, unfairly prejudicial or unfairly discriminatory to members, or contrary to the interests of the members as a whole. In these circumstances, Part 2F.1 of the Corporations Act allows the court to make remedial orders.

In certain circumstances, a major shareholder may be entitled to nominate a director to sit on the company’s board. As a director, the nominee will owe fiduciary duties to the company to act in the company’s best interest. A nominee director is not permitted to disregard the interests of the company; however, there may be instances where a nominee director is able to act in the best interest of the company and additionally in the interest of the nominating shareholder.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are generally not liable for the acts or omissions of the company. However, in exceptional circumstances courts may pierce the corporate veil to find shareholders, or related companies responsible for the actions of a company. While there are examples of the corporate veil being lifted in Australia (such as the infamous James Hardie case), there remains no discernible principle of company law to dictate in what circumstances the court will infringe upon the separate legal entity doctrine.

Part 5.7B – Division 5 of the Corporations Act establishes particular circumstances where a holding company is liable for the debts of a subsidiary in insolvency. In order for a creditor to be able to look through the corporate veil, the holding company must have been aware, or should reasonably have been aware, that the subsidiary was insolvent.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

The Takeovers Panel (the Panel) has the power to review conduct relating to control transactions in Australia and may make declarations of ‘unacceptable circumstances’ where it considers such conduct to be in breach of the Corporations Act, or the core principles underpinning Australian takeover law. The Panel has released guidance as to when lock-up devices will be considered acceptable (and would not be sufficient to support a declaration of unacceptable circumstances). The key consideration in this regard is whether the relevant device significantly limits competition among current or potential bidders or is otherwise likely to coerce shareholders to accept a bid

In this context, certain lock-up devices, such as break fees, no-talk and no-shop agreements, are common in Australia, with the Panel issuing guidance on when they may be appropriate. For example, break fees consisting of less than 1 per cent of the equity value of the target and no-talk agreements where a ‘fiduciary’ carve out exists, allowing directors to entertain alternative bids to the extent necessary to avoid a breach of duty, are generally accepted by the Panel.

Frustrating actions, being actions taken or proposed to be taken by a target company to force a bid to be withdrawn, lapse or fail to proceed, may be considered unacceptable by the Panel in certain circumstances. Frustrating action that denies shareholders the opportunity to consider or participate in a proposed bid is likely to be considered inconsistent with the duty to act in the best interest of shareholders. ‘Poison pills’, such as arrangements whereby a third party holds a right exercisable on a change of control, are generally considered to be a frustrating action which the Panel may make orders to prohibit.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The power to issue shares is a power exercisable by the directors in accordance with the Corporations Act. However, this power is subject to the terms of the company’s constitution, exceptions in the Corporations Act and, for listed companies, the ASX Listing Rules. For example, such limitations include:

• any pre-emptive rights provided for in a shareholders’ agreement or company constitution;

• restrictions in the Corporations Act and Listing Rules regarding the issue of securities to related parties or persons in positions of influence; and

• for listed entities, restrictions in the Listing Rules preventing the issue of securities in excess of a defined capacity (15 per cent of issued capital in any 12-month period) without prior shareholder approval.

Directors must always be cognisant of their directors’ duties when issuing shares and avoid acting for an improper purpose when doing so.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The Corporations Act does not prohibit restrictions on the transfer of fully paid ordinary shares. Private companies may establish trading restrictions within the company’s constitution or a shareholders’ agreement.

The ASX Listing Rules contain mandatory restrictions for certain securities and establish rules regarding voluntary trading restrictions. Chapter 9 of the ASX Listing Rules establishes restrictions on trading securities in particular contexts. Commonly restricted securities include shares issued to seed capitalists and early investors prior to a company’s initial public offering or to vendors who have sold assets or provided services to the company in exchange for securities prior to admission. The ASX may also impose restrictions on any securities at their discretion. Securities that the ASX determines should be restricted will be placed into escrow for a period of 12 to 24 months. Generally, the ASX will only enforce mandatory escrow periods to companies that are substantially speculative or unproven. The ASX will not apply restrictions to companies that have:

• met the financial admission requirements of Listing Rule 1.2;

• a proven track record of profitability; or

• a substantial portion of tangible assets or assets with a readily ascertainable value.

The ASX will require voluntary escrow periods for securities of a listed company in certain circumstances.

ASX listed companies are also required to maintain securities trading policies that may restrict the ability of shareholders involved in the management of the company (eg, directors) from trading in certain circumstances.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

In general, unless otherwise provided in a company’s constitution or a shareholder agreement, companies are unable to compulsorily repurchase shares other than in circumstances of a capital reduction referred to in question 4 above.

The Corporations Act provides for the compulsory purchase of shares by a bidding company under a takeover bid or scheme of arrangement where:

• a takeover bid receives 90 per cent shareholder acceptance, at which point the bidding entity can compulsorily acquire the remaining securities; and

• a scheme of arrangement receives the approval of 50 per cent (by number) of shareholders casting at least 75 per cent of the votes available in favour of a scheme, which will, subject to the terms of the scheme, allow the bidding entity to acquire 100 per cent of the shares in the target company.

14 Dissenters’ rights

Do shareholders have appraisal rights?

While common in other jurisdictions, Australian shareholders do not have appraisal rights. However, a remedy available to the court in the event of minority shareholder oppression (discussed further in question 8 above) includes an order for the purchase of shares held by a shareholder at fair value.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Australian companies generally operate a single-tier board structuring consisting of a board of directors. However, the board may delegate elements of its operation to committees or individuals. Certain companies may also create an advisory board, which is a purely advisory body from which the board will consider the advisory board’s views and advice before making its own decisions.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

As fiduciaries, the directors of a company owe duties to the company established by statute and a substantial depth of common law principles. Duties imposed on directors include the duty to:

• exercise powers with reasonable care and diligence;

• act in good faith in the best interests of the company and for a proper purpose;

• not improperly use their position;

• not improperly use information;

• not permit the company to trade while insolvent; and

• keep adequate financial records.

The Corporations Act provides defences to a breach of directors’ duties in certain situations, including when reliant on third-party advice (as further discussed in question 21 below) and where a director has made a ‘business judgement’ decision. The ‘business judgement’ defence is available where the director has:

• made a business decision in good faith for a proper purpose;

• duly informed themselves of the context of the decision;

• not had a material personal interest in the subject of the decision; and

• where they rationally believe the decision is in the best interests of the company.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors owes a fiduciary duty to the company as a whole and must act in the company’s best interest. However, this duty is not entirely inflexible, as the board may consider the interests of particular members, third parties or stakeholders provided the course of action remains in the best interest of the company.

Section 588G imposes a statutory duty on the directors of a company to prevent insolvent trading. This duty necessarily requires a director to consider the interests of creditors when a company is approaching or is trading insolvent. In certain circumstances, creditors may pursue individual directors for losses incurred owing to the company’s actions. Directors are protected from personal liability by the Corporations Act’s ‘safe harbour’ provisions, which protect directors who can show that their decision or course of action was reasonably likely to achieve a better outcome for the company than could be achieved by putting the company in administration or liquidation.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

An important point to note is that directors’ duties are owed to the company, that is, the company’s shareholders. Directors do not owe duties to individual or specific shareholders, but rather the company as a whole. These general principles inform how directors’ duties are enforced. In particular, as directors’ duties are owed to the company, the general rule is that the company is the ‘proper plaintiff’ with respect to breaches of such duties, and should be responsible for enforcing the duties. This approach is justified, inter alia, on the basis that courts should not interfere with the internal affairs and management of companies, including in circumstances where a company has decided, through its proper process, not to institute proceedings against another person (including a director).

However, where the directors who have been alleged to have breached their duties constitute a majority of the board of the relevant company, it is most unlikely that those directors will cause the company to institute proceedings to enforce statutory duties. Accordingly, directors’ duties tend to be enforced by the following entities:

• ASIC under its powers under the Corporations Act or the Australian Securities and Investment Commissions Act 2001 (Cth);

• the company pursuant to a statutory derivative action (an action that permits individual shareholders to apply for leave of the court to bring an action on the company’s behalf); or

• the company following the appointment of a liquidator.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors have a statutory duty under section 180(1) of the Corporations Act to exercise their powers and discharge their duties with a degree of care and diligence. The general test that has been applied is what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if acting on his or her own behalf. This test has both objective and subjective elements, meaning that the applicable standard of care will consider the company’s size, board composition and business, as well as the relevant skill set of the particular director. Notwithstanding this, directors are held to the degree of care and diligence that would be expected of a reasonable person if they were a director in the company’s unique context and if they held the same responsibilities within the company as the director.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Each director owes fiduciary duties to the company as outlined in question 16 above. However, common law principles have established that the standard of care and diligence is considered in the context of an individual’s experience, expertise and role. While directors’ duties may vary depending on a director’s skill in a relevant area, their role as an executive or non-executive director or their length of tenure on the board, it is important to note that all directors owe basic standards of care and diligence, which may never be excused (eg, a basic understanding of accounting principles and financial statements).

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Boards have discretion to delegate elements of their functions to individuals or committees under section 198D of the Corporations Act, unless the company’s constiution provides otherwise. It is considered good governance to outline the exercise of a delegated function by drafting clear committee remits, developing terms of reference and requiring committee reports.

Directors maintain ultimate responsibility for the actions of delegates. Directors are liable for the misconduct of delegated committees unless it can be established that they reasonably and in good faith believed the delegate would exercise their power in accordance with the rules imposed on the delegate and that the delegate was reliable and competent enough to exercise their delegated function.

However, there are limitations on director delegation. The common law has established that directors are unable to delegate their ‘core’ functions, including for example, approval of the company’s annual financial reports. In addition, the Corporations Act limits directors from relying solely on the advice of delegates or other parties, requiring directors to independently assess informaiton or advice provided to them before they can rely on the advice, even if the reliance is made in good faith.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Australian law does not dictate requirements or ratios of executive and non-executive directors. Provided companies meet their minimum officer holder requirements (discussed in question 23 below), companies may determine the make-up of their board in accordance with their own governance standards.

The Guidance Council Recommendations recommend that:

• a majority of the board of a listed entity should be comprised of independent directors;

• listed entities should disclose the names of directors the board considers to be independent; and

• the chairman of the board of a listed entity should be an independent director.

In determining whether a director is ‘independent’ companies should consider whether the director:

(i) is or has been employed in an executive capacity by the company or a related company;

(ii) is or has recently been a partner, director or senior employee of a business providing professional services to the company;

(iii) is or has recently been in a material business relationship with the company or a related company;

(iv) is a substantial security holder in the company;

(v) has a material contractual relationship with the company or a related company;

(vi) has close family ties with a person who would meet the criteria in (i) to (v) above; or

(vii) has been a director of the entity for such a period that their independence may have been compromised.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The minimum number of directors and officers a company must have is set by section 201A of the Corporations Act, which provides that private companies must have one director and public companies must have at least three directors. Australia does not limit board sizes.

As outlined in question 4 above, directors are generally elected by shareholders at a general meeting, however the Corporations Act allows a company’s directors to appoint other directors (although the term of such appointment is limited to the company’s next annual general meeting, where such directors may seek to be elected to the board). The company’s constitution may also provide for alternative methods of director appointment in certain circumstances.

In order to be a director, a person must be at least 18 years old and must not be disqualified from managing a company under the Corporations Act. Individuals will be disqualified from managing a company where they are an undischarged bankrupt, are insolvent, have been convicted of fraud or insolvency offences or have been charged with an offence punishable by a period of imprisonment of more than 12 months. Australia requires companies to have a specific number of directors who are ordinarily resident in Australia, being one for private companies and two for public companies.

While the composition of boards is not regulated in Australia, the Governance Council Recommendations promote board diversity by recommending the establishment of diversity policies and disclosure.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There are no laws or rules that dictate the amalgamation or separation of the chairman and CEO position in Australia. In smaller companies, it is common for the chairman or managing director to perform the duties of a CEO; however, larger businesses tend to separate the positions.

The Governance Council Recommendations recommend that listed companies separate the role of CEO and chairman on the basis that good governance principles demand there is a distinction between those in charge of managing the company and those responsible for overseeing the managers.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

As discussed in question 21, the directors of a company have the ability to delegate functions to committees; however, it is not mandatory to do so for most companies. The ASX Listing Rules require that larger listed companies included in the S&P/300 index must have an audit and remuneration committee. Other than this mandatory requirement, the Governance Council Recommendations recommend that all listed companies should have:

• a nominations committee;

• an audit committee;

• a risk committee; and

• a remuneration committee.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The Corporations Act does not prescribe a minimum number of board meetings to be held per year. Accordingly, companies are free to hold as many board meetings as required. In larger companies, these are usually monthly.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Listed entities are required by Listing Rule 4.10.3 to publish an annual corporate governance statement, which discloses the extent to which the entity has followed the Governance Council Recommendations. As stated in question 1, entities must do so on a ‘comply or explain’ basis, disclosing their reasons for not following recommendations.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Directors are remunerated in a variety of ways, regulated by the Corporations Act and, for listed companies, the Listing Rules.

Directors of a company may be entitled to a fee for directorial services. Section 202A of the Corporations Act provides that directors may be paid a fee as determined by member resolution. Shareholders will generally set a maximum remuneration pool by resolution and allow the board of directors to allocate fees paid to individual directors based on their contribution, experience or input. The upper remuneration limit applies indefinitely unless decreased or increased by shareholder resolution.

In addition, directors may also be reimbursed for travelling and other expenses properly incurred in attending company, director or committee meetings and in connection with the company’s business in general.

Beyond the above, directors who perform executive positions within the company will usually receive compensation in the form of salaries or bonuses as an employee and generally would not receive a separate board fee.

ASX listed companies are required to prepare an annual report outlining the allocation of director’s fees as well as any further remuneration paid to directors and senior management (Remuneration Report). The Remuneration Report must be published in the company’s annual report and presented to shareholders at an annual general meeting (AGM). Shareholders are given the opportunity to adopt the Remuneration Report at an AGM by an advisory resolution. The resolution does not bind the company, which retains the autonomy to respond to a negative resolution result at their discretion. Directors and executive management are prohibited, including via the exercise of discretionary proxies, from voting on a resolution to adopt the Remuneration Report (except the chairman who may exercise proxies if expressly authorised to do so at their discretion).

However, the Corporations Act includes a ‘two strikes’ rule in relation to successive failures of shareholders to approve a Remuneration Report. The rule provides that, if a Remuneration Report receives 25 per cent or more of the total vote against the adoption of the report at two consecutive AGMs, shareholders must consider a resolution to ‘spill’ the board. The spill resolution is determined via ordinary resolution at the same AGM as the ‘second strike’. If shareholders approve, a spill meeting must be held within 90 days, at which point all directors, other than the managing director, will need to stand for re-election.

The Corporations Act and Listing Rules limit payments that may be made to directors and key management personnel upon termination.

Section 200B of the Corporations Act prohibits ‘golden handshake’ payments in excess of the average compensation over the last three years without shareholder approval to any person who has been a director or key management personnel (if the entity is a listed company or certain other disclosing entities).

Listing Rule 10.18 expressly prohibits officers of listed companies from being entitled to termination benefits if a change occurs in the shareholding or control of the company generally. In addition, Listing Rule 10.19 echoes the anti-termination provisions contained within the Corporations Act, requiring a company to receive shareholder approval to offer a termination benefit to a company officer if the benefit would exceed 5 per cent of the equity interests of the company.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Individuals in senior management positions are considered ‘key management personnel’, as that term is defined by the Australian Accounting Board Standards, and are subject to the same rules pertaining to executive remuneration outlined in question 28.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Company directors and officers face a broad range of personal liabilities in relation to their duties and obligations to the company. Accordingly, D&O liability insurance is a common method of protecting directors and officers from risks that the company is unable to indemnify a director for (see question 31 for further information).

The company is entitled to pay insurance premiums in relation to liabilities that are not specifically prohibited under the Corporations Act. Section 199B of the Corporations Act prohibits a company from paying insurance premiums that cover a director, officer or auditor of the company (other than for legal costs) for situations arising out of a wilful breach of duty or the improper use of information or position by a director.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Companies will often indemnify directors and officers from liability exposure in the performance of their duties in favour of the company to the extent permitted by law. Companies are prohibited by section 199A of the Corporations Act from indemnifying a director, auditor or other officer of the company from:

(i) liabilities incurred to the company in the performance of their role;

(ii) any liability (other than legal costs) owed to the company or a related body corporate, incurred as a pecuniary penalty order under section 1317G or a compensation order under section 1317H of the Corporations Act, or owed to a third party, which did not arise out of conduct in good faith.

A company is also prohibited from indemnifying a director, auditor or officer for legal costs incurred:

• in defending legal proceedings where the individual was found to owe a liability referred to in (ii) above;

• in defending or resisting criminal proceedings in which the individual is found guilty;

• in defending or resisting proceedings brought by ASIC, or a liquidator for a court order, if the grounds for making the order at established by a court; or

• in connection with proceedings for relief under the Corporations Act that are denied.

A company is also excluded by the Australian Consumer Law (ACL) from indemnifying directors and officers against a liability to pay a pecuniary penalty arising out of a breach of the consumer protection provisions of the ACL contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) and legal costs arising in defence or resistance of proceedings in which the director or officer is ultimately found liable.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

As addressed in questions 3o and 31, companies may indemnify and insure directors against liability to the extent permitted by law. In addition, companies may seek shareholder approval to ratify the actions of directors in certain circumstances. The court may consider the effect of shareholder ratification in oppressive conduct proceedings (outlined further in question 8 above). Under the common law, shareholders may ratify the actions of directors provided their actions were not:

• a breach of statutory duties;

• fraud on the minority;

• the defeat of a member’s personal right;

• an insolvent transition to prejudice creditors; or

• an illegal act.

Shareholder ratifications require full and frank disclosure to shareholders to be effective and therefore are rare.

33 Employees

What role do employees play in corporate governance?

Senior company employees in executive positions or sitting on board committees may contribute to corporate governance standards; however, there are no legal or statutory corporate governance obligations imposed on employees generally.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Governance Council Recommendations recommend that listed entities undertake a process of periodically evaluating the performance of the board, committees and individual directors and disclose the results of that process to the public. As referred to in question 27 above, listed entities are required to publish a governance statement addressing the Recommendations, which would require them to undertake and disclose an evaluation process or explain why they did not.

Unlisted companies are not required to undertake and disclose similar processes but may choose to do so in the interests of good governance.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The availability of company constitutions varies by company type. Listed companies are required to disclose their constitution to the public on the ASX, while unlisted public companies must lodge their constitution with ASIC upon registration and then notify ASIC of any subsequent amendments. Private companies are not required to lodge their constitution anywhere, but must ensure a copy is available to members at their request.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Disclosure of information is a foundational principle of Australian company law. Companies are required to lodge documents with ASIC and the ASX where they are then available to the public.

Listed entities are required to continually disclose any information that would have a material effect on the price or value of the company’s securities to the ASX immediately, unless disclosure of the information would be a breach of the law or the information concerns an incomplete proposal, is insufficiently definite, is for internal management purposes or is a trade secret. Listed entities must also disclose a broad range of corporate activities, including capital issues, notices of meeting, a change in a director’s share interests and the issue of a dividend. The Corporations Act imposes similar continuous disclosure obligations on particular public unlisted companies under section 675 of the Corporations Act referred to as ‘disclosing entities’; however, these entities are not common.

Listed entities are also subject to periodic disclosure requirements. The Listing Rules require entities to issue half yearly and annual financial reports and publish an annual report. Some entities, such as investment companies and mining and oil and gas exploration companies are required to lodge quarterly cash flow and quarterly activity reports.

Public unlisted companies are subject to less stringent disclosure requirements, primarily involving the preparation and lodgement of annual financial reports with ASIC. Large private companies must prepare and lodge financial reports, while smaller private companies are subject to limited reporting requirements.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Listed companies are required to publish a remuneration report annually. The report is contained within the directors’ report section of the company’s annual report and is provided to shareholders and is available to the public on the ASX website.

As outlined further in question 28 above, shareholders have an advisory, non-binding vote at the company’s AGM to approve the remuneration report. If a company receives ‘two strikes’ on its executive remuneration, shareholders are given the option to ‘spill’ the board.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Companies may enter into agreements that give major shareholders, parent companies or other stakeholders the opportunity to nominate a director to be appointed to the board. Nominee directors are appointed to represent the interest of their appointee but must ensure they avoid conflicts of interest and abide by their directors’ duties to the company. Private companies may provide the terms and conditions of nominee directors in the company’s constitution or a shareholder agreement at their discretion. In contrast, listed entities have less freedom as nominee directors are subject to election and re-election requirements.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The extent to which companies engage with shareholders varies greatly from company to company. Shareholders have the ability to question directors and management of companies at AGMs, but it is common for companies to engage with shareholders (particularly key institutional shareholders) on a regular basis.

Key shareholder representatives such as ACSI engage with listed companies on a regular basis regarding matters that they consider may affect the interest of their members.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

There are a number of disclosure obligations placed on Australian companies with respect to the disclosure of corporate social responsibility matters (including environmental risks facing companies). These include the following:

• ASX’s Guidance Note 9 (concerning the disclosure of corporate governance practices) recommends that a ‘listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage these risks’. If the company does not disclose these details in its annual corporate governance statement, it must explain why not;

• when undertaking a fundraising under a prospectus, companies are required to disclose ‘all the information that investors and their professional advisers would reasonably require to make an informed assessment’ of, among other things, the financial position of the company, which may include social responsibility matters where these pose financial risks to the company; and

• in the ‘financial report and directors report’ required to be lodged with ASIC each financial year under section 292 of the Corporations Act, the company is required to report on the company’s performance in respect of any particular and significant environmental regulations to which the company is subject.

Such disclosure obligations are likely to increase in the future. This is because:

• global task forces have been established (and have reported in relation to) the standard of corporate disclosure of social responsibility matters (particularly climate risks) and how this standard can be improved;

• institutional investor representatives, such as ACSI, have established a dialogue with listed companies in relation to social responsibility disclosures and have issued various reports in relation to these matters; and

• increasingly, significant listed companies are providing additional disclosure over and above the specific obligations regarding these matters as they recognise that this is an area that shareholders are becoming increasingly interested in.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Unlike the United States and other international jurisdictions, Australia does not require companies to disclose the ratio of CEO to general workforce remuneration. While there are some calls for similar legislation to be imposed in Australia, there is limited regulatory or corporate appetite for reform in this area. The Governance Council Recommendations suggest that executive remuneration should be issued fairly, responsibly and not excessively; however, they stop short of requiring CEO–employee comparisons.

Remuneration reports (see question 28) and remuneration committees (see question 25) establish checks on executive pay under the current Australian governance standards.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

While Australia underwent a consultation process in relation to the implementation of mandatory gender pay gap reporting obligations in 2016, legislation was never implemented. Australian companies are not required to disclosure ‘gender pay gap’ information; however, the Governance Council Recommendations suggest listed entities undertake gender pay equity audits as part of their governance procedures.

Update and trends

Over the previous year, Australian corporate governance standards have been updated to address modern trends, including cybersecurity and crowd-sourced funding.

The Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) established a mandatory data breach notification scheme in Australia under Part IIIC of the Privacy Act 1988 (Cth), which came into operation on 22 February 2018. The scheme places significant obligations on board and management to address and respond to cybersecurity and data breach issues. The scheme introduces mandatory disclosure requirements by companies to affected individuals and will necessarily extend to added disclosure to ASIC and the ASX in circumstances of a data breach. Companies face substantial financial penalties of up to A$2.1 million for seriously breaching the scheme. Because the consequences of breaching the scheme pose such substantial financial risks to Australian companies, it is unlikely that directors will be able to satisy their duty of care and diligence without properly understanding the scheme and its application to the company and implementing an appropriate set of controls. Accordingly, the scheme is expected to drive governance changes at board level as companies may begin targeting individuals with cybersecurity experience in order to defend against and respond to cybersecurity threats.

Australia’s legal system has relatively low thresholds for shareholder activism provided by the meeting requisition threshold of 5 per cent and the ‘two strikes’ remuneration principle. However, despite these avenues, shareholder activism remains relatively subdued.

While fixed pay for ASX 100 companies has not increased beyond an average of approximately A$1.9 million in the previous 10 years, the ‘two strikes’ rule’s effectiveness may be called into question by reported figures indicating a mere six remuneration reports received a ‘strike’ in the 2017 AGMs of listed companies. However, market commentators have suggested the mere existence of the rule is driving executive remuneration figures down across the board.

In addition, shareholder activism via requisition resolutions was relatively uncommon in 2017. Shareholders exercised requisitioned resolutions in relation to environmental, social and governance issues in eight of the ASX 200 companies.

Despite the limited uptake in 2017, market forecasts suggest shareholder activism may increase in the coming years as the domestic market continues to expand, foreign activist intervention occurs, the influence of superannuation fund groups (such as ACSI) increases and global hedge funds and asset managers continue to grow in prominence. Increased shareholder activism in the near future is expected to drive governance standards and increase accountability.

Simon Rear

simon.rear@squirepb.com

Michael Van Der Ende

michael.vanderende@squirepb.com

Connor McClymont

connor.mcclymont@squirepb.com

Level 21, 300 Murray St

Perth WA 6000

Australia

Tel: +61 8 9429 7444

Fax: +61 8 9429 7666

www.squirepattonboggs.com

Bermuda

Stephanie P Sanderson, Kit Cunningham and Kimonea Pitt

BeesMont Law Limited

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Bermuda does not have a formal general corporate governance code of conduct. The primary sources of law, regulation and practice in Bermuda are provided by specific legislation and common law. At the legislative level, all companies in Bermuda are subject to the Companies Act 1981, as amended (the Companies Act). The Companies Act applies to all bodies corporate in Bermuda and sets out the corporate governance rules in general, with special provisions for the governance of mutual funds. The BSX Listing Rules regulate the corporate governance of companies that are listed on the Bermuda Stock Exchange (BSX) and require mandatory compliance. There are several industry-specific codes of conduct (Industry Codes) as well including the Insurance Code of Conduct, the Corporate Governance Policy for Trust (Regulation of Trust Business) Act 2001, Investment Business Act 2003 and Investment Funds Act 2006, and the Corporate Governance Policy for Banks and Deposit Companies Act 1999.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The Bermuda Registrar of Companies (ROC) is the main government agency that focuses on the corporate governance of companies in Bermuda, which is similar to Companies House in England. The ROC, similarly to Companies House in England, enforces many of the rules and obligations found in the Companies Act, maintains a register of companies in Bermuda and a register of charges. Additionally, the ROC is the location in which all incorporation applications must be submitted.

Although the ROC enforces the Companies Act, it is the Bermuda Monetary Authority (BMA) that regulates companies that offer financial services and enforces many industry specific corporate governance regulations (see question 1). The BMA’s risk-based supervisory and enforcement powers apply to financial institutions and other reguated entities, for example entities regulated for anti money laundering purposes and corporate service providers.

While there are no specific shareholder groups or proxy advisory firms in Bermuda whose views are considered, Bermuda’s regulatory bodies work closely with government and industry stakeholders.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Generally, the by-laws of a company deal with the appointment and removal of directors.

The directors of a company are appointed at the first general meeting of a company, subject to the by-laws of the company, and thereafter directors are elected or appointed at each annual general meeting (section 90 of the Companies Act).

The by-laws of a company will normally set out the circumstances in which a director may be removed, although the Companies Act also provides certain protections and procedural requirements for the removal of directors. Shareholders of a company may remove a director by requesting a special general meeting be convened and holding a vote to remove any such director.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The Companies Act provides that shareholders retain control over any change in the name of a company, appointment of directors (subject to any restrictions in the company’s by-laws), a change to the memorandum of association or by-laws, and any increase or decrease in the authorised share capital of the company.

The shareholders also retain the right to waive the requirement to have an annual audit or annual general meeting either for a fixed period of time or until such time as the shareholders request one (indefinitely), and approve any amalgamation or merger. Shareholders are also required to approve any loan by the company to any director of the company.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Subject to question 4 above, shareholder voting rights may be restricted by way of a shareholders’ agreement.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Generally, only those shareholders who have voting rights attached to their shares are given notice of a general meeting and allowed to attend; however, this is subject to the by-laws of the company or any shareholders’ agreement that may exist. Any shareholder may appoint a proxy to vote on their behalf at a general meeting.

No physical presence by a shareholder, or (in the case of a corporate shareholder) their representative, is required at a general meeting to be considered present and participating. Section 75A of the Companies Act provides that unless the by-laws of a company otherwise provide, a meeting of members may be held by means of telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting will constitute presence in person at the meeting.

In the absence of a meeting of the shareholders, the shareholders may resolve to approve actions of the company by way of a unanimous written resolution, which requires approval by all shareholders of the company.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The Companies Act provides that any shareholders may request that the directors of a company convene a special general meeting, provided that the shareholders requesting the special general meeting at the time of the deposit of the request hold not less than one-tenth of the paid-up capital of the company and carry the right to vote at a general meeting of the company (Requisition). Any such Requisition by a shareholder must state the purpose of the meeting, be signed by the requisitionists and deposited at the registered office of the company.

The Companies Act also includes the power for shareholders to requisition a company to give to members of the company notice of any resolution that may properly be moved and is intended to be moved at a general meeting and to circulate to members any statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution or the business to be dealt with at that meeting.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

In Bermuda there is no express code of conduct for shareholders. In practice, a company’s by-laws, together with the Companies Act and any shareholders’ agreement (as applicable), provide restrictions and directions as to the powers and discretion of any shareholder. However, there are generally not any fiduciary duties owed by controlling shareholders beyond voting in good faith.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

A company limited by shares has separate legal personality from that of its shareholders. The liability of a shareholder for the company’s liabilities is generally limited to the amount, if any, that remains unpaid on that shareholder’s shares.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

There is no legislation specifically regulating takeovers. However, the Companies Act 1981 applies to all companies registered in Bermuda and allows for both mergers and amalgamations, and a court sanctioned scheme of arrangement. There are no statutory merger control and takeover tests. The Bermuda Stock Exchange separately regulates all companies listed on it.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Directors, subject to a company’s by-laws or other governing documents, may issue new shares without shareholder approval. Pre-emptive rights may be contained in a company’s by-laws or a shareholders’ agreement; however, it is not a requirement under Bermuda law.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Shares are generally freely transferable, subject to the company’s governing documents. Private companies can impose restrictions on the transfer of shares and these restrictions often provide that shares must be offered to existing shareholders before being transferred to any third parties. A private company’s by-laws may also provide that the directors can refuse to register the transfer of shares to persons that they do not approve. In addition, by-laws may set out pre-emption rights. Typically, a company’s by-laws will provide that no share is to be issued or transferred to any infant, bankrupt or person of unsound mind.

It is not unusual for by-laws to contain a provision that the board of a company may in its absolute discretion and without assigning any reason refuse to register the transfer of a share. It is worth noting that anyone wishing to carry on business in or from within Bermuda through any type of corporate structure is subject to vetting by both the local service provider and the BMA. Transfers of shares by non-Bermudians are also subject to review or control and companies must seek consent to carry on business in certain designated areas (Companies Act 1981).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

The Companies Act allows for a company limited by shares, or other company having a share capital, to purchase its own shares, if authorised to do so by its memorandum or by-laws. The principle of the preservation of capital of a company requires that certain tests be met if a company is to repurchase its shares, including establishing that the company is and will be solvent after effecting the repurchase. Unless the by-laws of the company otherwise require, or unless the company’s constitution does not provide for it, the repurchase of shares by a company does not require shareholder consent.

14 Dissenters’ rights

Do shareholders have appraisal rights?

There are various shareholder appraisal rights as set out in the Companies Act.

Merger or amalgamation (section 106)

The directors of each amalgamating or merging company must submit the amalgamation agreement or merger agreement for approval by the shareholders. A notice of a meeting of the shareholders must be sent to each shareholder of each amalgamating or merging company and include (or be accompanied by) a summary or copy of the agreement, state the fair value of shares and state that a dissenting shareholder is entitled to be paid the fair value of his or her shares.

Unless the by-laws otherwise provide, the resolution of the shareholders approving the amalgamation or merger must be approved by a majority vote of 75 per cent of those voting at the meeting and the quorum necessary for that meeting is two persons holding (or representing by proxy) more than one-third of the issued shares.

Any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that they have been offered fair value for their shares can apply to the court to appraise the fair value of their shares within one month of the issuance of the notice (of the shareholders’ meeting).

Court-approved scheme of arrangement (section 99)

A section 99 scheme of arrangement (compromise or arrangement) must be approved by a majority in number representing 75 per cent in value of the shareholders (or class of shareholders) present and voting either in person or by proxy at the requisite general meeting to approve the scheme. Following shareholder approval, the scheme must be sanctioned by the court and if it is sanctioned then it is binding on all the shareholders (or classes of shareholders). While the Companies Act does not provide express dissenting shareholder or appraisal rights, those affected by the scheme are entitled to appear and raise objections at the hearing of the petition for the court order that the court takes into account.

Section 102 compulsory acquisition/squeeze-out (10 per cent)

Under section 102 of the Companies Act, if an offer to acquire shares (or any class of shares) of a company is approved by the holders of 90 per cent in value of the shares (which are the subject of the offer) within four months of the offer then the acquirer can, within two months of the date of the approval, compulsorily acquire the shares of dissenting shareholders by giving notice to those shareholders of the compulsory acquisition of their shares. A ‘dissenting shareholder’ in the context of a squeeze-out includes a shareholder who has not assented to the scheme or contract for acquisition of shares or any shareholder who has failed or refused to transfer his or her shares to the transferee company in accordance with any such scheme or contract.

A dissenting shareholder has one month from the date on which the compulsory acquisition notice was given in order to make an application to the court, which has power to make such orders as it thinks fit, to order to the contrary. Dissenting shareholders do not have express appraisal rights under section 102.

Section 103 alternative squeeze-out (5 per cent)

Section 103 of the Companies Act allows for the holders of not less than 95 per cent of the shares (or any class of shares) in a company to give notice of the intention to acquire their shares to the remaining shareholders (or class of shareholders), on the terms set out in the notice. The purchaser must offer the same terms to all shareholders in respect of shares to be acquired.

Any shareholder who receives an offer notice under section 103 has the right to apply to the court to appraise the value of their shares within one month of receiving the offer. Within one month of the court’s appraisal, the purchaser is entitled to either acquire all the shares involved at the price fixed by the court or choose to cancel the offer. There is no appeal process available in relation to the court’s appraisal decision.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominat board structure for listed companies is best categorised as one-tier or unitary. Management of the company, both listed and private, is typically the responsibility of the directors. In some cases, usually dictated by the size of the company, the directors may delegate day-to-day mamangement to individuals who are not on the board but who hold executive positions (eg, chief operating officer, chief financial officer, chief technical officer). The board of directors may consist of those involved in executive management of the company and non-executive directors.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

Bermuda law does not impose an all-embracing code of conduct on directors. In practice, a company’s memorandum of association and by-laws comprise its constitution and, together with the Companies Act, prescribe the ambit of the directors’ powers and responsibilities. Accordingly, if the directors act ultra vires the company’s constitution, they are answerable to the company. The function of the substantive law is to supplement the internal constitutional checks on a director’s powers and to deal with areas where the company’s constitution may be silent.

Many of the duties and obligations of a director are statutory; others are found only in common law. The Companies Act contains numerous provisions relating to the duties of directors and prescribes penalties for breach of such duties. The Companies Act makes no distinction between executive and non-executive directors; non-executive directors are directors for all purposes of the Companies Act.

Directors are responsible to the company, not to the shareholders. The courts tend to recognise the difficulty of identifying the interests of such an artificial abstraction and in practice regard the interests of the company as identical with those of the shareholders as constituted from time to time therefore avoiding identification of the company’s interests with specific members or encouraging short-termism to the detriment of the company as a going concern. There are, however, some circumstances, such as calling meetings, preparing financial statements, recommendations to shareholders, etc, where the directors may owe duties to shareholders.

Directors may be liable for any of the following:

• not acting honestly or in good faith with a view for the best interests of the company;

• using their power for the benefit of a third party or him or herself;

• not disclosing to the company their own interests in a contract or other action being taken by the company;

• making a personal profit as a result of their position as directors (particularly where no disclosure was made to the company prior to the profit being made);

• failing to uphold their duty of care, skill and diligence that a reasonably prudent person would exercise in their position; and

• allowing the company to enter a transaction or agree to something that was beyond their power or ability to perform.

If a company is insolvent or is likely to become insolvent, there are further board of directors’ responsibilities and potential liabilities, including:

• falsification of books or records and in connection with actions intended to defraud creditors of the company;

• knowingly carrying on the business of the company with the intent to defraud creditors of the company; and

• misapplying or retaining any money or property of the company, or being guilty of any misfeasance or breach of trust in relation to the company.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

See question 16.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Generally, shareholders are entitled to have the affairs of the company conducted in accordance with general law and specifically with the company’s memorandum of association and by-laws. Any shareholder who feels they have been negatively impacted by a director who has not carried out his or her duties may take action either personally, via a representative, or via derivative action.

Any shareholder who has been prevented from exercising a voting right, or denied a right (such as the benefit of a pre-emption right) may bring a personal action against the company.

Where a number of shareholders have a shared interest in bringing an action against the directors of a company, the Rules of the Supreme Court provide that the action may be begun and continued by one or more of the shareholders as representing all the shareholders. Any subsequent judgment will typically bind all persons represented unless, for example, certain persons were not actually named as parties to the proceedings.

In certain circumstances, a shareholder may enforce a claim on behalf of the company. An individual shareholder may seek to enforce the company’s rights by suing in representative form on behalf of him or herself and the other shareholders against the wrongdoer, as an exception to the rule in Foss v Harbottle. The principle is that an action can be brought on behalf of the company by the minority shareholders, on the basis that they are representatives of the company, to obtain redress on the company’s behalf.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The director’s duty of care and skill involves positive obligations and is considered to have three aspects.

Degree of care, diligence and skill

A director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience (a subjective test). Performance must be judged by the way the director applies any skills that he or she actually has. However, it has been suggested that directors have a duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them to properly discharge their duties as directors.

It was once thought that the obligations of non-executive directors were not very onerous. However, it has been suggested that there ought to be no difference between the skill demand of an executive and non-executive director, at least where the latter is professionally qualified.

In the case of a public company, a director who holds office as an executive shall exercise that degree of care, diligence and skill that a reasonably prudent and competent executive in his or her position would exercise.

Attention to the business

A director must diligently attend to the affairs of the company. Mere errors of judgement have been held not to breach the duty of skill and care. It has been held that a director is not bound to give continuous attention to the affairs of the company as his or her duties are of an intermittent nature.

Reliance on others

A director is entitled to rely on his or her fellow directors and the other officers of the company. They can delegate power to others where it is reasonable to do so provided that, in the case of a public company, this delegation shall not constitute an assignment of their office. Moreover, directors cannot absolve themselves entirely of their responsibility by delegation to others.

Non-executive directors would also seem to have certain duties of supervision that must be fulfilled before they can safely delegate responsibilities to others. For example, when appointing managers, the directors must be duly satisfied that the managers have the requisite skills to discharge the functions delegated to them. In addition, the directors must ensure that there is set up an adequate system of monitoring the managers. The directors must on a regular basis ensure that the managers have fulfilled their obligations. The directors should require a regular flow of information from the managers to ensure that they are carrying out their duties satisfactorily.

20 Board member duties

To what extent do the duties of individual members of the board differ?

See question 19.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Provided that any delegation by a director is not in breach of their fiduciary duty to the company, and subject to the company’s by-laws, there are no restrictions on directors’ delegation of responsibilities. Generally, by-laws expressly provide that the directors can delegate their powers, discretion and authorities to other directors or a committee of directors.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

There is no requirement under the Companies Act 1981 for a standard company to have independent or non-executive directors.

Non-executive directors are generally subject to the same duties and liabilities as executive directors (see question 19). However, in regulating these duties, the more limited involvement of non-executive directors in the day-to-day conduct of the business of the company is recognised.

Sector-specific requirements and policy should be considered depending on the nature of the business. For example, the Insurance Code of Conduct proposes that boards of insurers should have an appropriate number and mix of directors to ensure that there is an appropriate level of experience, knowledge, skills and expertise commensurate with the nature, scale and complexity of the insurer’s business.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Bermuda companies must have a board of directors. The size of the board may be determined by the members at a general meeting of the company or in such other manner as may be provided in the by-laws. The Companies Act 1981 permits the appointment of a single director for a standard company (who can be an individual or any legal person) unless the shareholders determine otherwise. There is no maximum number of directors prescribed by the Companies Act but, typically, the shareholders may determine the maximum number of directors at a general meeting or as provided in a company’s by-laws.

Ordinarily, the by-laws of a company will deal with matters relating to the appointment of directors as well as the power to fill vacancies. Subject to the Companies Act and any special provisions in the by-laws, the directors are elected or appointed by the members by resolution.

In respect of regulated entities, it is a statutory minimum criterion of licensing that a director should be a fit and proper person to fill that position. Directors should be of high integrity and have relevant experience, sufficient skills, knowledge and soundness of judgment to properly undertake and fulfil their duties and responsibilities.

Generally, there are no age, gender, nationality or diversity criteria in respect of directors of Bermuda companies. However, the Companies Act does require companies to have certain officers or representatives who are resident in Bermuda.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no specific legislation that requires the separation or joining of the functions of board chairman and CEO. Generally, flexibility on board leadership is allowed as long as the board is fulfilling its duties. The management structure adopted should be appropriate to the nature, scale and complexity of an individual institution. In a smaller, owner-managed institution, a single person may fulfil the roles of both chairman and CEO; however, the person holding both roles should remember that the responsibilities of chairman and chief executive are distinct, and should be viewed separately. In cases in which the role of chairman and CEO are vested in the same person in respect of a regulated entity, appropriate additional checks should be built into the board structure.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

There are no mandatory board committees. However, the board may delegate authority to board committees subject to full board oversight and ratification of key decisions that materially impact the institution’s operations. There is no obligation to delegate unless the by-laws expressly provide for this, for example, to an audit committee. Any committee of the board will have to abide by any regulations that the board imposes, and if there are no regulations specifically for the committee, the by-laws of the company will regulate the committee as far as it is practicable.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no minimum or set number of board meetings per year required by law. The company’s by-laws will typically contain provisions relating to the convening and conducting of board meetings.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

There are no prescribed disclosures of board practices required by law, regulation or listing requirement.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The Companies Act provides that the by-laws of a company may regulate the appointment, functions, duties, remuneration and removal of all agents, officers and servants of the company, and the security, if any, to be given by them to the company. The amount, if any, of directors’ fees is typically determined by the company by a members’ resolution. Executive directors may be paid a salary. A director may also hold any other office or place of profit with the company (except auditor) in conjunction with his or her office of director for any period and upon whatever terms the board may determine and may be paid extra remuneration for the additional office (whether by way of salary, commission, participation in profits or otherwise).

Generally, there is no obligation to disclose the remuneration paid to the directors. The Companies Act does not impose a limit on a director’s term of appointment to the board.

The Companies Act prohibits loans (or the provision of any guarantee or security in connection with any loan) being made to directors without the consent of the members.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

See question 28. Subject to any restrictions expressly provided in the by-laws, the board is typically able to determine the remuneration of senior management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

A company can purchase and maintain insurance for its directors and officers, which is common practice.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Bermuda law generally allows for directors to be indemnified by the company and indemnification and exculpation provisions are typically included in the by-laws.

The Companies Act provides that company may in its by-laws or in any contract or arrangement between the company and any officer, or any person employed by the company as auditor, exempt such officer or person from, or indemnify him or her in respect of, any loss arising or liability attaching to him or her by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which the officer or person may be guilty in relation to the company. However, generally, any provision exempting an officer or person from (or indemnifying him or her against any liability in respect of) any fraud or dishonesty of which he or she may be guilty in relation to the company will be void.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

See question 31.

33 Employees

What role do employees play in corporate governance?

Employees do not normally have a significant role in corporate governance. There is no specific legislation in respect of the rights of employees in relation to corporate governance for standard companies and employees are generally not entitled to board representation. However, a particular business may have as part of its corporate documents or internal policies a requirement to consult employees or certain employees may have such rights in their employment contracts.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

There is no general legislation that requires evaluation of the board, its committees or individual directors for standard companies, although sector-specific requirements should be considered (see above). In any case, the board should carry out periodic assessments of both the board as a whole and of individual board members as well as its governance practices, and take any corrective actions or make any improvements deemed necessary or appropriate. In the case of larger, more complex institutions it is expected that a formal assessment process will be adopted to ascertain continuing suitability. Shareholders should be provided with sufficient information to enable them to assess the effectiveness of the board and senior management in governing the institution.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

A company’s certificate of incorporation and memorandum of association are available at the office of the ROC (see question 36), but the by-laws of standard companies are generally not publicly available.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The ROC keeps the following documentation in relation to Bermuda incorporated companies, which is publicly available in Bermuda:

• the certificate of incorporation and memorandum of association;

• the address of the registered office;

• any prospectus or offer document that must be filed pursuant to the Companies Act 1981;

• any registered charges against the company;

• directors’ information; and

• any other filings required pursuant to the Companies Act 1981.

The Registry of the Supreme Court maintains records of legal proceedings and judgments.

The BSX will have published accounts and auditors reports and any other relevant filings and announcements in respect of listed companies.

The registered office of the company will contain the following information:

• the register of directors and officers, setting out names and addresses; and

• the register of members, setting out the names and addresses of members, details of the number of shares held, the amount paid up on the shares and the date on which the person was entered in the register of members.

The timing of the various filings and disclosures depends on its nature and the specific law relating to such filing or disclosure, as applicable.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

There are no statutory shareholder rights or restrictions on whether shareholders can vote or advise on executive remuneration. However, the Companies Act provides that such remuneration may be covered in a company’s by-laws (see above). The directors of a company may amend the by-laws but any such amendment shall be submitted to a general meeting of the company and that amendment will only become operative to the extent approved at the general meeting. Therefore, although there are not any statutory shareholder’s rights to advise or vote on executive remuneration, if any such remuneration is covered in the by-laws, the shareholders may be able to prevent alterations to those remuneration provisions.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Subject to a company’s by-laws and provided the shareholder is nominating the directors as their proxy, or, where the shareholder is a company, nominating the director as its representative, there is no restriction on a director being a representative or proxy of a shareholder at a general meeting.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

This entirely depends on the nature of the company, but typically shareholders are engaged on an annual basis in relation to the annual general meeting. Shareholders may also be engaged in respect of other general meetings to deal with matters arising between the annual general meetings, for example to amend the by-laws or revise the company’s authorised share capital. Shareholder engagement will also occur if the company is the subject of a business combination or takeover. In the context of M&A, takeovers and squeeze-outs, there are certain procedural requirements that dictate timing as well as which parties are responsible for taking certain actions or making disclosures.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Subject to a company’s by-laws and the business nature of the company (eg, fuel and petroleum product storage, processing and distribution), companies are not typically required to provide disclosure with respect to corporate social responsibility matters. However, increasingly companies are opting to do so from a marketing perspective.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Companies are not typically required to disclose CEO pay ratio under Bermuda law.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are not typically required to disclose gender pay gap information under Bermuda law.

Update and trends

The BMA recently issued a consultation paper in respect of implementing a regulatory regime for virtual currency businesses (VCB). This includes requirements on VCB corporate governance that would require the implementation of corporate governance policies and procedures as the BMA considers appropriate given the nature, size, complexity and risk profile of the VCB. It is intended that the VCB legislation will come into force in 2018 and will provide definitions for controllers, shareholder controllers and officers consistent with these definitions in the acts of the other financial sectors regulated by the BMA.

Public companies continue to see increased shareholder engagement including direct engagement with senior executives. The Bermuda law requisition procedure is also becoming increasingly popular in respect of shareholders of public companies who wish to effect changes, such as the removal of directors.

Stephanie P Sanderson

spsanderson@beesmont.bm

Kit Cunningham

kcunningham@beesmont.bm

Kimonea Pitt

kpitt@beesmont.bm

5th Floor, Andrew’s Place

51 Church Street

Hamilton HM 12

Bermuda

Tel: +1 441 400 4747

Fax: +1 441 236 1999

www.beesmont.bm

Brazil

Denise Hypolito Passaro and Linda Liau

Andrade, Foz, Hypolito e Médicis Advogados

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Brazil is a civil law country (as opposed to common law jurisdictions), where certain regulations and best practices are not incorporated into the country’s pyramidal body of law.

As a general rule, companies adhere to the following laws:

• the Corporations Law (Law No. 6,404/1976) specifically governs corporations and may supplementarily govern limited liability companies (LLCs). Said law regulates shareholder rights, board structures, duties and responsibilities, among others;

• the Civil Code (Law No. 10,406/2002) governs an extensive amount of civil law topics, including a specific section on all existing corporate structures under Brazilian law and simple corporate governance rules applicable to these structures;

• the Securities Law (Law No. 6,385/1976), which created the Brazilian Securities Commission (CVM), the regulatory body that governs the securities exchange market, its surveillance, as well as providing specific guidelines and rules pertaining to listed companies; and

• the Financial System and Institutions (Law No. 4,595/1964) establishes the legal framework of financial institutions in Brazil and its governing entity, the Monetary Council (CMN), which is responsible for providing the guidelines with which these institutions must comply.

The set of regulations and best practices below, although in some cases not as enforceable as the aforementioned laws, are also widely adopted and disseminated in Brazil:

• CVM rulings, opinions, joint committee decisions and directive releases. Highly enforceable and mandatory for listed corporations;

• B3 – Brasil, Bolsa e Balcão listing rules and corporate governance guidelines applicable according to the companies’ listing segment in the Brazilian exchange market (Novo Mercado, Level 2, Level 1, Bovespa Mais, and Bovespa Mais Level 2). Highly enforceable and mandatory for listed corporations; and

• the Brazilian Institute of Corporate Governance (IBGC) Code of Best Practices (guidelines and recommendations) and the Brazilian Financial and Capital Markets Association (ANBIMA) guidelines (market self-regulation).

Corporations and LLCs are the most common and widely used corporate structure in Brazil. LLCs are governed by the Civil Code and may choose to be supplementarily governed by the Corporations Law. Corporations are entirely governed by the Corporations Law.

Our answers to the questions below primarily refer to corporations, considered as more sophisticated entities and subject to stricter corporate governance surveillance.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary government agencies or entities responsible for making and enforcing corporate governance rules are:

• CMN: although it has no supervisory powers, it is responsible for issuing the general guidelines and rules to be observed by CVM;

• CVM is responsible for business conduct, market regulation and surveillance of listed companies, and has powers to investigate, impose sanctions, as well as prohibit improper market conduct;

• the Council of Appeal of the Financial System is responsible for judging appeals filed against sanctions rendered by CVM; and

• B3 Market Arbitration Court (CAM) is responsible for settling corporate disputes related to the securities market. CAM is applicable to listed companies with specific corporate governance rules under the Novo Mercado, Level 2 and Bovespa Mais listing segments.

In Brazil, except for a few investors associations, there are no well-known shareholder groups or proxy advisory groups whose views are often considered.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Listed corporations and those with authorised capital (even if not listed) must mandatorily have a board of directors. In other cases, the board of directors is optional and is usually adopted only when there is more than one group of shareholders (eg, joint ventures, corporations that receive private equity investment). All corporations, however, must have a board of executive officers.

If the corporation has a single-tier board structure (board of executive officers only), their members will be appointed and removed by the shareholders. If the corporation has a double-tier board structure, the board of directors will be elected and removed by the shareholders and the board of officers will be elected and removed by the board of directors.

Shareholders may freely appoint and remove directors (or officers, as the case may be) by majority vote. The by-laws of closely held corporations may set higher quorums for board elections.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

In Brazil, all shareholder votes are binding. Non-binding shareholder votes do not apply.

The following decisions are reserved to shareholders:

• amendment to the by-laws;

• election and removal of directors or officers;

• annual approval of the company’s accounts and financial statements;

• issuance of debentures;

• suspension of shareholder rights;

• valuation of shareholders’ assets for the purpose of paying-up share capital;

• issuance of founder shares or participation certificates;

• merger, spin-off, dissolution or liquidation, and appointment of the liquidator, as well as approval of the liquidator’s accounts; and

• bankruptcy or financial reorganisation.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

As a general rule, each common share is entitled to one vote. Preferred shares are usually non-voting but are granted certain dividend and liquidation preferences. The by-laws may limit the number of votes a shareholder is entitled to and plural voting is not allowed, regardless of the type of share. The by-laws may also grant holders of preferred shares the right to vote on a number of topics, such as company valuation, its merger or spin-off, among others.

Some form of disproportionate or limited voting may occur under some circumstances. For instance, electing board members, holders of common shares that own at least 10 per cent of the share capital may cast multiple votes proportionally to the number of board members being elected. Also, shareholders of listed companies holding 15 per cent of voting shares or 10 per cent of non-voting shares or shares with restricted voting rights have the right to elect a board member and his or her substitute in a separate election at a shareholders’ meeting.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders duly invested in their capacity have no special requirements to participate in general meetings or votes and may be represented by proxy. The appointed proxy must be a lawyer, a shareholder or a director or officer.

The Corporations Law does not expressly authorise resolutions to be passed by written consent but, in practice, closely held corporations do act by written consent by having shareholders representing 100 per cent of the shares sign the relevant meeting minutes.

Total virtual meetings are still not allowed, but proxy voting and remote voting has been increasingly adopted in listed companies. In 2015, CVM established a distant voting mechanism to be gradually adopted by listed companies, which is currently mandatory for all traded corporations.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Yes, shareholders are able to require meetings to be convened. As a general rule, meetings are called by the directors or officers, but may be called by the shareholders when directors or officers fail to do so under the events required by law or upon the shareholders’ request to approve certain matters.

Resolutions and director nominations may be put to vote against the wishes of the board. Shareholders’ meetings will approve resolutions or director nominations or dismissals pursuant to the quorum established by law or by-laws.

Listed companies adopting the recent remote voting procedures must grant certain minority shareholders the right to request the introduction of matters in the shareholders’ meeting agenda. This request may not be unreasonably denied.

There are no specific provisions in the Corporations Law granting shareholders the right to require the board to circulate statements by dissident shareholders. Nevertheless, minutes of shareholders’ meetings record all matters put to vote, including the votes of dissident shareholders. Dissident shareholders may also submit a written voting statement to be filed by the corporation.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders have a duty to use their power to fulfil the company’s business goals. The Corporations Law lists a number of acts that are considered an abuse of power by controlling shareholders, such as conflict of interest voting, voting against the company’s best interest, election of notoriously unqualified managers, approval of irregular accounts, and approval of amendments to by-laws intended to harm minority shareholders. These acts are subject to enforcement action and also subject the controlling shareholders to liability for damages.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

As a general rule, shareholders’ responsibility is limited to the issue price of subscribed shares held by each shareholder in the corporation.

In exceptional cases of fraud and commingling of assets, the law expressly allows third parties to pierce the corporate veil whenever corporate assets are insufficient to cover the company’s debts and obligations. Shareholders that practise any acts in violation of the law or by-laws, whether for self-advantage or the advantage of a third party, will be held jointly liable alongside the directors or officers for the performance of these unlawful acts.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Yes. The Corporations Law sets forth tag-along rights in the event of listed corporations’ change of control. In the event of a direct or indirect takeover of a listed corporation, the acquirer is obligated to conduct a public offering for all voting shares at a price per share equivalent to 80 per cent of the price per share to be paid by the acquirer to the controlling shareholder. For listed corporations in the Bovespa Mais, Novo Mercado and Level 2 segments, price per share must be the same as the price paid to the controlling shareholder (100 per cent tag-along rights) and the tender offer must be extended to all remaining shareholders.

Some corporations with widespread capital ownership and no defined controlling shareholder insert ‘poison pills’ in their by-laws with the purpose of preventing control takeovers. Basically, if an acquirer intends to purchase more than a certain percentage of shares, as limited by the by-laws, the acquirer must conduct a tender offer for the remaining shareholders. This has caused considerable controversy in Brazil. The IBGC Code of Best Practice recommends taking the utmost care in the adoption of poison pills to ensure that they do not prevent non-hostile takeover from happening.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The board may only issue new shares without shareholder approval if the company’s by-laws set forth an authorised capital amount and grant the board powers to do so.

Shareholders have pre-emptive rights to acquire newly issued shares, proportionally to the number of shares they hold. The law grants shareholders at least 30 days to exercise their pre-emptive rights. Pre-emptive rights may be excluded by listed corporations in case of public placements on the stock market.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Transfer restrictions may apply in the event shareholders are bound by a shareholders’ agreement, such as drag-along and tag-along rights, put and call options, lock-up provisions and right of first refusal. Shares subject to a shareholders’ agreement cannot be traded on the stock market.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

In general, corporations may not trade with their own shares, with certain exceptions provided by law, such as redemption, amortisation or repurchases for treasury or cancellation of shares. Listed corporations are subject to additional requirements determined by the CVM.

Redemption and amortisation may be compulsory if so determined by the by-laws or by the shareholders’ meeting. Redemption or amortisation that does not cover all shares of the same class shall be carried out by drawing lots.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Yes. Subject to few exceptions, dissenting shareholders are entitled to withdraw from the corporation and be reimbursed in the event of:

• transformation of the company into a different corporate structure (eg, from corporation to LLC);

• merger or spin-off;

• share merger;

• inclusion of an arbitration clause in the by-laws;

• creation of preferred shares and changes to their advantages and conditions;

• reduction of the mandatory dividend;

• a change in the company’s corporate purpose; or

• if the company becomes part of a conglomerate.

Generally, share value will be based on the company’s net worth and may only be below this amount if the reimbursement is based on the company’s economic value, when authorised in the by-laws.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

See question 3.

In listed companies, a two-tier board structure is mandatory.

The board of directors is the collective decision-making body responsible for the company’s general guidelines and how it conducts its business, whereas the board of officers is responsible for executing and carrying out decisions approved by the directors. In any case, the corporation will be legally represented before third parties by the signature of officers only.

Directors may also act as officers (at most one-third of the directors).

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors’ primary legal responsibilities are:

• to establish the company’s general guidelines and how it conducts business;

• to elect and dismiss the officers, as well as establish their duties, pursuant to law and the by-laws;

• to oversee the officers’ management;

• to call a shareholders’ meeting when deemed necessary or to approve the company’s annual accounts and management reports;

• to render an opinion on acts or agreements to be executed by the officers, on behalf of the company, if the by-laws so require;

• to approve the issuance of shares or warrants, if permitted under the by-laws;

• to authorise the sale of non-current assets, real property liens and guarantees to third-party obligations, unless the by-laws set forth otherwise; and

• to elect and dismiss independent auditors.

The board of officers’ primary legal responsibility is to conduct the corporation’s day-to-day management. Specific duties may be determined by the by-laws and the board of directors. As long as it is within their powers and in accordance with by-laws’ provisions, officers may constitute proxies to act on behalf of the corporation.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

As a general rule, a director or an officer must always perform his or her duties in the company’s best interest. The Corporations Law expressly assigns board members the following duties:

• Diligence and care: to act with the same duty and care that he or she would act under if conducting his or her own business affairs.

• Loyalty: to maintain the company’s business as confidential, not disclosing any business information that may be used to obtain a personal or third-party advantage.

• Inform: in listed corporations, board members must disclose the amount of the corporation’s (or related companies’) securities that he or she holds and report to the market relevant information that may affect the purchase or sale of the company’s securities.

• Conflict of interest: to refrain from intervening in any transaction that conflicts with the corporation’s interest.

Hierarchically and in simplistic terms, the board of directors is subordinated and owes legal duties to the shareholders whereas the board of officers is subordinated and owes legal duties to the directors.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

An enforcement action can be brought against directors or officers for damages caused to the corporation. The company is the primary legitimate party for filing such action upon its approval at a shareholders’ meeting by majority vote. If the action is not approved by the shareholders’ meeting, any shareholder holding at least 5 per cent of the capital stock may file it directly.

19 Care and prudence

Do the board’s duties include a care or prudence element?

See question 17.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The duties set forth by law apply to all individual board members, regardless of their skills and experience. See question 17.

In listed corporations, duties may be restricted by the corporation’s by-laws, which may establish specific attributions and responsibilities for specific management members.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

No board member’s legal duties and responsibilities may be delegated to another board or management body, either created by law or the by-laws. However, corporations may, upon the officers’ signature, appoint proxies to act on their behalf.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The Corporations Law does not set any minimum number of independent directors.

However, in the Novo Mercado segment at least 2 or 20 per cent (whichever is higher) of the listed corporations’ board members must be independent. A director is deemed independent if he or she:

• has no ties to the corporation, other than an equity interest;

• is not a controlling shareholder, spouse or close family member (to the second degree) of a controlling shareholder, nor has any ties to any company or entity related to a controlling shareholder;

• has not been an employee or officer of the corporation, or of the controlling shareholder, or of a subsidiary of the company in the past three years;

• is not a direct or indirect supplier or buyer of goods or services, to an extent that would imply loss of independence;

• is not an employee or senior manager of any company that is a service or product provider or consumer of the corporation to an extent that would imply loss of independence;

• is not a spouse or close family member (to the second degree) of any senior manager of the corporation; and

• is not entitled to any payment by the corporation other than the consideration earned as director.

The IBGC Code of Best Practice recommends the majority of the board to be composed of independent directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The Corporations Law determines the board to have a minimum of three members, but there is no maximum number set by law. The number of members, or a range between a minimum and maximum number of members, must be set forth in the by-laws.

The board of listed corporations in the Novo Mercado segment must have at least five members, of which 2 or 20 per cent (whichever is higher) must be independent members.

The IBGC Code of Best Practice recommends an odd number of members, between five and 11.

The size of the board may vary according to the size, sector, maturity level and complexity of the corporation, capital distribution (defined control or not), whether committees need to be created and other needs.

In case of a vacancy on the board of directors, the other board members may appoint the substitute to occupy the position until the following shareholders’ meeting.

The by-laws must determine how board of officers’ vacancies are filled.

The Corporations Law requires that board members to:

• have a good reputation;

• have not been convicted of any bankruptcy offence, fraud, bribery, corruption, misappropriation of public funds or embezzlement, crimes against the national economy or public property, nor subject to any criminal sanction that precludes access to public office;

• not occupy any position in a competing company, unless this is waived by a shareholders’ meeting;

• not have a conflicting interest with the corporation, unless this is waived by a shareholders’ meeting; or

• in the case of listed companies, have not been declared by CVM to be unable to occupy a board seat.

Although not imposed by law, the IBGC Code of Best Practice recommends the board to be composed of members with diverse expertise, cultural backgrounds, age and gender so as to ensure a more plural, qualified and effective decision-making process.

Board members and officers must provide the company with a domicile address where they can receive service of process concerning their acts. In the case of listed corporations, they must also inform their share ownership (number, type and class).

Composition of the board of directors and of the board of officers is public, as the corporate documents that appoint their members are filed with the Board of Trade and published in local and official newspapers.

For listed corporations, composition of the board, including curriculum vitae of all managers, must also be disclosed to CVM and B3 within five months of the fiscal year’s end and whenever a public offering takes place. CVM also requires listed corporations to disclose all board dismissals and resignations.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Corporations Law does not require the separation or joining of the functions of chairman and CEO, allowing some flexibility to corporations in general.

However, the IBGC Code of Best Practice recommends the separation of those functions and, according to the IBGC, the CEO should not be a member of the board of directors (but should participate in the meetings when invited).

For listed corporations in the Novo Mercado and Levels 1 and 2 segments, separation is mandatory (except on an exceptional and transitional basis, in case of vacancy).

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Except for certain listed companies, there are no mandatory board committees, but large corporations usually set committees, either in the by-laws or by means of internal rules of the board of directors. The most frequent committees are: audit, human resources and remuneration, risk, finance, strategy and governance.

Committees have advisory functions and no decisive power. Their recommendations are not binding on the decisions of the board.

Corporations that decide to set committees usually follow the IGBC guidelines, which recommend that committees:

• should preferably be formed by board members only;

• should have at least three members, and must have at least one expert in his or her area of expertise (if there is no specialist, external experts should be invited);

• should have a chairman that preferably does not exercise the same position in another committee; and

• should not be comprised of the corporations’ executives, although they may be invited to some meetings.

Listed companies in the Novo Mercado segment must mandatorily have an audit committee, responsible for evaluating and monitoring internal audit activities and compliance. The committee must have at least three members and their own internal regulation and rules approved by the board. The company must annually disclose an audit committee’s report summarising the committee’s main meetings and topics discussed, as well as the main recommendations presented by the committee to the board.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no minimum number of board meetings required, but at least one, to approve the annual financial statements to be submitted to the shareholders’ meeting, must be held.

The Corporations Law and usually the by-laws set a list of matters that require board approval and, therefore, extraordinary board meetings are quite often convened to resolve those matters.

The IBGC Code of Best Practice recommends that the chairman propose an annual schedule with the dates and subject matter of the ordinary meetings, the frequency of which should not be greater than once a month.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Several rules applicable to the board of directors are set in the by-laws and, therefore, are public. That includes number of members, term of office, appointment of the chairman, procedures in case of vacancy, meeting mechanism (call, resolution quorums, virtual meetings, minutes of meetings).

To become effective before third parties, minutes of board meetings must be filed with the Board of Trade and published in local and official newspapers (in the case of listed corporations, they are also disclosed on CVM’s and B3’s websites). Minutes of meetings may only contain a summary of the resolutions passed.

The Reference Form that is annually filed before CVM by listed corporations contains more detailed information on the board structure, composition and practices.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The shareholders’ meeting must annually approve the global or individual remuneration of all managers (board of directors and board of officers). Shareholders usually approve a global cap for the year, which must provide for fixed and variable compensation and benefits. Individual remuneration is usually set by the board of directors under the global cap approved by the shareholders’ meeting, according to human resources policies, career plans and recommendations from the remuneration committee, if installed. The IBGC Code of Best Practice does not recommend variable remuneration for directors. Variable remuneration is exceptionally accepted in the case of family businesses or companies whose corporate governance policies are on their initial phase.

Listed corporations must disclose more detailed information on management’s remuneration in the Reference Form annually filed before CVM.

The by-laws must determine the term of office of directors and officers, which must not exceed three years, re-election admitted. Listed corporations are subject to stricter rules: the term of office of all directors must be unified and limited to two years, re-election admitted.

Directors and officers may not borrow money or assets from the corporation nor use its assets, services or take advantage of their position for their own benefit or for the benefit of a company in which they have an interest or of a third party, without the prior approval of a shareholders’ meeting or of the board of directors. Also, directors and officers may not receive any type of direct or indirect personal advantage from third parties, without the by-laws or a shareholders’ meeting so authorising.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

See question 28.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O insurance is permitted and common practice among larger companies (premiums are quite expensive for small and medium-sized companies). D&O was regulated by the Brazilian Insurance Agency in October 2016. According to said regulation, the company pays the insurance premium at no cost to the directors and officers.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There are no constraints, provided directors and officers act in the ordinary course of business and in due compliance of the law and of the by-laws.

Given that managers in Brazil (mainly officers) can quite frequently be involved as a defendant in lawsuits brought against companies (tax and labour claims in particular), companies generally assume responsibility for the debt and hold their directors and officers harmless.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

A director or an officer is not personally liable for the commitments he or she undertakes on behalf of a corporation in the ordinary course of business. However, he or she will be liable for losses caused to the corporation in case he or she acts with negligence or wilful misconduct or in violation of the law or of the by-laws. There is no possible exculpation through amendments of the by-laws or other shareholder action.

A director or an officer is not liable for unlawful acts of the other directors or officers, except if acting in connivance with them, or if he or she neglects to investigate such acts or if, despite being aware of those unlawful acts, he or she fails to act to prevent them.

A dissenting director or officer may be exempt from liability when he or she records his or her dissent in the meeting minutes of the relevant management body (board of directors or board of officers), or when he or she immediately informs the other directors or officers, or the shareholders’ meeting, about his or her dissent in writing.

In listed corporations, manager liability may be restricted to managers who, under the by-laws, have specific responsibility for the performance of such duties.

33 Employees

What role do employees play in corporate governance?

The Corporations Law expressly sets forth that a corporation has a social role and, to that effect, all managers (directors and officers) may authorise reasonable gratuitous acts to the benefit of the employees or of the community to which the corporation belongs.

The by-laws may require the board to have an employee representative, chosen by employees, but this is not customary practice, except for state-owned corporations and for some privatised corporations, in which case the employees’ representative seat on the board is mandatory.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Neither the Corporations Law, CVM regulations nor listing rules require any evaluation of the board, its committees or individual directors.

The Corporations Law establishes that directors shall be held liable for losses caused to the corporation as a result of unlawful practices.

Notwithstanding the lack of legal requirement, the IBGC Code of Best Practice recommends that the boards (directors and officers) be evaluated. This evaluation may be carried out by board members, assisted by executives, other stakeholders or external advisers. The scope of the evaluation should include the board itself, as a collective body, committees (if installed), chairman, board members individually and governance secretariat (if any). The IBGC Code does not provide a specific period to conduct board evaluations, but recommends the board (and CEO in the case of officers) to disclose information on the evaluation process and provide a summary of the main identified issues to be improved, as well as corrective measures implemented, so as to allow shareholders to have a proper understanding of its operations.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Corporations’ by-laws and minutes of shareholders’ meetings are filed before the Board of Trade and published in local and official newspapers. If intended to become effective before third parties, the board of directors’ or board of officers’ meeting minutes must be filed before the Board of Trade (copies of all documents filed before the Board of Trade are available to the public and may be requested by any third party). Therefore, strategic and sensitive matters discussed at board meetings may to a certain extent be kept confidential if the minutes of these meetings are not filed.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Besides the corporate documents that become public once filed before the Board of Trade (see question 35), listed corporations have several disclosure requirements set by CVM and B3, such as:

• audited financial statements accompanied by a summary of the annual report and statement of the officers responsible for requesting the financial statements, to be disclosed on the date publicly made available to the public or at most within three months (for Brazilian corporations) or four months (for foreign corporations) of the end of the fiscal year;

• quarterly accounting information to be submitted within 45 days of the end of each quarter;

• Reference Form (CVM form with complete information on the company) filed within five months of the end of the fiscal year – to be updated throughout the year in case of certain changes;

• releases on relevant facts that may impact the corporation’s shares trade price, upon occurrence;

• minutes of shareholders’ meetings, board meetings and corporate acts in general, upon occurrence; and

• report on the CG Code of Conduct within seven months of the end of each fiscal year.

The Reference Form is a listed corporation’s most comprehensive public document, and along with the financial statements, is the primary reference to understand a company’s business. It addresses, among other issues:

• financials;

• risk factors and risk management policies;

• company’s history;

• operations, activities, products, markets;

• assets;

• management discussion and analysis;

• projections (not mandatory);

• management structure as provided in the by-laws or internal policies;

• management remuneration;

• human resources;

• share control structure and economic group;

• transactions with related parties and applicable policies;

• capital stock;

• issued securities; and

• trading and disclosure policies.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

The shareholders’ meeting must annually approve all managers’ global or individual remuneration, including directors and officers.

See question 28.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Shareholders representing at least 10 per cent of the voting capital may request that a multiple voting procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to vote cumulatively for only one candidate or to distribute his or her votes among several candidates.

Also, shareholders of listed companies, holding 15 per cent of voting shares or 10 per cent of non-voting shares (or shares with restricted voting rights) have the right to elect a board member, in a separate election at a shareholders’ meeting. If neither the holders of voting shares nor the holders of non-voting shares achieve the relevant minimum percentages, they may aggregate their shares to jointly elect a director, provided they jointly achieve 10 per cent.

According to CVM regulations, remote voting procedures at the shareholders’ meeting of traded corporations called to elect board members must grant shareholders (holding a minimum percentage of shares that varies according to the corporation’s capital stock) the opportunity to indicate candidates and to include them in the shareholders’ meeting materials, at the corporation’s expense.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Most Brazilian companies, including listed ones, have a defined controlling shareholder (or a group of shareholders bound by a shareholders’ agreement). Widespread and decentralised corporate control is still an exception in Brazil. In this sense, controlling shareholders still have a considerable influence in the corporation’s management decisions and, to some extent, boards are still tied to majority shareholders’ guidelines. But minority shareholders, particularly institutional investors, have been increasingly active and engaged, demanding greater transparency.

Listed corporations must have an investor relations (IR) officer, appointed by the board of directors among the senior management members. The IR officer is legally responsible for disclosing to investors, to CVM and to stock exchanges transparent, timely and reliable information on the corporation’s businesses. Larger corporations typically have a structured IR department, coordinated by the IR officer. Shareholder engagement typically occurs during the annual meeting season, upon disclosure of the annual financial statements and in preparation for board elections. Larger corporations often organise conference calls with investors and market analysts to discuss and explain the corporation’s results.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Yes, for listed companies. A new ruling issued by CVM in June 2017 (CVM Ruling No. 586/2017) requires listed companies to disclose and report on their corporate governance policies, as set forth in the CG Code of Conduct. The CG Code of Conduct was prepared by 11 market entities that compose the Interagent Study Group and was incorporated by CVM in the aforementioned ruling. This code of conduct provides a list of corporate governance principles to be adopted by listed companies (on a ‘comply or explain’ basis), with emphasis on their compliance by management boards (directors and officers). Among these principles are obligations relating to: the environment (eg, report on how the companies’ activities impact the environment and how these impacts are monitored); and diversity and gender (eg, report on the companies’ recruitment and selection policies and how these take into account gender and diversity). The Reference Form annually disclosed by listed companies must also report on environmental policies on a comply or explain basis. For the time being, there are no disclosure requirements specifically relating to human rights.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

See question 28.

There are no requirements to disclose the CEO’s annual total compensation with regard to the annual total compensation of other workers. However, for listed companies, the Reference Form has strict and detailed management compensation (directors and officers) disclosure requirements, such as:

• description of the compensation policy and elements that compose it (including higher and lower compensation paid to senior management);

• performance indicators;

• how compensation is structured to reflect the performance indicators; and

• stock option and retirement plans.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are not required to disclose ‘gender pay gap’ information. If measured, this type of information is usually obtained through survey and research conducted by specialised consulting or human resources firms.

Update and trends

In 2017, two relevant corporate governance developments took place. As mentioned in question 40, in June 2017 CVM rendered a new ruling (CVM Ruling No. 586/2017) requiring listed companies to disclose and report on their corporate governance policies, on a ‘comply or explain’ basis, pursuant to the Brazilian Corporate Governance Code of Conduct for Listed Companies (CG Code of Conduct).

Also in 2017, a new B3 Novo Mercado Ruling was approved. Some new rules became effective as of January 2018 and others will gradually become effective until 2021, so that corporations may have time to adapt their by-laws and practices. Among the relevant changes brought by this new ruling are:

• simultaneous disclosure of relevant facts in both English and Portuguese languages;

• immediate disclosure of board members’ resignation or dismissal;

• compulsory audit committee; and

• changes to the concept of independent board member.

Lastly, in 2017, the House of Representatives’ Committee for the Defence of Women’s Rights submitted Bill No. 7179/2017 to propose that 30 per cent of board members of listed corporations be comprised of women. The bill is currently (as at March 2018) awaiting the appointment of the Labour, Administration and Public Service Committee’s rapporteur for analysis in order to advance its procedural process.

Denise Hypolito Passaro

dhypolito@andradefoz.com.br

Linda Liau

lliau@andradefoz.com.br

Av Presidente Juscelino Kubitschek 28, 11th Floor

04543-000 São Paulo

Brazil

Tel: +55 11 3016 5090

Fax: +55 11 3016 5090

www.andradefoz.com.br

Chile

Matías Zegers, Josefina Consiglio and Pilar Ay

DLA Piper BAZ|NLD

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main statutes applicable to corporate governance are:

• Law 18,045 (Securities Act);

• Law 18,046 (Corporations Act);

• Decree 702 of Ministry of Hacienda, 2011, Rules of Corporations Act (Rules);

• Decree Law 3,538, Securities and Insurances Superintendence (SVS) organic law; and

• Law 21,000, Financial Market Commission (CMF) organic law.

Additionally, the SVS issued the General Rule Number 385, dated 8 June 2015 (GRN 385), which obliges listed corporations to annually inform the SVS and the general public about the corporate governance, social responsibility and sustainable development practices adopted by them under a ‘comply or explain’ scheme.

Likewise, other regulations regarding corporate governance have been issued by several institutions for the specific entities they oversee:

• in 2008, the Superintendence of Pensions issued special norms on the matter, applicable to Private Pension Fund Administrators;

• in 2011, the SVS issued the General Rule Number 309, stating the corporate governance principles for insurance and reinsurance companies;

• in 2013, the Superintendence of Banks and Financial Institutions introduced certain matters of corporate governance in its Updated Rules Digest;

• in that same year, the Health Superintendence issued a circular letter applicable to private health insurances (isapres); and

• the Social Security Superintendence has also issued circular letters, in relation to Family Welfare Funds (2015) and Mutual Benefits Societies of Employees (2017).

As a general rule, listed companies shall comply with all listing rules. However, GRN 385 follows the ‘comply or explain’ principle, meaning that listed companies are not obliged to comply with all practices included in the GRN 385, but to inform which practices have been adopted and how they have been implemented or to explain why a practice is not suited for or desirable to the company interest given its reality.

Finally, this chapter refers to corporate governance general rules in listed corporations and closed corporations, but partnerships limited by shares or special norms for other type of legal entities are not included.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The SVS was the authority in charge of overseeing the Chilean capital market, until February 2017 when the CMF replaced it. However, their functions are very similar despite the change of name and structure. The CMF has the authority to issue instructions and orders to apply and allow compliance of relevant laws and rules, to solve inquiries and petitions, and to investigate claims made by shareholders, investors or other legitimate interested parties. Additionally, for specific types of corporations, the relevant authority may issue rules related to corporate governance.

Despite the fact that it is a common practice that certain authorities, such as the older SVS and the new CMF, develop a consultation process with the general public for new regulations to be passed, there is no well-known shareholders’ group or proxy advisory firm whose views are often considered. Some advisory firms have rendered their opinion and made some recommendations about certain Chilean corporate governance issues, but the authorities are not bound to consider their opinion. In recent years, activist shareholders have appeared in the Chilean market, but as stated above, authorities are not obliged to consider their requests.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Directors are appointed and removed by shareholders acting in shareholders’ meetings. In order to revoke the board, all members must be removed at once. Shareholders may not remove one or more directors. Consequently, the number of votes required to elect a director will depend on their number and, as a general rule, to remove the whole board, 50 per cent plus one vote of the shares with voting rights are needed.

The board of directors is obliged to purse actions agreed by shareholders’ meetings, whose matters are listed in the Corporations Act and in certain cases in company by-laws.

Directors appointed by a shareholders’ group have the same duties towards the company and other shareholders as the remaining directors, not being able to infringe their duty with them to defend the interest of the shareholders’ group that elected them.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following decisions are reserved for shareholders:

• Ordinary shareholders’ meeting (occurs once a year at a predetermined time):

• reviews the company’s situation and auditor’s report, the approval or rejection of the annual report, the balance sheet and financial statements;

• profit distributions;

• appointment or revocations of directors and auditors; and

• any other matter of social interest that is not covered in the matters of the extraordinary shareholders’ meeting.

• Extraordinary shareholders’ meeting (occurs at any time when the social needs require it):

• company’s dissolution;

• company’s transformation, merger or division and amendments to by-laws;

• bonds convertible in shares or debentures issuance;

• sale of relevant assets;

• granting of guarantees to secure third-party obligations (excepted for affiliates where the board approval is enough); and

• any other matter that shall be decided by a shareholders’ meeting.

In Chile, the concept of the non-binding shareholder vote does not exist.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Chile follows the rule ‘one share, one vote’, being that the shares with multiple votes are prohibited by the Corporations Act, but shares with limited or no voting rights are allowed. As a general rule, even unpaid shares have voting rights, except if the articles of incorporation express the contrary. Shares owned by the same company do not have voting rights.

Most of the time, shares without voting rights or with limited votes are associated with certain preferences, for example, to elect a higher number of directors or to have the right for a higher proportion of company profits. If the company does not comply with preferences, shares will keep their voting rights while preferences are not fully respected.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders have to be registered in the company’s shareholders’ registry to participate in a meeting. In listed companies, shareholders have to be registered at least five business days prior to the shareholders’ meeting, and in closed corporations, at the beginning of the meeting.

Even shareholders with non-voting shares and directors are authorised to participate in shareholders’ meetings with the right to speak.

Shareholders may attend meetings personally or be represented by a third party, who may or may not be a shareholder. The proxy form has to comply with certain requirements in order to be valid, and the company has the right to qualify such proxies.

Shareholders cannot act by written consent without a meeting.

All matters shall be subject to independent voting unless they are approved by unanimous decision. Voting shall be developed through a system that secures the simultaneous issuance of votes or its issuance in secret. Scrutiny must be carried out in a single public act, and in both cases, it shall be publicly known how each shareholder voted.

According to article 64, section 3 of the Corporations Act, the SVS (now the CMF) may authorise distance voting systems for listed corporations. Those systems have to protect shareholders’ rights and the voting process. The SVS’s General Rule Number 273 has authorised the following systems: ballot, voting by electronic device and distance voting. The latter has to comply with authentication, access control, confidentiality, integrity and no-rejection principles.

The GRN 385 asks if the corporation has a system that allows:

• shareholders to remotely participate in shareholders’ meetings and voting, at the same time as those physically present;

• shareholders to remotely observe in real time what is happening in the meeting; and

• the general public to be informed in real time of the agreements reached by the meeting or with a time difference of less than five minutes.

Despite the fact that distance voting systems are permitted, to the best of our knowledge Chilean listed companies have not implemented them for the following reasons: the Chilean stock market is highly concentrated; most of the investors are located in Santiago; the majority of the meetings take place in this city; and proxies are commonly used.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Resolutions and directors’ nominations have to be put forward for voting even when against the wishes of the board. The board does not have the authority to limit the decisions to be made at the shareholders’ meeting.

Shareholders that own more than 10 per cent of outstanding shares with voting rights may request the board of directors to convene an ordinary or extraordinary shareholders’ meeting, expressing in their request the matters to be discussed at the meeting.

Shareholders who own more than 10 per cent of voting shares may formulate comments and propositions: related to the company’s business and to require their inclusion in the annual report; and related to the matters put up for vote by the board in shareholders’ meetings and to include them in the information to be sent to shareholders.

All shareholders have the right to speak in the meeting, thus their opinion (dissenting or not) shall be heard. Meeting deliberation and agreements shall be included in the relevant book’s minutes, and in listed corporations the most recent minutes of the meetings have to be available on the company’s website for shareholders. Additionally, books may be inspected by shareholders prior to the ordinary shareholders’ meeting.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Article 30 of the Corporations Act establishes, as a general rule, that shareholders have to exercise their rights respecting the company and other shareholders’ rights. The Corporations Act does not establish special duties for controlling shareholders, but they shall exercise their rights with due respect for the limits imposed by other shareholders and company rights. Hence, controlling shareholders may not abuse their control position to obtain benefit at other shareholders’ or the company’s expense.

Enforcement actions that may be brought against controlling shareholders will depend on the abuse committed or the law infringed. Other shareholders and the company may claim damages under civil law or using the derivative action described in question 18 below.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

No, as a general rule, corporations limit the shareholders’ liabilities, being responsible up to the amount they have agreed to pay in for subscribed shares only. Consequently, the only obligation that shareholders have with the company is to pay the capital corresponding to their shares, not being obliged to return the benefits received.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

In Chile, the majority of companies have a controlling shareholder, thus there is no need for specific defences. The shareholder is the only person in charge of deciding about the sale of his or her shares. Therefore, if a person wants to take control of the company, he or she will have to negotiate with the controller and then follow the special procedure established by law for the public offerings for the acquisition of shares, known as ‘OPA’.

Eventually, by-laws may include certain anti-takeover devices as long as they are not contrary to the applicable law.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

All matters related to company capital (increase, decrease, issuance of new shares, shares privilege, vote restrictions, etc) have to be approved by the relevant shareholders’ meeting. Consequently, the board is not allowed to issue new shares without shareholders’ approval.

Article 25 of the Corporations Act states the general rule regarding pre-emptive rights to acquire newly issued shares. Any shares or any other securities that will in the future give rights over company shares shall be offered, at least once, preferably to each shareholder on a pro rata basis of the shares owned. However, there are certain limited exceptions to pre-emptive rights, such as capital increase percentage destined to stock options for employees of the company or its affiliates and capital increase owing to merger by absorption to the absorbent company’s shareholders, among others.

The pre-emptive right can be renounced or transferred – to other shareholders or third parties – by the relevant shareholder during a term of 30 days and with the formalities established by the Corporations Act and its Rules. If the shareholder does not express his or her opinion during that term it will be understood that he or she renounces his or her right.

Shares not subscribed by shareholders cannot be offered to third parties at inferior value or in better conditions. In listed corporations, this restriction applies for a period of 30 days after the expiry of the option term. After that, the stocks may be offered to third parties at different prices and conditions if the offer is made through a stock exchange.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

In listed corporations, company by-laws cannot contain restrictions to free disposing of shares. Nevertheless, shareholders’ agreements that establish restrictions or certain rights over company shares are allowed. In order to be able to exercise the rights contained in the shareholders’ agreements before third parties, the agreement shall be deposited in the company, made available to other shareholders and third parties and noted in the shareholders’ registry of the company. The shareholders’ agreements will not affect the company’s duty to register the share transfer.

Common restrictions included in shareholders’ agreement are tag-along, drag-along and right of first refusal, among others.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Yes, under certain and limited circumstances the company may repurchase its own shares. Those cases are:

(i) owing to a withdrawal right exercised by shareholders;

(ii) as result of a merger with another company that is a shareholder of the absorbent company;

(iii) if it allows for compliance with a capital decrease agreement, when the market price of the stocks is lower than the rescue value to be paid to shareholders; or

(iv) when a shareholders’ meeting agreed on that following certain conditions and requirements.

These situations can only be temporal, for example, in cases (i) and (ii) the stocks have to be sold by the company in a stock exchange within one year of their acquisition, and in (iv) within 24 months or five years if the stocks are destined to be employees’ compensation plans. If stocks are not sold during the term, the capital will be automatically decreased.

The cases described in (i) and (ii) are mandatory.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Yes, article 69 and the following articles in the Corporations Act give dissenting shareholders the right to withdraw from the company and be paid for their shares.

The withdrawal right is granted to a dissenting shareholder, meaning a shareholder who opposes in the same meeting the agreement reached by the shareholders or, who being absent at that meeting informs the company about his or her disagreement within 30 days counted from the meeting’s date. The right is granted to all shareholders, even to those that own non-voting shares. Shareholders who attended the meeting – personally or represented – but refrain from voting, will not have the withdrawal right.

Matters that grant withdrawal rights are: company transformation, merger, sales of certain corporate and affiliates assets, the granting of certain guarantees for third-party obligations, in listed companies, for minority shareholders, when a shareholder acquires more than 95 per cent of shares, the cancellation of the company’s registration in the Securities Registry kept by the CMF, among others.

The value that the company shall pay to the dissenter shareholder for his or her shares is: for listed companies – the market price, and for closed corporations – the book value.

The dissenting shareholder may renounce his or her withdrawal right before the company pays the stock value. Once the price is paid, the stocks have to be registered in the shareholders’ registry under the company’s name.

The board of directors may convene a shareholders’ meeting, during a certain period of time specified by law, to reconsider or ratify the agreement that originates the withdrawal right. If the meeting revokes the original agreement, the withdrawal right will expire.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Corporations are managed by a board of directors appointed by the shareholders’ meeting. In Chile, the only allowed board structure is one-tier. Even when the law does not expressly state that it is a unitary board, there is no discussion about this.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors is in charge of managing the company and represents it judicially and extrajudicially, for the compliance of its purpose, being invested with all the managing and disposal authorities that law or the by-laws not established as authorities of the shareholders’ meeting.

Directors have to exercise their function in complying with their fiduciary duties. Their main duties are:

• the duty to be informed (and the right to request certain information);

• the duty of care, having to comply with the standard of conduct set by law; and

• the duty of loyalty, which includes:

• the duty of confidentiality; and

• the duty to respect the business opportunity of the company.

The director has to be loyal to the company in the exercise of his or her functions and cannot compete or damage it with his or her actions.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors represents the company, owing its legal duties to the company and its shareholders.

Directors appointed by a group or class of shareholders have the same duties towards the company and the rest of the shareholders as the remaining directors, not being able to infringe their duties under the pretext of defending the interest of those who have appointed them.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Yes, shareholders who represent at least 5 per cent of the outstanding shares or any director may sue, on behalf of the company, those responsible, including directors, for any damage caused to the company owing to infringement of the Corporations Act, its rules, by-laws, or norms issued by the board or by the previous SVS or the new CMF. This action is known as derivative action.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors have to exercise their functions in compliance with the fiduciary duties imposed by law, one of them being the duty of care. Directors shall use, in the exercise of their functions, the care and diligence that people ordinarily employ in their own businesses. This corresponds to the ordinary standard of care (culpa leve) defined by Chilean civil law.

The duty of care obliges every director to regularly follow and decide about managing issues, requesting all the information needed for this purpose, with the convenient collaboration or assistance from management, to actively participate in the board and committees, attend the meetings, request board meetings and that certain matters be reviewed by the board, opposed to illegal acts, among others.

Directors will be jointly and severally liable for damages caused to the corporation and its shareholders owing to any guilty and fraudulent actions.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Directors’ functions are collectively exercised in meetings duly constituted. Therefore, individual acts of directors do not constitute an act of the board, nor of the company and are not binding for the company unless the board, acting as such, delegates some specific functions.

Directors are jointly and severally liable for damages caused to the shareholders and the company owing to their negligent and fraudulent actions. To protect his or her responsibility, the director has to oppose the act or agreement and the opposition shall be recorded in the minutes of the relevant directors’ meeting and shall be informed to shareholders in the next ordinary shareholders’ meeting.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Individually considered directors are not allowed to delegate their personal functions as directors. However, the board may delegate part of its functions to senior executives, managers, lawyers, one director or directors’ commissions and, for specifically determined purposes, to other persons.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Given the characteristics of the Chilean stock market, which is highly concentrated, independence does not refer to management but to the relation to controlling shareholders.

Listed corporations that have a market capitalisation equal to or higher than the equivalent of 1.5 million units of account (US$59 million approximately, as at 31 May 2017) and at least 12.5 per cent of the issued shares with voting rights, are owned by shareholders that individually control or own less that 10 per cent of such shares, have to appoint at least one independent director and constitute a directors’ committee.

The independence concept was amended by Law 20,382 passed in 2009. Before the reform, a director was independent if he or she had been elected without controlling shareholders’ votes.

Currently, a person shall not be considered as independent if at any moment during the last 18 months:

(i) they maintained any economic, professional, credit or commercial connection, interest or dependency of relevant volume and nature, with the company, the other companies from the same group, its controller, the senior management of any of them, or has been director, CEO, manager, senior executive or consultant of them;

(ii) they maintained certain family relationships with the persons above-mentioned;

(iii) they have been director, CEO, manager or senior executive of a non-profit organisation that has received contributions or donations from the persons indicated in (i);

(iv) they have been a partner or shareholder who owned or controlled, directly or indirectly, 10 per cent or more of the capital;

(v) they have been a director, CEO, manager or senior executive of an entity that has rendered legal or consultant services, for relevant amounts, or an external auditor of the persons indicated in (i); or

(vi) they have been a partner or shareholder who owned or controlled, directly or indirectly, 10 per cent or more of the capital, directors, CEO, managers or senior executives of the main company’s competitors, suppliers or clients.

The main difference in responsibility of independent directors is that they shall be members of the directors’ committee that is further described in question 25. As explained in question 24, executive directors are not allowed.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The size of the board is determined in the company’s by-laws establishing an invariable number of directors. If shareholders want to modify the number of directors or to create a new directorship, a by-laws amendment has to be agreed on at the relevant shareholders’ meeting and must comply with all the formalities. There is one exception for companies that have to appoint independent directors and the directors’ committee, in which case if its by-laws consider fewer than seven members, the ordinary shareholders’ meeting has to appoint seven directors.

The minimum number of seats depends on the type of corporation. Closed corporations shall have at least three directors, listed companies at least five, and corporations that shall designate an independent director and establish a directors’ committee shall have at least seven directors. If the respective by-laws do not set the number of board members, the legal minimum shall apply.

The Corporations Act does not set a maximum number of directors. However, special laws may establish special minimum and maximum and other requirements for special corporations (eg, banks).

By-laws may establish substitute directors in the same number of principals. If they do, each principal director shall have his or her substitute. Substitutes will replace principals permanently in case of vacancy or temporarily in case of absence. If the vacancy of a director and his or her substitute occurs, the whole board has to be renewed in the next ordinary shareholders’ meeting. In the meantime, the board may appoint a substitute. There are special rules for vacancies of independent directors.

The following persons cannot be appointed as board members:

• minors (aged under 18 years old);

• directors who have been revoked owing to the rejection of the balance sheet by a shareholders’ meeting;

• persons with certain criminal records (including bankruptcy crime); and

• authorities regarding entities that they, directly and in accordance with the law, supervise or control.

There are other restrictions to being a director of listed corporations or their affiliates, such as being a senator, congressman, state ministry, CMF officer, stockbroker, etc.

Except for independence in certain cases, there are no required criteria that individual directors or the board as a whole must fulfil, such as age, gender, nationality, diversity or expertise.

General Rule Number 30 (GRN 30), issued by the SVS, which contains the ongoing information that listed corporations have to disclose, states a disclosure requirement relating to board composition. The annual report shall contain information about diversity in the board of directors, informing about the number of directors by gender, nationality, age range, and years as director. Also, it shall include information about the profession or occupation of directors appointed during the last two years.

Additionally, another General Rule (GRN 385) asks if the company has established a system to inform shareholders about:

• the diversity of capacity, conditions, experience and vision that is needed in the board;

• the maximum number of other boards in which it is appropriate that company directors participate;

• the candidate’s experience and profession; and

• if the candidate, during the last 18 months, has or has had any contractual, commercial or any other kind of relationship with the company’s controller, main competitors or suppliers.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The CEO position is incompatible with the board chairman position and with being auditor or accountant of the company, and in listed corporations is also incompatible with being a board member.

There is flexibility on the board leadership being the chairman elected by directors. In case of a tie, it will be decided by a ballot.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

There is only one mandatory board committee for listed corporations that complies with the requirements described in question 22. This directors’ committee is a mix of accounting and compensation committees.

The directors’ committee has the following main faculties and duties:

• to review the external auditors’ reports, the balance sheet and the financial statements;

• to propose to the board the name of external auditors and the risk rating agency;

• to review and issue a report about related-party transactions;

• to review the remuneration and compensation plans for the CEO, senior executives and other employees;

• to inform the board about the convenience of hiring auditors for services other than external auditing; and

• to prepare the annual report about its work, including recommendations for shareholders.

The directors’ committee shall be composed of at least three members and the majority of them shall be independent. If there are more than three independent directors, the board shall decide, by unanimous decision, who will be on the committee. In case of disagreement, preference shall be given to those directors who have been appointed with more votes from shareholders that own or control less than 10 per cent of shares. If there is only one independent director, he or she will appoint the other members of the committee. The president of the board may not integrate the committee or subcommittees unless they are independent.

Finally, by-laws may establish other different committees, their functions and composition requirements and corporations may voluntarily establish the directors’ committee.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Yes, in listed corporations the board of directors shall meet in ordinary meetings at least once a month. The company’s by-laws may establish a higher frequency or other specific requirements.

The GRN 385 asks if the board has established a minimum number of ordinary meetings.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

No, there is no disclosure required. However, the minutes and the books, among other company documents, shall be available at the company’s offices for shareholders’ review during the 15 days prior to the ordinary shareholders’ meeting.

Additionally, the GRN 385 asks if the board of directors meet, at least quarterly, with the external auditing company, risk management unit, internal auditing unit, compliance officer, corporate responsibility and sustainable development units, or their equivalents, to analyse relevant aspects of the functions developed by them.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

A company’s by-laws must determine if directors shall be remunerated or not. If they are, every year the ordinary shareholders’ meeting shall fix in advance the compensation amount to be paid to directors. Any other relevant payment made to the directors for functions different to the director’s position has to be authorised or approved with the relevant formalities.

Additionally, the annual report shall contain all remunerations received by directors during the prior year, including those for other functions than the director position, representation allowances, bonus and any other payment.

The members of the directors’ committee shall be remunerated. The remuneration shall be fixed, every year, by the ordinary shareholders’ meeting, in accordance with their functions. The remuneration shall not be less than the remuneration that any regular board member receives plus one-third of its amount.

As a common practice, directors’ remunerations are composed of a fixed fee and a variable part, which depends on the company’s results.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

As a common practice, the board of directors determines the remuneration of most senior management. In Chile, there is no say-on-pay by shareholders on this matter. GRN 30 states that the annual report has to state the remunerations paid to senior management as well as the compensation plans and special benefits for them.

GRN 385 asks if salary structures and polices of the CEO and senior management have to be approved by the shareholders’ meeting. Furthermore, GRN 385, trying to prevent bad practices, asks if the company has implemented a formal procedure to annually review salary structures, total compensations granted to the CEO and other senior executives, with the assessment of a third-party, and if they are published on the company’s website.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurance is a common practice for directors. Corporations can pay the director’s premiums. However, as the director is not an employee of the company, it is highly likely that the Chilean Internal Revenue Service will consider the premium a rejected expense. This means that the company shall pay a penalty tax of 40 per cent of the expenses amount. It will be necessary to prove before a tax court that the premium expense was needed to generate the company’s income.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no constraint on the company indemnifying directors and officers in relation to liabilities incurred in their professional capacity, but this is an uncommon practice. Liabilities that arise from gross negligence or fraud cannot be indemnified, in accordance with civil law.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Any by-laws disposition or shareholders’ agreement that precludes or limits directors’ or officers’ liability will be null and void. Moreover, the approval of the annual report, financial statements and other documents by the shareholders’ meeting does not preclude or limit the director’s liability for determined acts or business, nor does the specific approval of them preclude liabilities when they have been executed fraudulently or negligently.

33 Employees

What role do employees play in corporate governance?

According to the law and regulations, employees do not play any specific role in corporate governance. They are stakeholders without attributions or rights. If a person is an employee but also a shareholder, he or she will play his or her role as any other shareholder.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

No, there is no legal requirement in this regard. However, GRN 385 asks if the company has established a formal procedure to annually review the board’s organisation and functioning to detect areas of improvement, with the help of an expert third party. Additionally, GRN 385 asks about board evaluation process regarding the inclusion of practices mentioned in such rule.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Corporations shall have, available for shareholders, at their main office, branches and on their website (for listed corporations) updated versions of their by-laws duly signed by the CEO, indicating the date and notary public, in which their articles of incorporations, by-laws and any amendments have been granted along with the information about their legalisations.

Additionally, GRN 385 asks that corporations have an updated website, where shareholders may easily access the company’s public information.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The board shall disclose to shareholders and the general public certain of the company’s legal, economic and financial information required by law or by the CMF. The specific obligations will depend on whether it is a listed or closed corporation. In listed corporations, the board has to take measures needed to avoid the information being disclosed to certain persons before the general release.

The board of directors has the authority to qualify certain information as confidential, when it refers to pending negotiations that, if they are known, may affect the social interest. This shall be agreed by at least three-quarters of the directors in the exercise.

Examples of disclosure obligations are:

• information to be disclosed for the ordinary shareholders’ meeting: annual reports, balance sheet, minutes, external auditors’ reports, etc, which shall be available for shareholders’ review during the 15 days prior to the date of the ordinary shareholders’ meeting in the company’s offices. During that term, information from the company’s affiliates shall also be available. In listed corporations, the annual report, financial statements and auditors’ report have to be made available for shareholders and some of those documents have to be published in the company’s website; and

• ongoing information to be disclosed by listed corporations to the CMF, brokers and all stock exchanges (when the company is listed in one of them) contained in the GRN 30 includes:

• quarterly and annually financial statements and reports;

• capital variations;

• annual report;

• essential facts, about the company, its business and securities, as soon as the company knows about it or it happens. The information is essential when it would be considered relevant for investment decisions by a prudent person. The GRN includes a list of essential facts examples and the instruction to inform them. Confidential information has to be provided to the CMF in accordance with special instructions; and

• information of interest means information that cannot be qualified as essential, but is useful for a proper financial understanding of a company, its securities or their offer.

There are several other norms that contain obligations to disclose information about several matters.

Finally, GRN 385 asks if the company has implemented a formal and ongoing improvement procedure to detect and implement eventual improvements in the production and diffusion of information to the public and if such procedure is audited by a third party, on an annual basis.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Shareholders do not have an advisory or any other vote regarding executive remuneration; it is determined by the board of directors or by the senior management.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Yes, they do. The CEO shall inform shareholders, at least two days prior to the meeting, about the list of nominated directors that have accepted the nomination and have declared whether they have any unsuitability for the position. If this is not possible, the list shall be available at the beginning of the meeting. Candidates may be added to the list even during the meeting, provided they comply with certain requirements.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Yes, usually Chilean companies engage with shareholders through the investor relation units.

GRN 385 asks whether companies have a unit in charge of the relationship with shareholders, investors and the media.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Yes, GRN 30 states a disclosure requirement relating to corporate social responsibility and sustainable development. The annual report shall contain information about diversity in the board of directors, management teams and the organisation in general, informing about the number of people by gender, nationality, age range and years as part of the company. There is no special regulation regarding environment, human rights or other corporate social responsibility matters in the sources of corporate governance rules and practices mentioned in question 1. However, other norms could contain obligations to disclose information about environment or other matters, depending on the company´s business (eg, mining, energy, others).

Additionally, GRN 385 asks that the company establish some of the following practices regarding corporate social responsibility:

• the board of directors meets at least quarterly with the unit of social responsibility, sustainable development or those responsible for an equivalent function to analyse: the effectiveness of the policies approved by the board to transmit the benefits of diversity and inclusion for society, inside the organisation, its shareholders and the general public; organisational, social or cultural barriers detected that could be inhibiting the natural diversity; usefulness and acceptance that sustainability reports have had with spread to relevant interest groups;

• the board of directors has approved a policy and established formal procedures that aim to provide the public with information regarding: the policies adopted by the corporation in matters of social responsibility and sustainable development, the interest groups identified by the company, the relevant risks in sustainability and sources of them, indicators measured by society in this matter, the existence of goals and the evolution that sustainability indicators have had; and

• the board of directors has established formal procedures that detect and reduce organisational, social or cultural barriers that could be inhibiting the natural diversity.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

No, companies are not required to disclose the pay ratio between the CEO’s compensation and other workers. However, GRN 30 states that the annual report has to express the overall remuneration of its team of senior executives.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Yes, GRN 30 states a disclosure requirement relating to the gender pay gap. The annual report shall contain the proportion that represents the base gross salary average, by type of position, responsibility and function performed, of female executives and workers with respect to male executives and workers. There is no special regulation regarding gender pay gap disclosure of directors’ remuneration.

Update and trends

In February 2017 the Law No. 21,000 came into force, which regulates the CMF (which replaces the previous authority, the SVS). Although their functions remain almost unchanged, the new CMF structure varies significantly from the SVS one. Instead of only one superintendent, the CMF has five commissioners, elected by the President and the Senate. This grants more independence from political changes. Regarding auditing faculties, the CMF has new investigative tools such us access to secret banking information and telephone interception, but in return the Law offers more guarantees to audited entities. For example, fine values are set in advance by a catalogue and a leniency system is implemented.

Matías Zegers

mzegers@dlapiper.cl

Josefina Consiglio

jconsiglio@dlapiper.cl

Pilar Ay

pilar.ay@dlapiper.cl

Isidora Goyenechea 3120, 17th Floor

7550083 Las Condes

Santiago

Chile

Tel: +56 2 2798 2600

Fax: +56 2 2798 2650

www.dlapiper.cl

France

Alexis Chahid-Nouraï

Aramis

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main sources of law relating to corporate governance in France are:

• the Commercial Code;

• concerning listed companies, the general regulations, which are binding, and recommendations of the French stock exchange authority (AMF), which may be binding on a case-by-case basis; and

• specific laws that organise the governance of corporate vehicles designed for certain business sectors (financial institutions) or professions (such as auditors or pharmaceutical businesses).

The relevant European regulations have been incorporated into these sources.

The Commercial Code encourages companies listed on a regulated market to refer to a corporate governance code, and requires those companies that do not intentionally refer to these codes to explain their reasons for not doing so and to clarify their own corporate governance rules.

Two established corporate governance codes are currently available: the Afep-Medef Code, designed for large listed companies, and the MiddleNext Code, which was initially dedicated to small and medium-sized listed companies and now also addresses the case of large listed firms controlled by one shareholder or a group of shareholders. They are non-binding, based on the ‘comply or explain’ principle. A corporate governance code for (non-listed) medium-sized and start-up companies was also published by a professional organisation of managers and directors (ADAE) several years ago.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

There is no specific agency with exclusive competence in the elaboration and enforcement of corporate governance rules.

However, the AMF, as guarantor of sound market information, closely reviews and monitors corporate governance practices of listed companies and publishes an annual report on this matter.

The Afep and Medef associations have set up a high-level committee on corporate governance in order to review the practices of the listed companies applying the Afep-Medef Code and to ensure the effective implementation of the ‘comply or explain’ principle. This committee works closely with the AMF.

Several shareholders’ associations are active in order to promote and defend shareholders’ rights. They are often consulted by authorities in the development of new regulations and are sometimes involved in legal actions to defend their position.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

In France, the ‘limited liability company’ concept covers different corporate forms of vehicles:

• Public limited company (SA): most functioning rules are provided for by the Commercial Code and are compulsory; the SA is the only type of vehicle (apart from the SCA) that may be listed.

• Joint-stock company (SAS): functioning rules are predominantly decided by the shareholders in the articles of association.

• Limited company (SARL): functioning rules are provided for by the Commercial Code and are compulsory; a SARL is generally reserved to small businesses.

• Limited partnership (SCA), organised by the Commercial Code and to a certain extent by the articles of association – a sort of limited partnership with a share capital, where two types of members coexist: general partners, who are liable on their personal assets for the SCA’s debts, and limited partners who basically are shareholders. The SCA form is chosen by listed companies as a poison pill against hostile takeover bids.

In an SA, either with a one-tier structure (a board of directors) or with a two-tier structure (an executive board and a supervisory board), the shareholders always have the power to remove members of the (supervisory) board at a simple majority vote in a meeting, even if this matter has not been included in the agenda.

SCAs are managed either by a general partner or a third person whose rules of appointment and removal are freely set in the articles of association. SCAs also have a supervisory board whose role is to control management and that may exercise a veto right on the appointment of managers. The power of shareholders in such companies is limited: every decision has to be confirmed by the general partners, with the exception of the appointment of the members of the supervisory board.

Shareholders of an SAS benefit from a large flexibility to draft the articles of association, especially as regards governance rules, which is the reason why investors who need to address specific governance issues and tailor peculiar corporate functioning rules generally choose this legal form. Appointment and removal rules of executives and directors are provided for in the articles of association.

SARLs do not have a board of directors per se, as management and executive functions are combined in a single type of duty. The appointment and removal of managers are decided by the shareholders at a simple majority unless the articles of association provide for a qualified majority. Shareholders may also request removal of the managers with cause to the courts.

When consulted on a specific question, a shareholders’ vote is binding (with a few exceptions). But apart from their removal right regarding the board or legal action, shareholders have no direct way to require the board to pursue a particular course of action.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Shareholders’ approval is required for the following decisions:

• approval of the company’s (and consolidated) annual accounts;

• dividends allocation;

• appointment of the (supervisory) board members and allocation of the global amount of their attendance fees, the (supervisory) board having the exclusive power to split the fees between members;

• appointment of the statutory auditors;

• approval of the report of the statutory auditors on transactions between the company and its related parties;

• amendment of the articles of association (eg, increase or reduction of the share capital, mergers, change of corporate form or nationality, etc); and

• dissolution.

The articles of association may also provide that certain other decisions require the shareholders’ prior approval, but such restrictions cannot be opposed to third parties and agreements concluded without such a prior approval remain binding. The company’s representatives can, however, be held liable for the loss suffered by the company as a result of such agreements. The same solution applies regarding transactions with related parties when the shareholders have refused to approve the statutory auditor’s report.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

French law provides for the ‘one share one vote’ principle in non-listed companies (but exceptions are permitted) while in companies listed on a regulated market, a double voting right is automatically granted to registered shares after a two-year period of uninterrupted holding (unless otherwise provided for by the articles of association).

Companies may also issue preference shares deprived of voting rights, usually in consideration of entitlement to preferred dividends. Such preference shares are limited to a quarter of the total amount of shares in listed companies (half in non-listed). On the contrary, some preference shares benefit from double voting rights, or a veto right for certain decisions.

A cap on the votes may also be implemented for each shareholder, it being specified that the articles of association of listed companies may suspend such a limit in the event of a takeover bid.

In an SAS, disproportionate voting rights are allowed with no restriction.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders must justify ownership of their shares two business days prior to the meeting in listed companies (record date) and either this date or the meeting date for non-listed companies.

Shareholders who cannot attend the meeting can vote by mail or proxy. This proxy is either given to a specific person, who may be a shareholder, or sent to the company with no specific proxy holder’s name, which corresponds to a vote in the way recommended by the board. In companies that have adapted their articles of association accordingly, shareholders may also vote electronically.

Although French law allows shareholders to participate virtually in the meetings if the articles of association so provide, professional associations and law professionals do not, at present, recommend using such an option.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Shareholders’ meetings are generally convened by the board.

Shareholders may ask the board to convene a meeting. In case of refusal, shareholders holding at least 5 per cent of the share capital may request to the courts the appointment of an agent who will convene the meeting. Such shareholders do not need to evidence urgency, but the judge will assess whether the request is consistent with the company’s interests.

After a public takeover or a change of control of a company, majority shareholders may also convene a shareholders’ meeting.

Before a meeting, minority shareholders (holding at least 5 per cent of the voting rights in companies with a share capital not exceeding €750,000, less if it does) may force the board to put a matter on the agenda, including director nomination, which will be discussed during the shareholders’ meeting. They may justify their action in a statement, which will be transmitted to the shareholders. Otherwise, shareholders cannot force the board to circulate any statement.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

French law does not provide for any duties owed by controlling shareholders to the benefit of the company or to minority shareholders. However, case law prevents majority shareholders from voting in favour of resolutions taken against the company’s interests with the sole purpose of favouring their own interests to the detriment of other shareholders. When this is characterised by the judge, the disputed vote may be declared null and void and the majority shareholders may be sentenced to pay damages.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

The responsibility of shareholders is normally limited to the price paid for their shares.

However, the corporate veil may be pierced when a shareholder has de facto replaced the CEO and committed mismanagement acts, for example if it has commingled its assets and those of the company or caused the insolvency of the company by obvious misconduct.

In addition, parent companies may be held liable for damage caused by their subsidiaries: as regards environmental losses, if a mismanagement action can be assessed against the parent company; and if they belong to a large group (employing 5,000 persons in France or 10,000 worldwide), as regards human rights abuses, physical injuries or environmental losses, if the parent company has failed in the setting-up of a specific prevention plan and if a loss directly arises out of such failure.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Anti-takeover devices are allowed under French law insofar as they abide by the corporate interest. Although France has implemented the Takeover Directive, it has often chosen not to adopt some options of the Directive.

Before a takeover bid is public, various measures may be implemented to thwart any offer, including:

• double voting right, which increases the number of shares that a bidder must acquire to gain the target’s control;

• prior disclosure of shareholders’ agreements provisions relating to share transfer (see question 12);

• share repurchase programmes (up to 10 per cent of the share capital); and

• delegations to the board to issue new shares or specific ‘bid warrants’. Such warrants are designed to be attributed, if a takeover bid takes place, to existing shareholders for no consideration, in order to maintain the share ownership, being specified that if the bid fails, the company can finally decide not to issue the shares.

During the takeover bid, unless the articles of association provide otherwise, the board is no longer (as it formerly was) required to remain neutral and to submit any anti-takeover action to shareholders’ approval. The board may also sell (or buy) a strategic asset, seek an alternative and friendly bid (the white knight), use delegation previously granted by the shareholders, etc. However, an approval is still necessary to perform a repurchase programme if it may harm the success of the bid.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Shareholders’ approval is necessary for the issuance of new shares but can be delegated to the board (which may then sub-delegate such power to the executive officers). Rights of issuance can be granted to the board with or without a preferential subscription right to shareholders. In such latter case, a priority right may be implemented in listed companies by the board, depending on the shareholder delegation’s terms.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Restrictions on share transfers are compulsory in SARLs (prior approval of any transfer to a third party) and optional in other non-listed limited liability companies. If some or all shareholders agree to be bound by such restrictions, they are provided for in the articles of association or in shareholders’ agreements (in which case they may remain confidential).

Shareholders of listed companies may include share transfer restrictions in shareholders’ agreements only and such restrictions must be disclosed to the public when they relate to at least 0.5 per cent of the shares or voting rights, failing which the undisclosed agreement will have no effect during a takeover bid (see question 10).

Common restrictions include pre-emption rights, prior approval (by the shareholders’ meeting, the board or a specific corporate body), tag-along and drag-along rights, standstill. But apart from the latter clause whose effect has to be limited in time, such restrictions may not harm the ability of a shareholder to exit the company if it has found a buyer (the transfer being made to this buyer or to the company or the other shareholders).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

The shareholder of a non-listed company may force the company or other shareholders to buy its shares if the implementation of a prior approval clause contained in the company’s articles of association has given rise to the refusal of the contemplated share transfer (see question 12).

Articles of association of an SAS and non-listed SA may contain drag-along rights or exclusion clauses (with objective exclusion causes and price determination rules) whereby a shareholder may be forced to sell its shares.

In listed companies, compulsory repurchase may only occur when 95 per cent of the shares and voting rights are held by a shareholder or shareholders acting in concert. Such bid may be triggered either by minority shareholders or by majority shareholders, or may follow a takeover bid at the successful bidder’s initiative.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Minority shareholders do not have the right to sell their shares if they disagree with a decision of the company unless it is so provided in the articles of association or in a shareholders’ agreement.

Certain restructuring transactions (such as a merger, a disposal of all or most of the company’s assets, reorientation of the company’s purpose, substantial changes to the articles of association) involving listed companies may lead to the AMF imposing on the majority shareholders to launch a takeover bid at fair market value (this is compulsory in the event of the conversion of an SA into an SCA).

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

One-tier structured SAs are largely predominant, representing about 80 per cent of large issuers. About two-thirds of them are led by a CEO who is also the chairman of the board. Two-tier structured SAs represent about 15 per cent and SCAs about 5 per cent.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors is the corporate body in charge of setting the main lines of the company’s business activity and strategy and of ensuring their implementation, in accordance with the powers reserved by law to the shareholders and the company’s executives. If the board is legally entitled to deal with any issue it considers relevant, it has by law exclusive competence in the following matters:

• drawing up of the annual (consolidated) accounts and management report;

• suggestion of dividends allocation;

• convening of shareholders’ meetings and fixing their agenda;

• appointment and removal of the company’s executives;

• authorisation of guarantees granted by the company and of transactions with related parties; and

• bonds’ issuance (unless reserved to the shareholders’ meeting by the articles of association).

In two-tier structures, the supervisory board’s role is mainly to appoint (remove if permitted by the articles of association), control and supervise the executive board (eg, review of the accounts, management reports and strategy, prior approval of transactions with related parties) and refer to the shareholders’ meeting. The executive board and the supervisory board may each convene shareholders’ meetings.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board has no legal personality and is only a corporate body that promotes and defends the company’s interests.

Ultimately, the board is responsible to the shareholders, who can decide, at each meeting, to remove any of its members (including all of them). However, civil and criminal liability of directors may be sought where applicable either by the company itself or by shareholders (see question 18) (or third parties in limited cases and public prosecutor as regards criminal liability).

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Legal actions may be brought against directors individually or collectively. The ‘corporate’ derivative action aims at indemnifying against losses suffered by the company itself as a result of faults of its directors. It can be initiated for the account of the company either by the company’s legal representative or by a shareholder acting on behalf of the company. Shareholders may also bring an action in order to be indemnified for losses that they have directly suffered.

Such actions may only be brought in the event that directors have committed a breach of law or of the company’s articles of association, or mismanagement acts. When the fault is committed collectively, the enforcement action is led against all directors taken individually, but each member of the board may elude its liability if it can prove that it opposed the disputed decision.

Criminal liability may be sought in specific cases, mainly in the event of misuse of corporate assets, abuse of powers, distribution of fictitious dividend and publications of untrue accounts. It may be initiated by any purported victim, but the legal action is controlled by criminal judges.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors owe a duty of care to the company at all times. Case law has promoted a specific duty of loyalty by board members in the event that such directors hold sensitive information and are involved in share transactions with other shareholders.

Internal rules of the board often describe more precisely the scope of such duty (eg, attendance of members, conflict of interests).

20 Board member duties

To what extent do the duties of individual members of the board differ?

The duties of the various board members are the same and considered on an equal basis.

Directors may be members of specific board committees (audit (which is compulsory in listed companies), appointment, compensation, strategic, ethical, etc) and their work (and exposure) may so differ in practice. Usually, members of specific committees are chosen among directors with skills and experience corresponding to their field of expertise.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate to the management some of its specific powers such as the authorisation of guarantees (by law), or the issuance of new shares (upon shareholders’ approval).

The board may create committees in charge of monitoring specific questions. It can also appoint any person in order to perform specific tasks. But the aim of such committees or such appointments is only to facilitate or improve the work of the board and its decision-making process. Directors cannot ignore any of the matters discussed in board meetings: committees or individuals that the board has appointed always act under its authority.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Companies listed on a regulated market must appoint at least one independent director at their audit committee. The Afep-Medef and MiddleNext codes require that at least half of the directors are independent or one-third in case of a company controlled by a majority shareholder or a group of shareholders. The Afep-Medef Code also provides that independent directors should represent two-thirds of the audit committee and the majority of the appointment and compensation committee if applicable.

The definition of independence is left by law to the board (or supervisory board). Governance codes propose criteria in order to assess independence, which may be adapted by companies to the extent that they explain their approach. For companies referring to the Afep-Medef Code, independent directors are defined as having no particular relationship (majority shareholder, employee, family, others) with the company’s executives. According to these criteria, an independent director is someone who:

• has not been an employee or an executive officer for the last five years in the company or a related company;

• is not a significant supplier, a client or a financing institution; and

• has not been an independent director for longer than 12 years (renewal included). This last provision is specific to the Afep-Medef Code.

While they are expected to be particularly cautious of the company’s interests, their liability does not differ by law from that of the other directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The board size of between three and 18 members is ultimately determined by the shareholders. If they do not provide otherwise, no more than one-third of the directors may be over 70 years old. The same threshold applies for employees of the company.

Listed companies and large companies (ie, companies that had, for three consecutive financial years, over 500 permanent employees and a total turnover or balance sheet of more than €50 million) must appoint women in a proportion of at least 40 per cent of the members as of 2017. As of 1 January 2020, the threshold in terms of permanent employees will be lowered to 250. As an exception to the 40 per cent requirement, in boards made up of eight members or less, the gender gap cannot be larger than two directors.

Before their appointment, shareholders may request information on the candidates’ curricula vitae during the last five years, and in listed companies a brief summary of their expertise is always available. Apart from the specific requirement regarding the independent member of the audit committee, expertise is not required by law.

Criminal records are only provided to the AMF for listed companies during initial public offerings, but directors or supervisory board members in all companies must demonstrate that they have not been restricted from running a business owing to criminal proceedings.

The (supervisory) board may appoint temporary new members in the event of a vacancy, subject to confirmation by the next shareholders’ meeting, while only the shareholders may create new directorships.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Laws and governance codes do not require the separation or joining of these functions, but organise decision-making processes (including in terms of transparency) in this respect.

Historically, such functions were joint and such structure still prevails today (about two-thirds of SAs with a one-tier structure are managed by a CEO who is also the chairman of the board).

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The audit committee is mandatory in companies listed on a regulated market, but the board of directors may decide to take over its functions directly. In such cases, when the agenda of the board meeting handles relevant matters of the audit committee, executive members of the board must temporarily leave. Only board members may be part of the audit committee, of which at least one independent director must have a specific financial expertise (see question 22).

Otherwise, the board may set up whatever committees it considers appropriate and has complete flexibility to organise them.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Legally, in one-tier structures, the board must meet at least once in order to draw up annual accounts and convene the annual shareholders’ meeting (twice in listed companies, which have to publish half-year accounts).

In two-tier structures, the supervisory board has to meet at least four times a year in order to review the executive board’s report.

However, in listed companies, corporate governance codes require more frequent meetings: the MiddleNext Code recommends a minimum of four meetings a year, whereas the Afep-Medef Code does not set a minimum requirement but provides that the number of meetings must be sufficient to enable the board to perform an in-depth review of all topics that are put on its agenda and that one meeting per year must be held without the presence of the executive officers.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

A listed company is required to disclose in a report established by the chairman of the board specific information on its operations and on the company’s governance in general. Such information includes the structure of the board, the numbers and the overall attendance of the meetings during the last year, which governance code it applies and a review of the company’s compliance with that code. Explanations on the items it has chosen not to enforce have to be disclosed under the ‘comply or explain’ principle.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

In consideration of their duties in such capacity, directors can only receive attendance fees, the global amount of which is decided by the shareholders’ meeting. The split of this amount is, however, reserved to the (supervisory) board itself, being specified that governance codes recommend to allocate the fees in consideration of the attendance of each relevant member to the meetings, a criterion that should be predominant for the Afep-Medef Code. Directors are also reimbursed for the expenses incurred while carrying out their duties but no other compensation is allowed.

Directors’ appointment term is legally capped at six years (renewable) but the shareholders may retain a shorter term of duties.

Loans to directors are prohibited and transactions between the company and directors (or relatives) are submitted to a prior approval by the board and subsequent review by the auditors and vote by the shareholders. Transactions that exceed one year must now be reviewed by the board.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The remuneration of senior management is determined by the (supervisory) board, and has, in listed companies, to be disclosed to shareholders and to the public and is submitted to a compulsory ‘say-on-pay’ vote (see question 37).

Governance codes intend to set effective criteria in order to give a general and consistent frame to the executive officers’ compensation. These criteria include benchmark, balance, intelligibility and consistency.

When variable compensation is provided, the AMF requires that it is calculated with respect to objective criteria fixed in advance.

Executive officers are in the same position as directors regarding loans or transactions with the company (see question 28).

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Directors’ and officers’ liability insurance is permitted and very common in companies having significant business exposure. Usually, companies pay the corresponding premiums.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

As opposed to market practice in other jurisdictions, a French company never indemnifies managers acting in their professional capacity as any fault committed by them would likely give rise to a claim by the company itself against such managers or the purpose of the D&O liability insurance scheme, which is authorised by French law, would cover the relevant situation where the managers would incur personal liability (unless the acts having given rise to liability cannot legally be covered by an insurance policy).

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Executive officers may delegate to employees part of their powers in specific matters and consequently preclude their personal, including criminal, liability (eg, in labour law or tax matters). To be effective, the delegation must be precisely determined and the assignee must be granted all resources and powers needed to perform the relevant tasks (including in the articles of association or otherwise).

There is no other way to preclude or limit the liability of directors and officers.

33 Employees

What role do employees play in corporate governance?

All companies employing at least 50 individuals have to set up a works council, which has to be periodically consulted and informed on various matters that include in some instances contemplated corporate governance changes. Representatives of the works council may attend all meetings of the corporate bodies and must be provided with the same level of information.

Two non-cumulative schemes exist in order to appoint one or several genuine directors representing the employees in companies listed on a regulated market according to a process provided for in the articles of association: when they have employees owning more than 3 per cent of the share capital; or when they employ, with their subsidiaries, more than 5,000 individuals (10,000 worldwide) and must set up a works council.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

French law requires the chairman of the (supervisory) board of each listed company to issue an annual report on the corporate governance in place within the company. The (supervisory) board has to approve the terms of this report. The statutory auditors must also give their views thereon.

The content of this report addresses most of the corporate governance issues: the frequency of the (supervisory) board meetings, options chosen when the ‘comply or explain’ principle applies, description of the (supervisory) board’s and the committees’ work, description of the compensation policies for executives and directors, review of the independence criteria applicable to the directors, etc. The Afep-Medef Code issued a recommendation on a board evaluation process including an evaluation of the effective contribution of each director to the work of the board.

Every year, the AMF reviews a sample of these reports and delivers a study, which is a major source of sound practices in corporate governance (see question 2). The latest AMF report notes that only a limited number of companies include an evaluation of the individual contribution of each director in their annual report and stresses the importance of this measure in order to ensure an improvement of corporate governance.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

All companies’ articles of association are available at the companies registry and can be sent electronically. Corporate governance codes recommend that listed companies publish their board and committee internal rules on their website.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

All companies must file specific corporate documents with the companies’ registry, such documents being publicly available (eg, articles of association, and shareholder resolutions amending the articles of association or appointing corporate bodies, merger agreements, statutory auditors and specific auditors’ reports).

Listed companies have periodic disclosure obligations. In particular they must make publicly available their annual financial report (containing the annual accounts and notes thereto, management report, statutory auditors’ report), half-year information (half-year accounts, interim management report, and statutory auditors’ limited review report) and certain other information such as statutory auditors’ fees and missions, data regarding repurchase programme, etc. Quarterly results are no longer subject to a disclosure obligation but listed companies usually continue to disclose them. The annual financial report is often presented in a document, filed with or controlled by the AMF, which contains all sections of a prospectus not related to a specific securities transaction (and which can be used, with a supplement containing all such sections, as a prospectus).

They also have an ongoing disclosure obligation, where they must disclose with no delay any non-public information that, if known to the public, would likely have a significant effect on the securities price (privileged information). The AMF regulations authorise the relevant issuer to postpone such disclosure in order to protect its legitimate interests, provided that the public is unlikely to be misled and the issuer ensures confidentiality of such information.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Following intense debates, a law passed in 2016 has established a binding ‘say-on-pay’ vote for companies listed on regulated markets as regards remuneration of the corporate officers (CEO, deputy CEO, chairman of the (supervisory) board but excluding directors). Two votes are compulsory:

• a first vote must be organised to approve the general terms and structure of the fixed and variable pay of the corporate officers, it being specified that in the event of a negative vote, the existing terms or structure would survive; and

• subsequently, votes on the individual remuneration (fixed, variable and exceptional) of corporate officers must be organised after the relevant financial year, it being specified that the variable and exceptional remuneration may not be paid until a positive vote occurs. This vote will take place for the first time in 2018 for companies whose financial year ends on 31 December 2017.

Golden parachutes have to be authorised as transactions with related parties (the vote not being purely advisory; see question 4).

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Before a meeting, shareholders holding a certain number of shares (5 per cent if the share capital does not exceed €750,000, less if it does) may force the board to put the appointment of a director on the agenda. All meeting materials (including those at shareholders’ request or initiative) are prepared and distributed at the company’s expense.

During shareholders’ meetings, in the event that a director nomination is on the agenda or upon dismissal and appointment of a director, every shareholder may apply for the board position.

Regarding proxy solicitation, shareholders may freely consult the list of registered shareholders in order to contact and convince them to vote in a certain way. However, they have no right of access to the list of bearer shares’ holders. The cost of proxy solicitation is assumed by the initiator of such solicitation. Anyone can actively solicit proxies if it discloses its voting policy.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

French listed companies are increasingly engaging with shareholders beyond the mandatory, legal interactions at the time of the annual shareholders’ meeting (through written or oral questions, resolution proposals, etc). The engagement efforts mainly depend on the size of the company: the larger it is, the more specific and dedicated staff it involves. The types of initiatives are also diversified (shareholders’ clubs, social events, periodical information meetings, newsletters, etc).

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Large listed companies (ie, companies listed on the regulated market that have over 500 permanent employees and either a total turnover of €50 million or a balance sheet of €20 million at the end of the financial year) and large non-listed SAs and SCAs (ie, companies that have over 500 permanent employees and a total turnover or balance sheet of €100 million at the end of the financial year) must disclose, in respect of the financial year starting on 1 January 2017 and with the full regime applicable in respect of the financial year starting after 1 September 2017, corporate social responsibility information.

This information includes, for both listed and non-listed companies, details on the impact of the activity on climate change, actions taken in favour of sustainable development and recycling, relations and state of negotiations with the works council, diversity programmes, etc. Additionally, listed companies must disclose information on the effect of their activity upon human rights and the fight against corruption.

This information is disclosed in the annual report and must be verified by an independent body prior to the annual shareholder’s meeting. The independent body verifying corporate social responsibility disclosure must be certified with recognised accreditation. The independent body is subject to the same rules on conflict of interests as statutory auditors.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

No ‘pay ratio’ needs to be disclosed under French law. However, shareholders are entitled to receive information on the compensation of the five or 10 (according to whether the company has over 200 employees or not) best paid people in the company. The exact amount, which should include advantages in kind, is certified by the company’s auditor.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are required to disclose the ‘gender pay gap’ as part of the annual consultation of the works council. For companies employing fewer than 300 persons, a general comparison is made by taking into account differences in pay, qualification, experience, age and promotion rates per occupation category. Companies employing over 300 persons must provide a breakdown of this data by specifying for each gender the average period between two promotions, average experience level per occupation, within each occupation, per level and hierarchy within the company. The average age is to be presented by occupation and level and hierarchy within the company.

Information on pay is therefore broken down by average monthly pay per occupation, level and hierarchy within the company and age group. The information on the 10 best paid women in the company is also to be provided.

Update and trends

A law adopted on 27 March 2017 created a new obligation to establish a prevention plan relating to human rights and fundamental freedoms, a person’s security and the environment for SAs employing for two consecutive financial years, directly or via their subsidiaries, 5,000 persons in France or 10,000 persons worldwide.

The first prevention plans are to be published in the annual report of companies subject to this obligation for the financial year that ended on 31 December 2017. The following plan, to be published in 2019 in the annual report for the financial year ending on 31 December 2018, must also include the description of measures taken to implement the prevention plan.

Any third person justifying an interest may bring judicial action against the company for failure to comply with this obligation and hold the company liable for damages incurred as a consequence.

Alexis Chahid-Nouraï

chahidnourai@aramis-law.com

9 rue Scribe

75009 Paris

France

Tel: +33 1 53 30 77 00

Fax: +33 1 53 30 77 01

www.aramis-law.com

Germany

Eva Nase and Georg Greitemann

P+P Pöllath + Partners

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The primary sources for capital companies in Germany (GmbH, AG, KGaA, SE) are the German Limited Liability Companies Act (GmbHG), the German Stock Corporation Act (AktG), the European and German acts on European stock corporations (Societas Europaea, SE), the German Commercial Code (HGB), the Reorganisation of Companies Act (UmwG), the Takeover Act (WpÜG), the Securities Trade Act (WpHG), the Anti-Money Laundering Act (GwG), the applicable listing rules and the German Corporate Governance Code (DCGK), which differentiates between recommendations, which must either be complied with or deviations from which must be explained (comply or explain), and proposals, from which deviations are allowed without disclosure.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary government agencies are the federal parliament and, to a growing extent, the EU legislators. The German Corporate Governance Code and its annual amendments are prepared and issued by the Government Commission for the German Corporate Governance Code. The listing rules are usually set by the stock exchanges or other listing entities.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

The two most popular legal company forms are the stock corporation (AG) and the company with limited liability (GmbH).

As regards the AG, the members of the supervisory board (non-executive directors) are elected by the shareholders (general meeting). The members of the management board (executive directors) are elected by the supervisory board and not by the shareholders. This basic structure cannot be altered. Unless the articles of association provide otherwise, members of the supervisory board are elected by the simple majority of votes and can be removed with a 75 per cent majority of the votes. Unless the AG has entered into a control agreement with its parent company, the supervisory board and the management board act independently and cannot be required by the shareholders to pursue a particular course of action.

Unless the articles stipulate otherwise, the GmbH only has managing directors and no supervisory board. The managing directors are appointed and removed by the shareholders (shareholders’ meeting) with a simple majority. The shareholders’ meeting can require the managing directors to pursue a particular course of action.

The legal forms of a European stock corporation (SE) and a partnership limited by shares (KGaA) are, to a great extent, comparable to an AG.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following selected decisions are reserved by law for the shareholders of an AG:

• election and removal of the supervisory board members;

• appointment of the auditor;

• appropriation of profits;

• formal approval of action for members of both the management board and supervisory board; and

• fundamental decisions, in particular amendments to the articles of association, liquidation of the corporation, merger, demerger, change of legal form, sale of substantially all the corporation’s assets, and conclusion of corporate agreements (control agreements, profit and loss pooling agreements).

The following decisions are reserved by law for the shareholders of a GmbH:

• election and removal of the managing directors and conclusion of their service agreements;

• approval of the annual accounts;

• appointment of the auditor;

• appropriation of profits;

• formal approval of action for managing directors;

• fundamental decisions, in particular amendments to the articles of association, liquidation of the corporation, merger, demerger, change of legal form, sale of substantially all of the corporation’s assets, and conclusion of corporate agreements (control agreements, profit and loss pooling agreements); and

• instructions to the managing directors.

Matters that are subject to a non-binding shareholder vote are rather uncommon in German law.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In an AG, one share cannot carry more than one vote per share (in case of shares without nominal value) or one vote per euro of nominal value (in case of shares with a nominal value). The articles of association of a non-listed AG can provide for limits on the exercise of voting rights.

In a GmbH, disproportionate voting rights or limits on the exercise of voting rights are allowed.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

In an AG, an SE and a KGaA, shareholders cannot act by way of written consent without a meeting. Semi-virtual meetings of shareholders are permitted. The articles of association can provide for the requirement to register within a time frame of at least six days prior to the general meeting. In case of listed companies, such registration must be made by way of a specific depositary statement referring to the shareholding on the 21st day prior to the general meeting.

In a GmbH, shareholders can act by way of written consent without a meeting. Virtual meetings of shareholders are permitted.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

In an AG, an SE and a KGaA:

• shareholders holding at least 5 per cent of the registered share capital can require meetings of shareholders to be convened; and

• shareholders holding at least 5 per cent of the registered share capital or shares with a nominal amount of at least €500,000 can require resolutions to be put to a shareholder vote against the wishes of the supervisory board or management board, if this request is received by the company 24 days prior to the general meeting and, in case of a listed company, 30 days prior to the meeting.

Shareholders’ requests to add to the meeting agenda must be published, potentially together with a statement from the management and supervisory board.

Counterproposals made by shareholders to the resolution proposals made by the management and supervisory board must be submitted to the shareholders, also potentially together with a statement of the management and supervisory board. In the case of listed companies, counterproposals and the company’s statements thereto must be published on the company website.

In a GmbH, shareholders holding at least 10 per cent of the registered share capital can require meetings of shareholders to be convened or require resolutions to be put to a shareholder vote against the wishes of the managing directors.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

All shareholders have a fiduciary duty towards the company and towards the other shareholders. The fiduciary duty of controlling shareholders is more intense than the fiduciary duty of non-controlling shareholders. In an AG with a controlling shareholder, the controlling shareholder and its boards are subject to certain additional statutory duties. Enforcement actions can be brought against controlling shareholders and, under certain circumstances, their representatives for breach of these duties.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Based on corporate law, shareholders can be held responsible for the acts or omissions of the company only under exceptional circumstances. This may happen where the company acts through its shareholders. For example, if the GmbH has no managing directors, the shareholders are obliged to file for insolvency if the company is insolvent. Failure to do so will result in liability of the shareholder.

There are certain other areas of the law that provide for responsibility of shareholders for acts or omissions of the company, including without limitation antitrust law, data protection law and criminal law.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

In public takeover bids, the management board is allowed to take pre-bid and certain post-bid defensive measures in accordance with the Takeover Act.

Pre-bid defences

The target’s shareholders’ meeting can authorise the management board to take action to prevent the success of any takeover bid, subject to approval of a defensive action (if and when taken) by the supervisory board. This authorisation is valid for 18 months and requires a qualified majority (75 per cent of the share capital represented at the general meeting). Furthermore, the shareholders’ meeting can decide on capital measures or it can authorise the management board to acquire the company’s own shares or to issue convertible bonds. The fact that payments for early termination of the contract of members of the management board should not exceed twice the annual remuneration (see question 28) limits the defensive effect of possible compensation claims, the ‘golden parachute’ defence.

Post-bid defences

After the takeover announcement, the management board must refrain from any frustrating action. However, the management board can seek alternative bids (white knight defence) or take actions that a prudent and conscientious director of a company not subject to a public takeover bid would have taken. Moreover, it can take defensive actions approved by the target’s supervisory board, respectively approved by the shareholders’ meeting (see above), or call a shareholders’ meeting following the takeover announcement to vote on the defensive action. The notice periods are significantly shorter than with regard to ordinary shareholders’ meetings. If this meeting is convened, the offer period is extended to 10 weeks to allow the shareholders’ meeting to take place before the offer expires. Finally, the boards can influence the shareholders to refuse a hostile takeover bid when giving their reasoned opinion. In this respect, the management board and the supervisory board must consider the transparency principle and avoid misleading statements.

European opt-in

A German listed company can opt out of the German rules for defensive action and opt in to the rules set out in the Takeover Directive (Directive 2004/25/EC) and implemented in the Takeover Act by amending the company’s articles of association. By disapplying the opt-in, the target is automatically subject to the rules of the Takeover Act on defensive actions.

Breakthrough

Also, the articles of association of a German listed company may apply the ‘breakthrough clause’ of the Takeover Directive as implemented in the Takeover Act, under which certain transfer restrictions and restrictions on exercising voting rights in certain contracts do not apply under certain circumstances.

Publication of defence measures

All listed German companies must give detailed information on all existing defence mechanics in the management report that forms part of the company’s annual financial statements. The supervisory board must comment on this information in its own statement for the annual general meeting.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The general meeting of an AG, an SE and a KGaA can authorise the management board, subject to the approval of the supervisory board, to issue new shares (authorised capital). Authorised capital may not exceed 50 per cent of the registered share capital. Statutorily, shareholders do have pre-emptive rights. With a 75 per cent majority pre-emptive rights can be excluded, even in a management board’s authorisations to issue new shares. Yet, proxy voters only approve such authorisations for exclusions of pre-emptive rights under certain requirements and to a certain percentage of the authorised capital (often 20 per cent).

Similarly, the shareholders’ meeting of a GmbH can authorise the managing directors to issue new shares (authorised capital). Authorised capital may not exceed 50 per cent of the registered share capital. Under applicable case law, shareholders of a GmbH have pre-emptive rights to acquire newly issued shares, subject to certain exceptions and exclusion mechanisms.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Restrictions on the transfer of fully paid shares in listed stock corporations (AG, SE or KGaA) are not permitted. Restrictions on the transfer of fully paid shares in non-listed companies are permitted and customary. In closed companies, the transfer of shares is usually subject to the prior approval of the supervisory board, shareholders’ meeting or general meeting. Other customary restrictions include a right of first refusal or a tag-along right.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Compulsory share repurchases are not common in German law and practice. They may be allowed in certain exceptional cases.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Shareholders have the right to sell their shares to the company at a fair value in case of certain types of mergers or similar transactions (eg, entering into a domination or profit and loss pooling agreement, change of legal form, squeeze-out, delisting, etc).

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure of an AG, an SE and a KGaA follows the two-tier system with a management board, managing and representing the company, and a supervisory board supervising the management board. A one-tier system with one board consisting of executive and non-executive board members is only allowed in Germany within an SE.

Most GmbHs only have managing directors, which are all executive directors. They can have a supervisory board or advisory board, resulting in a two-tier structure. In cases of co-determination, a supervisory board is compulsory in a GmbH. A GmbH cannot have a one-tier board that includes executive and non-executive directors.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The supervisory board has the power to appoint and dismiss members of the management board, as well as the responsibility to supervise the management board’s activities. So far, the supervisory board is entitled to request – regularly and irregularly – reports from the management board and to define certain transactions and measures in the articles of association of the company, the rules of procedure of the management board or in individual cases that are subject to the supervisory board’s approval. However, such approval does not have any effect on the transactions or measures with regard to third parties, but only on the internal relationship between the two bodies.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The supervisory board does not represent anybody in fulfilling its own legal duties. The supervisory board shall rather be independent to a great extent, according to the DCGK, in case of listed companies the supervisory board shall in its opinion propose a reasonable number of independent members. Supervisory board members, who may be delegated or elected from a certain shareholder majority, are not allowed to pass on any information received in their function as members of the supervisory board to the respective shareholder. Consequently, supervisory board members must always act in the best interest of the company, which itself is defined by the ‘stakeholder model’ (the opposite of the Anglo-Saxon shareholder model with a respective acting in the best interest of a shareholder).

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Managing directors of a GmbH may be instructed to take or to refrain from taking certain measures by way of a shareholder resolution (see question 3). Management board members of an AG and an SE are, conversely, entitled to manage the company in their own discretion. Consequently, neither the general meeting nor the supervisory board is allowed to adopt management decisions and to bring forward enforcement action against members of the management board. However, the supervisory board is entitled and, according to case law, obliged to assert liability claims against the management board, if the company suffered damages owing to breach of tasks and duties by the management board.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Managing directors of a GmbH and management board members of an AG, an SE and a KGaA do have to apply the care of a prudent and diligent businessperson. Also, in supervising the management board of an AG or SE, the supervisory board has to follow this principle.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Generally, supervisory board members have the same rights and duties. However, applicable law and the DCGK provide for the requirement of appointing individual members with certain skills, for example financing, reporting and auditing expertise. Thus, these members’ duties differ from the other members’ duties. Hence, the differences in duties do not reflect a higher liability exposure.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The supervisory board is not allowed to assume management responsibilities and nor is it allowed to delegate supervising functions to the management board or to other persons. The supervisory board is, however, entitled to implement committees from its midst. In some instances, such as with respect to the management board members’ service agreements, the committees are statutorily not entitled to resolve on such matters instead of the supervisory board, but only to prepare the respective resolutions of the supervisory board and to supervise their execution. Also, the board may ask a board member to prepare a certain topic. Yet, the responsibility to decide upon such topic remains in any instance with the supervisory board.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

In the case of a one-tier system within an SE (see question 15), applicable law requires that the majority of the members of the board must be non-executive. Members are non-executive if they are not registered as managing directors of the SE with the commercial register. If they are registered as managing directors, they have the power to manage and represent the company. Non-executive members are not allowed to do so, but are only entitled to supervise the executive directors (ie, the managing directors) within the internal relationship.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The supervisory board of an AG,an SE and a KGaA must have at least three members. Unless the stock corporation is co-determined (meaning that one-third or half of the board members are elected by the employees, see question 33), the supervisory board may also consist of any statutorily higher number of members, up to 9, 15 or 21 members, depending on the registered share capital of the corporation. In case of statutory co-determination, the number of members must be divisible by three. In case of equal co-determination, the total number of supervisory board members is dependent on the total number of German employees.

Shareholder representatives on the supervisory board are generally appointed by the general meeting; employee representatives in cases of co-determination generally by employee elections. In case of vacancies, under certain circumstances, members can, upon filing, also be appointed by a court.

In AGs, SEs and KGaAs that are co-determined and listed on a stock exchange, the supervisory board (in case of a one-tier system SE the administrative board) shall be composed of at least 30 per cent of women and at least 30 per cent of men. The minimum percentage shall be complied with by the supervisory board in its entirety.

Furthermore, corporations that need to fulfil the aforementioned gender criteria for their boards have to include a declaration on corporate governance in their management report. This declaration has to include information on whether the company has complied with the portion requirements for the appointment of women and men as supervisory board members.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

In the German two-tier-system, the CEO (and other members of the management board), managing and representing the company, is strictly separated from the supervising function of the supervisory board. Neither body is allowed to assume functions of the respective other body (see questions 21 and 22). In case of a one-tier-system, within an SE the CEO and chairman of the board may be the same person without any separation requirement.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The supervisory board is entitled to establish committees from its midst. In some instances, the committees are statutorily not entitled to resolve on matters instead of the supervisory board, but only to prepare resolutions of the supervisory board and to supervise their execution. According to the DCGK, an AG, an SE and a KGaA need to implement an audit committee and a nomination committee for nominating the candidates for election to the supervisory board.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Supervisory boards of listed companies are statutorily required to hold at least four meetings a year. Supervisory boards of non-listed companies are entitled to resolve on the holding of only two meetings per year. In any case, the supervisory board has to report on the number and main topics of its meetings in its annual report to the general meeting.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

As mentioned in the answer to question 26, the board is statutorily obliged to report on its constitution, its meetings, the attendance thereof and its supervising activities in its yearly report to the general meeting. The same applies to the work of its committees.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The AktG and the DCGK provide for specific rules, to which the supervisory board has to adhere when resolving upon fixed and variable remuneration of the management board members – the latter is differentiated between short-term and long-term incentives – as well as on loans or other compensatory arrangements (eg, stock options). Also, the general meeting is legally entitled to resolve on the management boards’ remuneration (say-on-pay). However, this resolution is of a declaratory nature only (ie, the supervisory board’s responsibility to decide upon the remuneration remains unaffected thereby). Service contracts may be entered into for five years at the most, with the right of renewal. According to the DCGK, the service contracts of management board members shall provide that payments, including fringe benefits, made to a management board member in case of an early termination of the contract do not exceed twice the annual remuneration (severance cap) and do not constitute remuneration for more than the remaining term of the employment contract.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The responsibility to decide upon senior management’s cash compensation is statutorily addressed to the management board. The supervisory board can, however, foresee approval requirements with respect to cash compensation and other advantages, like granting of cars. According to applicable law, the granting of stock options to senior management requires a resolution of the general meeting, which has to fulfil certain statutory requirements, and the approval of the supervisory board.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurances are permitted and common practice for management and supervisory board members in listed companies. Yet, they are also becoming more popular in non-listed companies. Premiums are generally paid by the company. However, members of the management board of a stock corporation are obliged to bear a deduction between 10 per cent of the damage and one-and-a-half times his or her fixed salary. With respect to supervisory board members, a respective deduction is recommended by the DCGK.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Besides the granting of D&O insurance coverage, indemnifications by an AG, an SE and a KGaA are not permitted, as the company is only allowed to waive or settle on liability claims against management board members three years following their accrual and only subject to a general meeting’s approval without an objection of a shareholder minority jointly representing 10 per cent of the registered share capital.

In a GmbH, as German law follows the stakeholder model, according to which managing directors have to act in the best interest of the company (and not the shareholder or the majority of shareholders), indemnification agreements are subject to fiduciary duties’ constraints. Also, indemnifications by a GmbH are not allowed, if and to the extent that the managing directors have breached capital protection rules.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

A preclusion is not allowed within an AG, an SE and a KGaA. The supervisory board is responsible and, according to case law, obliged to assert liability claims against management board members (see question 31).

33 Employees

What role do employees play in corporate governance?

The management board is obliged to implement proper corporate governance and to continuously supervise its functionality. Therefore, the management board is allowed to deploy employees by way of vertical instruction and is thus dependent on the fulfilment of the employees’ tasks and duties. This fulfilment is itself subject to supervision by the management board. If an AG, a KGaA or a GmbH exceeds the threshold of generally 500 German employees, one-third of the supervisory board members of the company must be employee representatives (One-Third-Participation Act). If it exceeds 2,000 German employees, the supervisory board must consist of 50 per cent employee representatives (Co-Determination Act) (see question 23).

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

No such evaluations are provided for, either statutorily or according to regulation or listing requirements. This applies to both management and supervisory board.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The deed of incorporation and the articles of association of German companies are publicly available. They are available through the commercial register, which is administered and managed by the local courts. The online commercial register (www.handelsregister.de) includes and allows downloading of all commercial register documents submitted since 2007. The articles of association of listed companies are generally also available through their websites.

The by-laws of companies (meaning rules of procedure for the supervisory board, supervisory board committees, the management board or the managing directors) are generally not publicly available. Some listed companies publish their by-laws on their websites.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Companies must publicly disclose their annual accounts. Listed companies may be required to disclose more financial documents, such as half-year or quarterly reports.

Companies must publicly disclose certain information regarding changes to their shareholder structure and certain other information (eg, capital increases).

Companies must file certain information and documents with the commercial register, which can be accessed by the public. In addition, companies whose shares are listed in an organised market must disclose:

• insider information through ad hoc notifications;

• subject to receiving such information from shareholders, the increase and decrease of their shareholdings (3, 5, 10, 15, 20, 25, 30, 50 and 75 per cent), and the increase and decrease of positions in financial instruments with the same percentage rates except for the 3 per cent threshold;

• subject to receiving director’s dealings notifications, information thereupon; and

• an annual statement on compliance with the German Corporate Governance Code (comply or explain, see question 1).

Under the recently amended German Money Laundering Act (GwG), legal persons organised under private law and registered partnerships have to collect, retain and keep up-to-date information on its beneficial owners and notify this information electronically to the German transparency register. There are, however, exceptions to this obligation in the case that the identity of the beneficial owner can already be discerned from other publicly available information or publicly available registers.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

The general meeting of an AG, an SE and a KGaA has an advisory vote on the remuneration of the members of the management board (see question 28). This vote cannot be objected to by means of a contesting action or action for annulment.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

As the members of the management board of an AG, an SE and a KGaA are not elected by the shareholders’ meeting, shareholders of a stock corporation do not have the ability to nominate members of the management board. As regards members of the supervisory board, candidates are to be proposed to the general meeting by the supervisory board. However, shareholders are entitled to make counterproposals to the resolution proposals made by the supervisory board (see question 7). Apart from this, the model of a shareholder-nominated director is not provided for in German law and regulations.

Shareholders of a GmbH have the ability to nominate managing directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Listed companies generally do not engage with their shareholders, in particular not outside the ordinary or extraordinary general meetings. In preparing such meetings, the CEO has calls with shareholder representatives and potential proxy voters. However, the CEO abstains from providing them with any information that the CEO has not already disclosed in the invitation to or does not intend to disclose in general meeting to all other shareholders.

However, the Government Commission for the DCGK has stated that dialogue between the supervisory board and investors is the best practice of German good corporate governance. It has therefore proposed to add a respective proposal to the DCGK that the chairman of the supervisory board should, to an appropriate extent, be in regular conversation with investors on supervisory board issues. The DCGK’s inclusion of this proposal became effective on 27 April 2017. If a listed company chooses not to follow this proposal, it does not have to explain its choice or its reasons (see question 1).

Closed companies typically engage with their shareholders, as is the case in the majority of jurisdictions.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Under the HGB, companies that meet certain criteria concerning their size are under the duty to issue a non-financial statement that expands their management report. This statement has to briefly describe the business model of the company. Moreover, it has to refer to other aspects of corporate social responsibility, at least to environment-related matters, employee-related matters, social matters, respect for human rights and fight against corruption and bribery.

As regards disclosure requirements for corporations that need to fulfil certain gender criteria for their boards, see question 23.

Companies with limited liability and employee co-determined supervisory boards have to include in their annual report information on the achievement of their gender diversity targets.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no requirement to disclose this ‘pay ratio’. Nevertheless, companies do have to add a note to their profit and loss statement stating the total remuneration granted to each of the following bodies, the management board, the supervisory board, an advisory board or a similar body.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no requirement to disclose information concerning the ‘gender pay gap’. Yet, companies with generally more than 200 employees are obliged upon request of an employee to inform upon the average payment for comparable work and if comparable work is predominantly done by women or men. Furthermore, companies with more than 500 employees that are under the duty to publish a management report, are according to the new Payment Transparency Act (EntgTranspG) obliged to publish a report that states their measures concerning the promotion of gender equality and equal pay.

Eva Nase

eva.nase@pplaw.com

Georg Greitemann

georg.greitemann@pplaw.com

Hofstatt 1

Entrance Färbergraben 16

80331 Munich

Germany

Tel: +49 89 24240 0

Fax: +49 89 24240 999

www.pplaw.com

An der Welle 3

60322 Frankfurt

Germany

Tel: +49 69 247047 0

Fax: +49 69 247047 30

Hungary

Mihály Barcza and József Bulcsú Fenyvesi

Oppenheim Law Firm

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Act No. V of 2013 on the Civil Code (the Civil Code) is of greatest relevance in the first instance, specifically its laws of contract, rules laying the basic framework for securities and shares, and the rules pertaining to legal persons and specifically to companies, including high level rules on the transformation, merger and demerger of companies.

Listed companies shall also observe the regulations and guidance of the Budapest Stock Exchange (BÉT). Regulations must be complied with, however, BÉT also issued a recommendation for responsible corporate governance (the Listing Recommendation), which is to supplement the rules of the Civil Code, and which operates on a ‘comply or explain’ basis (ie, it is recommended but not compulsorily applicable to listed companies), although deviations from the guidance must be explained and justified by the company. Companies are also to comply with the by-laws of their bodies, as well as voluntary company codes on business ethics, social responsibility, etc.

Act No. CXX of 2001 on the Capital Market (the Capital Market Act) contains essential rules on issuing and offering securities in public companies, the acquisition of participations in public companies, reporting obligations, IPOs and minimum offer prices. Special rules apply to companies engaged in regulated industries such as energy, media and financial sectors.

Responsible corporate governance must observe the requirements of Act No. C of 2000 on Accounting, and various data protection rules, as well as – in the financial and real estate sector, for the most – anti-money laundering regulations such as Act No. LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing. In these fields, companies are also required to compile and abide by their own specific rules of proceedings in compliance with the law.

Irrespective of the industry concerned, corporate actions shall comply with competition law regulations, safeguarded by the Hungarian Competition Authority (GVH) in accordance with the relevant Act No. LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (Competition Act) and in the regulations or guidance issued by the GVH.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Primary legal rules pertaining to companies, including corporate governance, are made by the Parliament of Hungary in the first instance. Further legal rules and regulations are introduced by the Ministry of National Economics, various ministries and sectoral authorities such as the Hungarian Energy and Public Utility Regulatory Authority, the National Media and Infocommunications Authority, and the Hungarian National Bank. Rules are enforced by the sectoral authorities, the Hungarian National Bank, and finally, the courts.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Ultimately, it is the shareholders who have the right to decide essential business and personal matters in the company. However, that right is not held by the shareholders alone, but jointly, in their capacity in the shareholders’ meeting.

Accordingly, directors are generally appointed or removed by the shareholders, based on a resolution of the shareholders’ meeting, which is adopted with the majority of shareholder votes. Generally, all shareholders have the right to vote, and they can cast votes in proportion to their stake held in the company. However, there may be deviations from the general rule, as explained in question 5 below, including the case when the appointment or removal of the directors must be decided with the vote of a shareholder owning a preference share granting him or her the exclusive right to appoint or remove the directors. It is of note, however, that in public companies shares granting the right to appoint or remove the directors may not be issued.

It is of relevance that the shareholders may resolve on the matters allocated to the competence of the shareholders’ meeting by the law or by the company’s statutes. Hence, the shareholders may pursue the board or management to take a certain action if the respective matter is allocated to their competence. Otherwise, the shareholders may not instruct the board or management. There is one exception to that rule: if the company is owned by one single shareholder, the sole shareholder may instruct the management on any matter, and the management is obliged to abide by such instruction.

Generally, matters are decided at the shareholders’ meeting with the simple majority (50 per cent + 1) of the votes, however, the law or the company’s statutes may require a higher majority (of, eg, 75 per cent or even 100 per cent) in certain matters.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Shareholders may pass a binding resolution on the matters allocated to the competence of the shareholders’ meeting by the law or by the company’s statutes. In general, the shareholders’ meeting decides essential business and personal matters in the company. Accordingly, matters allocated to the competence of the shareholders by the law include merger, spin-off, appointing the management as well as the auditor and the members of the supervisory board, modifications to the company’s statutes, contracts to be concluded between the company and its management or shareholders, bringing damage claims by the company against the management or members of the supervisory board or shareholders, approval of the financial statements, payment of dividends, decisions on the company’s registered seat, activities and business, branches, etc. It is also common to allocate to the competence of the shareholders’ meeting further additional matters such as major contracts of the company, IP of the company, commencing lawsuits on behalf of the company, granting securities, taking loans, etc. Depending on the provisions of the company’s statutes, such additional matters may be decided by the shareholders’ meeting in any case, or only if the respective matter exceeds a given threshold.

Notwithstanding matters specifically allocated to the competence of the shareholders’ meeting, shareholders are free to discuss and resolve (with non-binding effect) on any matter that is put on the meeting’s agenda by the management or by the shareholders.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In general, all shareholders have votes in proportion to their stake in the company; however, a few deviations from proportionate stakes may occur: shareholders holding non-voting shares may not vote at all; shareholders may veto the resolution on a certain matter based on a preference share granting such veto rights; and shareholders owning voting preference shares have more or multiple votes in general (as specified for the respective shares) than their stake in the company’s registered capital would justify. However, in public companies, voting preference shares are limited: the maximum votes that can be attached to a voting preference share is 10 times the votes that would correspond to the face value of the respective share.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders may take part in the shareholders’ meeting provided that they have been registered prior to the meeting in the members’ list or in the book of shares, as the case may be. In case of companies limited by shares, the shareholders must also present their shares or a certificate of ownership of the shares, to be admitted to the shareholders’ meeting. All shareholders admitted to the meeting have the right to vote, except the shareholders who hold non-voting shares and are conflicted in the respective matter. Shareholders may hold virtual meetings instead of physical meetings, provided that the company’s statutes so allow, and it sets forth the procedural rules for such virtual meeting. If the statutes so allow, and the management sends the proposals to the shareholders in writing, the shareholders may also pass resolutions without holding a meeting, by sending their votes back to the company’s management in writing.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Most commonly, the shareholders’ meeting is convened by the management. However, shareholders representing 5 per cent of the votes may ask the shareholders’ meeting to be convened for the cause and with the purpose as indicated by the shareholders. Should the management fail to convene the shareholders’ meeting accordingly and for the nearest possible date, within eight days, the court will, in its order, convene the meeting or authorise the proposing shareholders to do so.

Agenda items and resolutions – even for the appointment or removal of the directors – may be proposed, before the meeting and in compliance with the applicable procedural rules, by the shareholders representing at least 5 per cent of the votes in private companies, and by 1 per cent of the votes in public companies. New items or draft resolutions may also be put on the agenda at the shareholders’ meeting provided that all shareholders are present and consent to the amendment. New agenda items may also be introduced at the meeting if all shareholders are present and consent to the amendment. Such amendments and proposals can be made even against the wishes of the management board. In private companies, amendments are included in the agenda automatically. In public companies, amendments to the agenda must be made by the board pursuant to the proposal of the shareholder, and, although the management is obliged to make such amendments if the relevant procedures were kept by the shareholders, in case the board fails to amend the agenda, the proposing shareholder may have to face a costly and lengthy court procedure to enforce its right to put its item to a shareholder vote.

The board may be made to circulate statements by dissident shareholders if the dissident shareholder obtains a resolution of the shareholders’ meeting obliging the board to do so, or if the board is obliged to circulate such statement under a contract or the company’s constitutional documents such as the company’s statutes or the by-laws of the board.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders must be careful to pass resolutions in the interest of the company. Otherwise, if their resolution caused damage to the company, the company may bring damage claims against the controlling shareholders on the basis of the damaging resolution.

In addition, the controlling shareholders (even those of limited liability companies) must follow strict rules such as not to conduct detrimental business policy regarding the company, and to take into account creditors’ interests in a threatening insolvency situation. If these obligations are breached, the controlling shareholders will be held liable for the company’s uncovered debts. Respectively, if the company falls into liquidation, the person who was a controlling shareholder in the three years preceding the liquidation may be held liable for the uncovered claims of the creditors, provided that this person is proven to have failed to take into account the interests of the creditors in a threatening insolvency situation. Also, in the liquidation of the company, the shareholder holding at least 75 per cent of the votes or the sole shareholder may be held liable if it is proven to have conducted a continuously detrimental business policy regarding the company and may be held liable for the company’s uncovered debts.

Shareholders who intend to acquire certain statutory level of control in public companies must follow the statutory takeover procedural rules. If these rules are not kept, the acquirer cannot exercise its voting rights in the company, and the unlawfully acquired control must be terminated (ie, a number of shares must be transferred to decrease the acquirer’s stake below the statutory level of control).

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders cannot ever be held responsible for the acts or omissions of the company. For potentially being held liable for the debts of the company, see the cases mentioned in question 8 above for lifting the corporate veil.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Companies and management are free to apply various instruments to prevent takeover. If a public company’s statutes so provide, the board of the target company must remain impartial, and must not implement measures to prevent or disturb the acquisition (such as the acquisition of the company’s own stock or a capital increase). Nevertheless, even in that case, the board may: in a compulsory public takeover bid encourage a counter-offer to be made; or decide to implement a resolution of the shareholders’ meeting made before the announcement of the public takeover bid has been made (or information thereof has been received), provided that it falls in the ordinary course of business of the company; or take the measures specified in the resolution of the shareholders’ meeting made at a meeting convened after the announcement (or information) of the public takeover bid. According to the Listing Recommendation, public companies are to disclose their anti-takeover policies.

In private companies, the conduct of the board is not restricted (ie, they can attempt to prevent acquisition or make the company a less attractive target by any lawful means, eg, by making the shareholders implement a capital increase, or the acquisition of the company’s own shares, making the shareholders increase the level of votes required for certain decisions in the company). A rather simple but effective means to resist takeover is to require in the company’s statutes the company’s consent for the transfer of the shares.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

New shares may be issued once all formerly issued shares have already been paid up. Commonly, new shares can be issued only upon the approval of the shareholders. However, in companies limited by shares, the shareholders may also authorise the board in advance to increase the company’s capital, whereby the board will also be authorised to issue new shares (if the capital increase is implemented via issuing new shares, respectively) and to make all necessary decisions in relation thereto. Such authorisation may be granted to the board for a maximum term of five years, and the highest possible amount of the capital increase must be specified in the authorisation.

The shareholders automatically have a pre-emption right for the newly issued shares in proportion to their stakes held in the company. In companies limited by shares, persons holding subscription preference bonds in the company also have a pre-emption right (or subscription preference right) for the newly issued shares, and pre-emption right can be exercised during the period and in the order as specified in the company’s statutes. If the issuance is made against additional contributions to the company’s registered capital, the shareholders may authorise any third person to subscribe for the newly issued shares for the case the persons having pre-emption rights do not exercise such right.

However, shareholders will obviously not have pre-emption right if the newly issued shares are employee shares.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The transfer of fully paid shares may be restricted in many ways, including limiting the allowed type of transfer, restrictions on the person of the potential transferee, requiring certain preliminary procedures or consents, or stipulating options or preference rights for the shares, etc. It is typical, for example, that the transfer may be subject to the consent of the company (such consent to be granted based on the decision of the shareholders’ meeting in a limited liability company, and commonly by the decision of the board in a company limited by shares), or the shares can only be sold subject to the pre-emption right of certain shareholders. As special case for transfer restrictions, employee shares cannot be transferred to persons who are not employees of the company. Also, the shares of private companies cannot be publicly offered for transfer.

In limited liability companies, it is common that shares can be transferred only via sale and purchase, and shares may be sold to non-shareholders only if neither the shareholders, nor the company, nor the third person authorised by the company exercised their statutory pre-emption rights. Certain statutory control in a public company can be acquired subject to conducting the relevant statutory takeover procedure.

Transfer restrictions regarding shares of a limited liability company shall be indicated in the company’s statutes to become effective, and to ensure enforcement, with regard to third persons. Transfer restrictions regarding shares of companies limited by shares are valid only if the restrictions are indicated on the printed shares themselves, or on the securities accounts where the shares are kept.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Companies limited by shares may issue redeemable shares, in a maximum value of 20 per cent of the registered capital, to which the put option of the shareholder or the call option of the company may be attached. Such put option or call option can be realised provided that the company’s financial status so allows (ie, if the company could pay dividends), and only for the shares the issue value of which has been paid up. Once redeemed, the shares must be withdrawn, and the company’s registered capital must be reduced accordingly.

Although not a classical redemption or repurchase, shares can (or, under certain circumstances, must) be withdrawn by the company, and the value of the withdrawn shares must be paid to the shareholder or its legal successor, while the company’s registered capital must be decreased accordingly. Withdrawal of shares may occur if a shareholder has failed to contribute the issue value of its shares or to perform its additional payment obligation (if any), if the company intends to discontinue holding its own shares, if a shareholder holding employee shares died or became incapable to hold the employee share any further.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Shareholders cannot be obliged to take part in mergers or spin-offs, or in changing the company form. Dissenting shareholders will cease to be shareholders, and they shall be allocated their stake from the company’s equity according to the rules of allocation in case of the termination of the company. However, if the company’s statutes so provide, dissenting shareholders shall be paid a fair market value for their stake.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Hungarian law, the shareholders of a public company may decide in the company’s statutes whether the company will be managed in a two-tier system (managed by a management board and supervised by a separate supervisory board, each comprising at least three members) or a one-tier system. In the one-tier system, the company is managed by a board of directors of at least five persons, the majority of whom must be independent, and no separate supervisory board is appointed, but the board of directors also takes care of the tasks of the supervisory board.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board’s primary responsibility is to conduct the management of the company in the company’s best interests. The management board must regularly report to the supervisory board and to the shareholders in respect of the management, the company’s financial status and its business policy. The board of public companies must prepare and publish a corporate governance report and further reports required by the law and the Listing Recommendation.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

Most commonly, the members of the board are appointed by the shareholders’ meeting. In private companies, however, the supervisory board may be vested (by the shareholders) with the powers to appoint the directors. In any case, the board, as well as the individual directors, must attend their management tasks in compliance with the laws, the company’s statutes and the resolutions of the shareholders’ meeting on the one hand, and on the other hand in the best interests of the company (and not in the interest of any of the shareholders). Although the board reports to the shareholders’ meeting and to the supervisory board, in connection with its management duties it bears legal responsibility towards the company in the first place.

The board is obliged to provide information and allow access to the company’s documents and registers to each individual shareholder. Information and access may be limited or refused only if that would infringe the company’s business secret, or the shareholder would abuse such rights.

In special situations such as in a threatening insolvency situation, when managing the company, the board must also take into account the interests of the company’s creditors. Consequently, if as a result of breaching this obligation or because of certain other unlawful actions of the board (or directors), the company’s debts are not fully covered in a liquidation, the directors may be held liable with regard to the company’s creditors for such uncovered debts.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The company (based on a resolution of the shareholders) may bring damage claims ex contractu against the directors if the directors breached their management duties and, as a result, the company incurred damage. In addition, if the director attends to his or her duties under an employment agreement with the company, the company may also bring claims against the director under the employment agreement. If the company was terminated without legal successor, the last shareholders of the company may enforce damage claims against the directors, as the case may be.

If directors do not provide information or allow access to the company’s documents to the shareholders as requested, the shareholders may attempt to enforce their right before court in non-litigious proceedings.

Directors may be held liable for the liquidated company’s uncovered debts (if the statutory preconditions are met) in a lawsuit commenced against the directors by the liquidator on behalf of the company, or by the company’s creditors in their own name.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors must manage the company in the company’s best interests, which includes a care element. Nevertheless, care is understood as an increased level of care as it can be expected from a person who undertook his or her obligations in a contract, and who is in a responsible position of the director of a company. Hence, if the directors breached their management duties and, as a result, the company incurred damage, the directors will be held liable. Liability may be excused if the director proves that: the factor causing the breach was out of the director’s control; which could not have been foreseen by a person acting with due care under the same circumstances at the point in time when the director entered into the agreement with the company for his or her mandate; and the factor causing the damage or the damage itself could not have been be eliminated by a person acting with due care under the same circumstances.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Directors’ duties and liability are essentially the same irrespective of any difference in their skills and experience. However, the board may delegate certain responsibilities to its members, considering the directors’ different skills and experience, whereby in fact duties of the individual directors may still differ. Delegation of duties, however, will not shift liability in respect of the delegated duty to the selected director. (See question 21.)

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate certain responsibilities or powers to the individual directors, or its committees, or other persons such as the company secretary. Such delegation must comply with the provisions of the company’s statutes and the by-laws of the board. Public companies have to consider the Listing Recommendation upon delegation of responsibilities.

Delegation of powers usually serves practical or operational reasons and may trigger reporting obligations for the authorised persons. Such delegation, however, will not shift liability for the delegated responsibilities to the selected director, and will not eliminate the potential liability of the board regarding the delegated responsibilities with regard to the company or third persons. Respectively, the board is deemed to act and bear liability jointly and severally, as a body. Any difference or distinction in liability of the individual directors can be made upon determining the level of liability between the directors themselves.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Although in private companies there is no requirement to include non-executive or independent directors, sometimes private companies also happen to employ independent directors for business reasons, or to ensure the balance in the management board of a joint venture.

In public companies, if the management is operated in a one-tier system, the law requires more than 50 per cent of the board of directors to be independent. Directors are deemed independent if, apart from their seat on the board of directors and apart from any transaction conducted within the company’s usual activities, aiming to satisfy the board members’ personal needs, they do not have any other relationship with the company. In addition, a director will be considered independent provided that he or she:

• is not the employee of the company or a former employee for five years following the termination of such employment;

• does not provide services to the company or its executive officers for consideration as an expert, or other similar services, under personal service contract;

• is not a shareholder of the company controlling at least 30 per cent of the votes, whether directly or indirectly, or is a close relative or domestic partner of such person;

• is not a close relative or domestic partner of any non-independent member, executive officer or executive employee of the company;

• is not entitled to receive financial benefits based on his or her board membership if the limited company operates profitably, or receives any other form of remuneration from the company apart from the salary for his or her board membership, or from a company that is affiliated to the company;

• is not engaged in a partnership with a non-independent member of the board of directors in another business association on the strength of which the non-independent member attains control;

• is not an auditor of the company, or an employee or partner of the audit firm, for three years following the termination of such relationship; or

• is not an executive officer or executive employee of a business association, whose independent board member also holds an executive office in the company.

Non-executive or non-operational are the directors who are not employed by the company or any of its connected companies. The Listing Recommendation requires non-executive (non-operational) members to be involved in the managing board, or the board of directors in a number to ensure that their opinion or decision can significantly influence the resolution made by the board as a body.

Difference in the responsibilities of directors, non-operational directors and independent directors may be detected along the factors described in questions 19 and 20 above.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

A (two-tier) board must comprise a minimum of three directors, while a (one-tier) board of directors must have at least five seats. The number of the directors is not maximised by the law; however, the Listing Recommendation sets the practical requirement that the board or the board of directors have enough but not too many seats to ensure the most efficient operations and management.

Most commonly, the directors are appointed by the shareholders’ meeting. In private companies, however, certain shareholders holding the preference shares granting them the right to do so may have the privilege to appoint and remove one or more directors. Also, in private companies, but not in public companies, the supervisory board may be vested (by the shareholders) with the powers to appoint the directors instead of the shareholders.

Legal criteria for becoming a director include basic requirements, such as the appointee being of legal age of at least 18 years, and having full legal capacity in the scope required for attending his or her functions. Beyond that, any person who:

• has been sentenced to imprisonment by final verdict for the commission of a crime may not be a director until he or she has been exonerated from his or her criminal record;

• has been prohibited by the court from holding an executive officer profession cannot be appointed as a director within the time limit specified in the prohibition order; and

• has been prohibited by final court order from practising a profession may not serve as a director of a company that is engaged in the activity indicated in the verdict.

It is in the best interests of a company to have properly skilled and experienced directors. This is not granted by a legal rule, but the company’s statutes may require certain skills or experience for director positions. On the other hand, it is the responsibility of each director to assess (also in light of his or her potential liability in this position) whether he or she has the necessary abilities and knowledge for the position. There is no legal rule or listing regulation in respect of the age, gender, nationality or diversity of the directors; nevertheless, the statutes of a company may set forth requirements on those factors. In the latter case, public companies must disclose their relevant selection or appointment requirements or methods.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no legal or listing regulation requiring the separation or joining of the functions of the board chairman and the CEO. Leadership in the board is left for the company’s statutes or the by-laws of the board. It is common to vest the chairman of the board with powers to lead the board. Nevertheless, because the chairman of the board is appointed by the directors themselves, it might be in the shareholders’ interests to grant certain powers in leading the board to another person, potentially a CEO.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Private companies are entirely free to set up or to avoid forming any committees. In public companies, an audit committee must operate to assist to the supervisory board or to the board of directors in supervising the financial reporting system, selecting the auditor, and cooperating with the accountant. The audit committee must be formed from at least three of the independent directors, and at least one of the members must have accounting or auditor qualification. In addition, in compliance with the relevant EU recommendation, the Listing Recommendation suggests that in public companies: a remunerations committee be operated for providing guidance and rules for the remunerations and assessment of the board of directors and that of the supervisory board; an appointments committee also be set up to assist with appointments of directors and members of the supervisory board; and a risk management committee be created. The board itself may act as the remunerations committee and as the appointments committee if the low number of seats in the board so justifies.

Beyond that, any further committee is allowed by the law if the company’s statutes provide to create them.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no legal or recommended minimum or set number of board meetings per year. Beyond that, if the company’s statutes or the by-laws so provide, the board may discuss matters and make decisions also out of a meeting, in writing. Nevertheless, it must be ensured in the statutes of the company or in the by-laws of the board that the board can meet and discuss actual matters, including urgent ones, as necessary.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

According to the relevant Listing Recommendation, board structure, practices and operations are to be made public in case of public companies.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Directors’ remuneration is determined by the shareholders’ meeting, taking into account the proposals of the remunerations committee, as suggested by the Listing Recommendation. Directors are usually mandated for a definite term of maximum five years, or even for an indefinite term, as provided in the company’s statutes. Each director’s mandate is set forth in the company’s statutes or in the resolution appointing the respective director. Nevertheless, directors may be removed by the shareholders any time.

According to the relevant Listing Recommendations, loans and compensatory arrangements between the company and the directors are to be approved by the shareholders’ meeting pursuant to the proposal of the board or its remunerations committee, and to be disclosed in the company’s remunerations statement. Sensitive business information is not to be disclosed; however, non-disclosure must be justified by the company.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The relevant Listing Recommendation suggests that the remuneration of senior management is to be determined by the board in detail, based on the guidelines set forth by the shareholders’ meeting. Such remunerations (except for sensitive business information) are to be disclosed in the public company’s remunerations statement.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurance has become a common practice. Although directors may also pay the premiums, it is common that the company can pay the premiums, especially if the insurance provides coverage not only for the director’s costs but also for the company’s damage.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Companies can indemnify directors and officers against liabilities incurred by them in their professional capacity. Like all agreements between the company and the director, indemnity agreements concluded with the directors must be approved by the shareholders’ meeting. Furthermore, certain matters are usually excluded, such as claims enforced against the director by the company, consequences of causing damage intentionally or of fraudulent actions or crimes, indemnity to bad leavers.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Upon request of the director, shareholders may decide to warrant discharge to the director, confirming that in the past (full or fragment) financial year he or she attended his or her management activities properly. Once such discharge has been warranted, the company will be able to enforce damage claims against the discharged director in relation to the discharged activities provided that the company can prove that discharge was warranted on the basis of untrue facts or data.

It is of note, furthermore, that damage claims can be enforced by the company against the directors on the basis of the decision of the shareholders’ meeting. Hence, if the shareholders fail to decide so, the company will not enforce a given claim against the director concerned.

33 Employees

What role do employees play in corporate governance?

An employee representative and works council operating at the company have certain negotiation and information rights in various cases, such as mergers, spin-offs, transfer of a business unit. If a collective agreement exists at the company, its provisions must be observed by the board in its proceedings, and it may have influence on corporate governance matters at the company. Furthermore, the employees have the right to take part in the company’s supervisory board: if the company has more than 200 employees, one-third of the supervisory board members must be delegated by the employees. If the company operates in a one-tier system, and therefore no separate supervisory board exists at the company, employees may exercise their participation rights within the frames of the agreement concluded between the board of directors and the works council operating at the company.

Also, certain employees may be authorised by the shareholders to take part in the management of the company, assisting the directors. Furthermore, if employees become shareholders of the company via employee stock option plans or various vesting systems, as a result they might gain insight to the company and (although usually rather slight) influence on the shareholder side.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

According to the relevant Listing Recommendation, the board and the supervisory board of public companies is to evaluate its own activities (as a body), as well as the activities of their individual members ever year in terms of skills, results and goals reached. The activities of the management are to be evaluated by the board. In addition, the appointments committee is also to prepare an evaluation in respect of the board, the supervisory board and the management. The committee’s evaluation of the board and the board members is to be sent to the chairman of the board.

The company is to disclose the aspects and the results of evaluations in its annual report and in its reimbursement statement on its website.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The company’s statutes are publicly available on the official company register website and on the company’s own website. By-laws are available on the company’s website.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

All companies must disclose their corporate data (such as registered seat, registered capital, directors, signing rights, activities, bank accounts and, in some private companies, shareholders), and must update those once any of such data has changed. Companies are required to disclose their annual financial statements.

Public companies must comply with additional disclosure requirements, including publishing their annual corporate governance report indicating all data and circumstances required by listing regulations; publishing their disclosure guidelines; disclosing their independence guidelines regarding directors and their evaluation guidelines, organisational structures, proceedings, strategic goals, business ethics, remuneration guidelines; relevant news or facts that may affect their status or their shares, etc. Disclosures are to be made in the language of the company’s registered seat and also in English.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Remuneration guidelines of public companies must be approved by the shareholders first. The board is to determine management’s remuneration within those guidelines. The directors’ remuneration is determined by the shareholders’ meeting. Remunerations are disclosed annually, and appear to be voted on annually. Nevertheless, any changes in remunerations of the directors, or the remunerations guidelines are to be voted on by the shareholders. Also, remunerations may be put on the agenda of the shareholders’ meeting whenever one or more shareholders representing at least 1 per cent of the votes so require.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Minority shareholders owning together at least 1 per cent of the votes in a public company (and 5 per cent in private companies) may amend the agenda of the shareholders’ meeting, whereby they can nominate directors and have such nominations voted on at the shareholders’ meeting. In addition, minority shareholders owning together at least 5 per cent of the votes in a company may arrange for the shareholders’ meeting to be convened with the aim and purpose specified by the minority shareholders, which may include proposals for removing the directors and nominating new directors for the company.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

In private companies, shareholder engagement is not specifically regulated: shareholders may be consulted regularly, or only around the annual meeting. In public companies, the board is responsible for proper communications and engagement with shareholders. Shareholders are to be duly informed of all relevant events, and board committees also engage with shareholders in accordance with their by-laws. If shareholders so require, they have the right to request information from the directors, and to access the company’s documents and registers, which the directors must satisfy (except for abuse of right by the shareholder or protecting the company’s business secret).

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Public companies are to disclose their guidelines with respect to business ethics and policies such as the environmental and social responsibility policy.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Private companies are not required to provide such disclosures. Public companies do not have to directly disclose the pay ratio; however, the pay ratio may be determined from the evaluation and reimbursement data on the one hand and from the company’s financial report indicating the number and costs of employees on the other hand – as all that is to be made public under the relevant Listing Recommendation.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are not required to disclose any gender pay gap information. Nevertheless, certain companies may choose to make this information public in relation to their sustainability disclosure.

Update and trends

The trends begun over the past year are expected to continue:

• several companies are keen to take the necessary measures to ensure compliance with the General Data Protection Regulation;

• human resources remain a challenge in many sectors, and human capital is attempted to be ensured via various incentives;

• initiatives are being made to reduce gender discrimination; and

• climate change, sustainability and cybersecurity also continue to be of interest.

Mihály Barcza

mihaly.barcza@oppenheimlegal.com

József Bulcsú Fenyvesi

jozsef.fenyvesi@oppenheimlegal.com

12 Károlyi Utca

1053 Budapest

Hungary

Tel: +36 1 486 2200

Fax: +36 1 486 2201

www.oppenheimlegal.com

India

Shardul S Shroff, Rudra Kumar Pandey and Vishal Nijhawan

Shardul Amarchand Mangaldas & Co

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The concept of corporate governance has gained significance in India with the advent of the Companies Act, 2013 (the Companies Act), which, along with other relevant laws, has put in place strict provisions on governance and penal consequences for non-compliance with these provisions. As a result of this enhanced liability, companies have been taking measures to create a robust compliance system.

The Companies Act, which replaced the erstwhile Companies Act, 1956 on 30 August 2013, and the regulations issued by the Securities and Exchange Board of India (SEBI) are the primary sources of the Indian corporate governance regime. The provisions of the Companies Act have been notified in a phased manner.

The provisions of the Companies Act must be read with rules, notifications, orders, circulars and forms issued under the Companies Act by the Ministry of Corporate Affairs, Government of India (MCA). Unlisted and closely held Indian companies are subject to the corporate governance norms contained in the Companies Act. Schedule IV of the Companies Act contains a code for the professional conduct of independent directors (IDs), which applies to all public listed companies and certain classes of public companies. Compliance with the corporate governance provisions must be included in the board’s report.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the Listing Regulations) specify the obligations of ‘listed entities’, a term that includes not only those entities that have listed their equity shares, but also those that have listed other instruments, including non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instruments, perpetual non-cumulative preference shares, Indian depository receipts, securitised debt instruments and units issued by mutual funds. The Listing Regulations sets out the corporate governance principles applicable to listed entities.

The Listing Regulations make it mandatory for companies that have listed their equity shares and convertible securities to comply with certain requirements to ensure transparency in the management of such companies, such as inclusion of IDs, regulation of the remuneration of non-executive directors, constitution of various committees, disclosures on related party transactions (RPTs), accounting treatment, maintenance of a minimum frequency of meetings of the board of directors (Board) and limitation on the number of committees of which a director can be a chairman. The Listing Regulations also require the adoption of a written code of conduct for all members of the Board and senior management of every listed company.

Additionally, the following laws also deal with corporate governance initiatives:

• Securities Contracts (Regulation) Act, 1956;

• Securities and Exchange Board of India Act, 1992 and the rules and regulations framed thereunder;

• Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code);

• Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (the Insider Trading Code);

• Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;

• Depositories Act, 1996;

• Corporate Governance Voluntary Guidelines, 2009 issued by the MCA;

• National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 issued by the MCA; and

• Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises issued by the Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises (effective 1 April 2014 and applicable only to public sector enterprises).

Non-compliance with the provisions of the Companies Act on corporate governance attracts monetary fines, imprisonment, or both. Further, any failure on the part of a listed company to comply with the Listing Regulations may lead, inter alia, to one or more of the following consequences: imposition of fines; suspension of trading; freezing of promoter or promoter group holding of equity shares; and other actions being initiated by SEBI, depending on who violated the provisions of the Listing Regulations.

A committee was constituted by SEBI under the chairmanship of Mr Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Bank (the Kotak Committee) in June 2017 with the aim of improving standards of corporate governance of listed companies in India. The Kotak Committee was requested to make recommendations to SEBI on the following issues (in the context of equity listed companies):

• ensuring independence in spirit of IDs and their active participation in the functioning of the company;

• improving safeguards and disclosures pertaining to RPTs;

• issues in accounting and auditing practices by listed companies;

• improving effectiveness of Board evaluation practices;

• addressing issues faced by investors on voting and participation in general meetings;

• disclosure and transparency related issues, if any; and

• any other matter, as the committee deemed fit pertaining to corporate governance in India.

The Kotak Committee submitted its report to SEBI on 5 October 2017, providing its recommendations on various issues. In its Board meeting dated 28 March 2018, SEBI accepted certain recommendations of the Kotak Committee (without any modification), such as recommendations pertaining to reduction in the maximum number of listed entity directorships, expanding the eligibility criteria for IDs, enhancing the role of the audit committee, nomination and remuneration committee (NRC) and risk management committee (RMC), and enhancing disclosure of RPTs and permitting related parties to vote against RPTs.

The Board of SEBI also accepted certain recommendations (with modification), such as recommendations pertaining to minimum number of directors in listed companies, number of woman IDs, separation of the roles of managing director (MD), chief executive officer (CEO) and chairman, quorum for board meetings, holding of annual general meetings (AGMs), and shareholders’ approval for royalty or brand payment to related parties.

Subsequently, SEBI notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 (Amendment Regulations) on 9 May 2018 and issued a circular on 10 May 2018 to implement the recommendations of the Kotak Committee. Except where specific dates are provided in the Amendment Regulations, the Amendment Regulations will come into force on 1 April 2019.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary Indian implementation entities of corporate governance initiatives are SEBI (the primary regulator of the Indian securities market and listed companies) and the MCA.

Other entities responsible for the enforcement of corporate governance issues include:

• the National Company Law Tribunal (the Tribunal) under the Companies Act, having quasi-judicial powers to decide certain matters under the Companies Act, including the protection of minority shareholders from oppression by majority shareholders and mismanagement, and its appellate authority, the National Company Law Appellate Tribunal (the Appellate Tribunal);

• the Registrar of Companies (ROC), which generally has its presence in every Indian state, and primarily ensures compliance by a company in relation to filings and disclosures under the Companies Act;

• the Regional Director (RD), to which certain powers of the central government have been delegated. There are seven RDs in India, each with their own territorial jurisdiction, in which they, inter alia, supervise the working of the relevant ROCs; and

• the Competition Commission of India (CCI), created under the aegis of the Competition Act, 2002, which regulates antitrust issues where a company’s action may have an adverse effect on competition in the relevant Indian market.

There are also other regulatory authorities that regulate companies engaged in specific sectors, such as Insurance Regulatory and Development Authority (for the insurance sector) and Telecom Regulatory Authority of India (for the telecom sector).

The concept of shareholder activist groups or proxy advisory firms is emerging in India. The SEBI (Research Analysts) Regulations, 2014 (the Analyst Regulations) define a ‘proxy adviser’ as any person who provides advice, through any means, to an institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items. Institutional Investor Advisory Services India Limited and InGovern, both established in 2010, are prominent proxy advisory firms operating in India. Stakeholders Empowerment Services, a corporate governance research and advisory firm, claims to be the first company to have registered as a ‘proxy adviser’ under the Analyst Regulations; however, these firms are not formally consulted by the authorities prior to promulgation of corporate governance initiatives. Usually, committee recommendations and proposed regulatory norms are put up for public comment by concerned authorities in order to ensure large-scale participation. The National Foundation for Corporate Governance, set up by the MCA as a not-for-profit trust, in association with the Confederation of Indian Industry, the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India (ICSI), also provides a platform for spreading awareness regarding corporate governance issues.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Subject to the provisions of the articles of association (AOA) of a company, directors are appointed by the Board and hold their office until the next AGM, at which their appointment must be approved by the company’s members. Alternatively, directors can be appointed at a general meeting of the shareholders.

An Indian public company is required to have at least two-thirds of its directors liable to retire from their position by rotation. Such directors are appointed by the shareholders in general meetings by an ordinary resolution of the company, and they are required to retire within a maximum period of three years from their appointment date. Any reappointment of such directors requires fresh shareholders’ approval. Unless the AOA provide otherwise, the remaining directors of a public company and the directors of a private company (a company that restricts the number of its shareholders to 200) are also required to be appointed with shareholders’ approval.

Further, the appointment of IDs is approved at a shareholders’ meeting, and is eligible for reappointment on passing of a special resolution by the shareholders and disclosure of the reappointment in the Board’s report.

Thus, in India, shareholders generally have a say in the appointment and reappointment of directors. In the absence of a higher requirement adopted by a company in its AOA, directors are appointed by a simple majority vote. The Companies Act also provides companies with an option to adopt a proportional representation mechanism for director appointments, so as to enable the representation of minority shareholders on the Board.

To ensure wider shareholder participation in listed companies, the Companies Act provides for the appointment of one director by small shareholders of the listed company, where ‘small shareholder’ means a shareholder holding shares whose nominal value does not exceed 20,000 rupees. The Companies (Appointment and Qualification of Directors) Rules, 2014 specify that a listed company may either opt to have a small shareholders’ director suo moto, or appoint one upon receiving notice from at least 1,000 small shareholders of the company or one-tenth of the total number of small shareholders of the company, whichever is lower. A small shareholders’ director is an ‘independent director’ under the Companies Act and is not liable to retire by rotation; however, his or her tenure cannot exceed a period of three consecutive years, and at the end of the tenure he or she is not eligible for reappointment.

Subject to the provisions of the AOA of a company, the Board can appoint additional directors, alternative directors and nominee directors.

The shareholders have inherent powers to remove directors (including non-retiring directors) by a simple majority vote, provided a special notice to this effect has been served on the company by shareholders holding at least 1 per cent of the paid-up share capital of the company or holding shares on which at least 500,000 rupees have been paid up on the date of the notice, at least 14 clear days prior to the ensuing general meeting (excluding the day when the notice is served and the day of the meeting), a copy of such special notice has been forthwith provided by the company to the directors proposed to be removed, and the directors are given an opportunity to present their case before the shareholders either in writing or at the general meeting convened to consider their removal. The company is required to give special notice to the members of a general meeting convened for such a resolution at least seven days before the meeting. Directors appointed by the Tribunal under the provisions of the Companies Act and directors appointed by the proportional representation mechanism cannot be removed by the shareholders. An ID who is reappointed for a second term can be removed by the company only by passing a special resolution.

Generally, the Board is vested with the company’s management powers and the shareholders are only entitled to exercise control over those matters that are specifically reserved under the Companies Act or the company’s AOA, for shareholders’ approval. Thus, generally, the shareholders cannot interfere in the Board’s decision-making process or usurp any authority available to them. However, shareholders, by virtue of their authority to appoint or remove directors, can control the overall Board composition and can sometimes transact businesses, which for any reason cannot be transacted by the Board, including resolving matters, in the event of there being a deadlock between directors or there being an inadequate quorum at the Board level. The Companies Act specifically empowers shareholders holding at least 10 per cent of the paid-up share capital of the company to cause the company to notify its shareholders of any resolution proposed to be moved at a meeting of the shareholders, provided such a requisition is deposited with the company at least six weeks before the meeting in case the requisition would trigger the requirement of circulating a notice of the proposed resolution, and at least two weeks before the meetings for all other requisitions.

Further, judicial pronouncements also suggest that when the directors act mala fide or act extraneously to their powers and are the wrongdoers, the shareholders are entitled to take steps for redressal.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The Companies Act mandatorily requires shareholder approval for certain decisions including, among others, those relating to:

• change in name, registered office or authorised share capital;

• modification of the memorandum of association (MOA) and AOA of the company;

• issuance of shares on a preferential basis;

• issue of sweat equity shares;

• approval of audited accounts;

• declaration of dividends;

• appointment and removal of auditors;

• appointment and removal of directors and determining their remuneration;

• appointment of more than 15 directors to the Board;

• reappointment of IDs after the expiry of their term;

• approving loans to directors;

• disposal of a company’s undertaking;

• borrowing and investing a company’s funds beyond certain limits;

• approving any scheme of arrangement or compromise;

• reduction in capital;

• buy-back of securities;

• liquidation of a company;

• specified RPTs;

• application to change the status of the company to ‘dormant’;

• variation in the rights of shareholders; and

• approving the directors’ holding of an office of profit (other than that as MD or managers) with the company or its subsidiaries.

The Companies Act does not provide a mechanism for a non-binding shareholders’ vote. Though the primary authority to call general meetings and decide the agenda lies with the Board, the shareholders are permitted to requisition general meetings to carry out proposed business or demand the circulation of resolutions proposed by them for consideration at the ensuing Board-initiated general meeting. Any decisions on resolutions so initiated by shareholders, if approved by the requisite majority as prescribed under the Companies Act and the company’s AOA, bind the Board. For further information, see questions 3 and 7.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Indian listed entities are prohibited from issuing shares in any manner that may confer on any person superior rights as to voting or dividend with regard to the rights on equity shares that are already listed as per regulation 41 of the Listing Regulations. However, private limited companies and unlisted public companies are permitted to issue equity shares with a disproportionate right as to voting, dividends or otherwise, subject, inter alia, to the existence of a specific authority in this regard in their AOA and shareholders’ approval. The preconditions to be met by a company for such an issuance are prescribed conditions, including having a consistent track record of distributable profit for the last three years, and at any time, shares with differential rights cannot exceed 26 per cent of the total paid-up equity share capital of the company (including equity shares with differential rights). Companies are not under any limitation while determining disproportionate rights. Though equity shares with zero voting rights are generally considered extraneous to the Companies Act, through an amendment to the Companies Act in June 2015, the restriction in the Companies Act in regard to non-voting equity shares has been made inapplicable to private companies, subject to appropriate authorisation in the AOA, and therefore, private companies, which are not subsidiaries of public companies, are able to issue equity shares with zero voting rights. This flexibility will benefit private companies that want to obtain equity funding without dilution of control.

Preference shareholders do not have voting rights at general meetings, except on resolutions that directly affect their rights. However, voting rights on a par with the equity shareholders accrue to them in the event of the company defaulting in the payment of dividends to preference shareholders for a period of two years or more.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders who are recorded in the register of members or in the records of the depository (for paperless shares) are entitled to attend and vote at general meetings. In the case of bearer securities (such as share stocks), when the shareholders present proof of ownership of the company’s shares, as per the AOA, they become entitled to attend and vote at general meetings.

Shareholders who are natural persons can either attend general meetings themselves or appoint a proxy to attend and vote at the meeting. Shareholders who are legal entities are required to appoint natural persons as their authorised representatives to attend and vote at general meetings. These representatives can exercise all powers of the original shareholders including appointing a proxy. Proxies are prohibited from speaking at the meetings and unless the AOA provide otherwise, they can vote only by poll (and not by show of hands). The Companies Act prohibits a person from acting as proxy on behalf of more than 50 members, and members whose aggregate holding in the company exceeds 10 per cent of the total share capital of the company. When there is a show of hands, every shareholder has one vote irrespective of his or her shareholding in the company and on poll (if requisitioned) every shareholder has voting rights in proportion to his or her share in the company’s paid-up equity capital.

If there are partly paid-up shares, voting rights are conferred based on the amount paid up on such shares and such rights would be unavailable on partly paid-up shares on which calls remain unpaid. For listed companies, and companies with more than 200 shareholders, approval on certain items requires the adoption of a postal ballot mechanism, in which votes are cast through postal ballots dispatched by the company to each of its shareholders individually. The Companies (Management and Administration) Rules, 2014 (2014 Rules) mandatorily require certain business to be transacted only by voting through postal ballot, including the following:

• alteration of the objects clause of the MOA;

• change in the location of the registered office outside specified limits;

• issue of shares with differential rights;

• buyback of shares; and

• the disposal of a company’s undertaking.

For voting rights available to preference shareholders, see question 5.

Shareholders may also participate in meetings through video conferencing and vote electronically through secure electronic platforms, as the 2014 Rules make it mandatory for listed companies and companies with more than 1,000 shareholders to provide an electronic voting facility to its members for all general meetings. A ‘virtual meeting’ of the shareholders of a company, that is, a meeting without any physical venue, is not permissible under the Companies Act, as minimum quorum requirements, which are applicable to shareholders’ meetings of public companies and private companies, require the requisite number of members to be personally present at the venue of such meeting.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Typically, the Board convenes a company’s general meetings. However, shareholders holding 10 per cent of the company’s paid-up share capital, by a written notice, may requisition the Board to convene an extraordinary general meeting (EGM). If the Board fails to call a meeting within 21 days after the date of deposit of a valid requisition on a day not later than 45 days after the original requisition date, the shareholders may themselves proceed to convene an EGM within a period of three months from the date of the requisition.

Shareholders holding 10 per cent or more of the company’s total voting power may requisition the company to circulate, along with the notice of a general meeting, any resolution that they intend to move at such meeting, along with a statement of the proposed matter to be dealt with in the resolution. However, the Companies Act does not provide for the circulation of statements by the Board as received from dissident shareholders, who only have a right to discuss their views in a meeting and challenge the unfavourable decisions against them before the Tribunal in certain circumstances.

A company’s general meeting may be called with not less than 21 clear days’ notice. A general meeting may also be called at shorter notice (for which consent can be given in writing or in electronic form):

• in case of an AGM: with the consent of at least 95 per cent of the members entitled to vote at that meeting; and

• in case of any other general meeting: if the company has a share capital, then with the consent of the members holding majority in number of members entitled to vote and who represent at least 95 per cent of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or if the company has no share capital, then with the consent of members holding at least 95 per cent of the total voting power exercisable at the meeting.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders are expected not to oppress or act against the interests of the minority shareholders. Minority actions are allowed in cases of majority shareholders of a company proposing to benefit themselves at the expense of the minority, expropriating minority rights by carrying out modifications in charter documents or taking actions to oust the minority by the improper issuance of shares or otherwise.

Under the Companies Act, 100 shareholders in number or one-tenth of the total number of shareholders of a company, whichever is lesser; or shareholders holding not less than 10 per cent of the issued share capital of a company can bring actions against the controlling majority or the Board, where the affairs of the company are being conducted in a manner oppressive to any shareholder; or in cases of mismanagement prejudicing the interests of the company or the public at large.

In the dispute between Mr Cyrus Mistry and Tata Sons Limited, the Tribunal held that the term ‘issued share capital’ in the context of determining the qualification of shareholders to initiate an action for oppression and management before the Tribunal, includes preference capital as well, and therefore the complainants must, in aggregate, hold at least 10 per cent of the issued share capital of the company, which includes its preference capital, unless this requirement is waived by the Tribunal. On the issue of waiver of this requirement, the Tribunal held that such waiver is to be granted only in rare and compelling situations and further that the Tribunal shall only interfere if the actions of the Board or majority are unconscionable, unjust and fraudulent, so as to cause oppression to the complaining party. On appeal, the Appellate Tribunal noted that to form an opinion as to whether an application merits waiver, the Tribunal is not only required to form its opinion objectively, but also required to satisfy itself on the basis of pleadings or evidence on record as to whether the proposed application merits consideration. It further noted that the Tribunal is required to take into consideration the relevant facts and evidence, and is required to record reasons reflecting its satisfaction. It further noted that the Tribunal is not required to decide the merits of the application, but required to record grounds to suggest that the applicants have made out some exceptional case for waiver. The Appellate Tribunal held that taking into consideration the aforesaid facts and exceptional circumstances of the case as apparent from plain reading of the application and as some of them related to ‘oppression and mismanagement’, it was of the view that a case had been made for ‘waiver’.

To protect the interests of minority shareholders, the Companies Act also provides for class action by members of a company seeking restraining orders against certain actions of the company and for claiming damages or compensation from the company, its directors, auditors or any expert, adviser or consultant for any wrongful act or for any incorrect or misleading statement made to the company. The Companies Act provides that a class action may be initiated through an application to the Tribunal by at least 100 members of the company, or not less than 10 per cent of the total number of its members, whichever is lesser, or members holding 10 per cent of the issued share capital of the company. For companies that do not have a share capital, an application initiating a class action must be made by at least one-fifth of the total number of its members.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Generally, shareholders are not liable for the acts or omissions of a company. Shareholders’ liability, in any event, only extends to their contribution towards the company’s assets at the time of its winding up (without any limitation in cases of unlimited liability companies and to the extent of the amount unpaid on their shares or the amount guaranteed by them, in cases of limited liability companies).

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Certain provisions of the Takeover Code make hostile acquisitions relatively difficult by favouring existing controlling shareholders and management. Particularly, the requirement to disclose shareholdings upon crossing certain thresholds allows the controlling shareholders to keep an eye on ‘predators’. The Takeover Code provides for a compulsory offer of a minimum of 26 per cent of the paid-up capital by an acquirer, when the shares or voting rights held by him or her, and by persons acting in concert with him or her in the target company, entitle them to exercise 25 per cent or more of the voting rights in the target company.

The Takeover Code also necessitates the target company’s management to cooperate by requiring the letter of offer to include certain information of the target company, the authenticity of which is underwritten by the acquirer. Further, it also requires the target company’s Board to constitute a committee of IDs to provide the shareholders their unbiased recommendations on whether the offer should be subscribed to and such recommendations are published at least two working days before the tendering period. Availability of the option to persons other than the acquirer to make competing offers also makes the takeover process difficult.

Indian takeovers are also subject to the CCI’s scrutiny in cases where such a takeover can have an adverse effect on competition in a relevant Indian market.

Further, commercial contracts often have stringent ‘change of control’ clauses and may include the ‘brand pill’ provision, which prevents a hostile bidder from using the promoter’s brand where the promoter loses control over the target.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Companies need shareholders’ approval through a special resolution (the number of votes cast in favour of the resolution by shareholders must be at least three times the number of votes cast against the resolution by shareholders) for the issuance of new shares and securities convertible into shares, except when such issuance is being effected through a rights issue, providing shareholders with a pre-emptive right to acquire newly issued shares in proportion to their existing contribution to the paid-up share capital of such company. Any offer to the public through prospectus by a listed company or a company intending to list its securities on any recognised stock exchanges in India must comply with the regulations issued by SEBI for such issuances.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Fully paid-up shares of public companies are freely transferable. Under the Companies Act, agreements between persons that restrict the transfer of such shares have been made enforceable as contracts. However, it is advisable to make the company a party to such an agreement restricting transferability to ensure that there is privity of contract, and the agreement is enforceable against the company.

It is mandatory for private companies to restrict transfer of their shares (including fully paid-up shares) by having specific provisions in their AOA and a private company may refuse to register a transfer of its shares pursuant to such a restriction. The affected transferee has the power to approach the Tribunal against the company’s refusal to register such transfer.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Companies have to mandatorily redeem redeemable preference shares issued by them within a maximum period of 20 years from the issuance date. Such redemption is not a reduction in capital and companies are permitted to reissue the redeemed preference shares.

Equity shares have no such requirement; however, companies have the option to buy back equity shares under the voluntary route (up to 25 per cent of the aggregate paid-up capital and free reserves of the company by inviting shareholders to tender their shares) or via a reduction of capital approved by the Tribunal. Under the voluntary route, shareholders have an option not to tender their shares, unlike the Tribunal approved route, where once a reduction of capital is approved by the Tribunal and effected, it binds all the shareholders (including dissenting shareholders). Equity shares bought back or reduced in this way are necessarily extinguished, as Indian companies cannot hold their own shares.

Various authorities under the Companies Act are also entitled to direct a compulsory share repurchase, by a company or other shareholders, as a means of protecting minority interests, when there is oppression or mismanagement by majority shareholders. Further, the Companies Act allows an acquirer to acquire shares of the minority shareholdings, pursuant to a scheme approved by the shareholders holding nine-tenths of the value of the proposed transferable shares, unless an application has not been filed by the dissenting shareholders to the Tribunal, and if such an application has been filed, then the Tribunal has not objected to the same.

14 Dissenters’ rights

Do shareholders have appraisal rights?

The Companies Act requires the promoters and shareholders in control of a company to give dissenting shareholders an opportunity to exit the company if it intends to utilise money raised from the public through the prospectus for any object other than the object stated in the prospectus; and vary the terms of any contracts referred to in the prospectus, at the exit price, and in the manner prescribed by SEBI. Further, the Companies Act allows an acquirer to acquire shares of the minority shareholdings, pursuant to a scheme approved by the shareholders holding nine-tenths of the value of the proposed transferable shares, provided an application has not been filed by the dissenting shareholders to the Tribunal, and if such an application has been filed, then the Tribunal has not objected to the same.

SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2016 on 17 February 2016 to include a chapter on ‘Conditions and Manner of Providing Exit Opportunity to Dissenting Shareholders’ (Exit Regulations). The Exit Regulations clearly specify that they are applicable only if:

• there are identifiable promoters or shareholders in control of the company;

• the public issue was opened after 1 April 2014;

• at least 10 per cent of the shareholders who voted in the general meeting disagree with the proposal for amendment of the objects or contract; and

• the amount to be utilised for the objects specified in the prospectus is less than 75 per cent of the total amount raised by the public issue.

The Exit Regulations prescribe a market-linked mechanism for the determination of the ‘exit price’ at which the dissenting shareholders will be provided an exit by the promoter or shareholders in control. The Takeover Code has been amended to ensure that the requirement of making a public offer is not triggered by an acquisition by promoters or shareholders in compliance with the requirements of the Exit Regulations.

Dissenting shareholders have ample exit opportunities in cases of takeover and delisting. In such cases, the acquirer or the promoters, as applicable, are required to provide an opportunity for the shareholders to tender their shares at a fair value. The Takeover Code provides for a compulsory offer of a minimum of 26 per cent of the paid-up capital. For the delisting of its shares from stock exchanges, it is mandatory for the promoters to offer to purchase shares of all the non-promoter shareholders who wish to tender their shares, and to acquire at least 90 per cent of total issued shares of that class.

The Tribunal may also order a company to make an exit offer to dissenting shareholders of a company proposing a compromise or arrangement with its members or creditors, if, in the opinion of the Tribunal, such an exit offer is necessary to effectively implement the terms of the compromise or arrangement. Further, in the case of a shareholders’ right variation (by way of a resolution passed with a three-quarters majority of the particular class), the holders of at least 10 per cent of the shares of that class, being dissenting shareholders, can apply to the court for the cancellation of the variation.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant Board structure for Indian-listed companies remains one-tier. The Board consists of directors of the company. Only individuals can be appointed as directors.

The Companies Act and the Listing Regulations provide for the formation of an audit committee, an NRC and a stakeholders’ relationship committee (SRC). However, the recommendations of these committees are not binding on the Board as they are only advisory in nature. For instance, the Board is not bound by the recommendations of the audit committee as long as it discloses its non-acceptance of the recommendation along with the reason for such non-acceptance in the Board report.

Specified companies are also required to constitute a corporate social responsibility (CSR) committee.

The Board can delegate certain specified powers to a committee of directors, the manager or any other officer of the company.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The Board’s primary responsibilities include managing the company’s affairs and assets and ensuring the company’s compliance with applicable laws. Apart from the powers specifically reserved for shareholders, the Board is entitled to exercise all powers and to do all acts and things, as the company is authorised to do, subject to compliance with applicable laws, the provisions of the company’s charter documents and the regulations, if any, made by the shareholders in a general meeting.

Besides, directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and, where the company has violated any applicable laws, they are generally deemed to be an ‘officer who is in default’. They are also expected to execute their duties in a manner that does not conflict with their personal interests. The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

Regarding the shareholders, the primary responsibilities of the Board include finalising the company’s accounts and presenting them for shareholders’ approval, recommending dividends and convening shareholders’ meetings. The Companies Act and the Listing Regulations specifically provide that directors are generally liable to members of the company while carrying out the company’s business and are expected to act in good faith and promote the object of the company for the benefit of its members as a whole.

The Companies Act prescribes a binding ‘Code for Independent Directors’, which provides the standard for professional conduct for IDs (the Code).

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The Board represents the company and all actions taken by the Board in good faith and intra vires bind the company. The Board owes legal duties to the company and the directors are per se not agents or trustees of the shareholders. However, the Board is expected to exercise its duties with the utmost care, diligence and skill while exercising its powers and any breach thereof may make it liable to the shareholders and to affected third parties, such as creditors, debenture holders, trustees or other persons dealing with the company.

The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Directors can be held personally liable for, among others, illegal acts, fraud, negligence, conspiracy, breach of trust and duties, false representation, wilful contribution to tortious action, misappropriation of the company’s funds and assets, making improper payments including dividend payments and entering into contracts ultra vires. In such cases, the company or its shareholders (by means of derivative actions), along with the affected third parties, can sue the directors for such breaches, through class action (see question 8) or otherwise.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and decision-making. They are expected to execute their duties in a manner that does not conflict with their personal interests and are required to disclose to the Board their direct and indirect interests in any business dealing concerning the company. If there is a conflicting personal interest, they are mandated to refrain from participating in such a decision-making process. However, in case of private companies, the interested director may participate in the meeting after disclosure of his or her interest.

In case of RPTs, the restriction on the member of a company (who is a related party) on voting on a shareholders’ resolution to approve any contract or arrangement which may be entered into by the company, is not applicable: in case of private companies; or in case of a company in which 90 per cent or more members, in number, are relatives of promoters or are related parties.

The Code for requires IDs to, inter alia, satisfy themselves on the integrity of the financial information of the company, and the robustness of its financial controls and systems of risk management, safeguard the interests of all stakeholders, particularly the minority shareholders, and seek clarification or amplification of the information provided to the Board, and where necessary, obtain and follow professional advice and the opinion of external experts at the expense of the company.

Judicial pronouncements suggest that the directors must use their skill reasonably and in sync with their knowledge and experience. They are expected to adopt the standard of care that an ordinary person might be expected to take in the circumstances and therefore they cannot be held responsible for mere judgement errors if they have acted in good faith.

Recently, the Amendment Regulations have amended the definition of the term ‘related party’ under the Listing Regulations to the effect that any person or entity belonging to the promoter or promoter group of a listed entity and holding 20 per cent or more of the shareholding in such listed entity will be deemed to be a related party. The Amendment Regulations have further amended the Listing Regulations to require the listed entity:

• to formulate a policy on materiality of RPTs and on dealing with RPTs including clear threshold limits duly approved by the Board; and

• to pass necessary resolution of shareholders for payment with respect to brand usage or royalty (for the transaction to be entered into individually or taken together with previous transactions during a financial year) exceeds 2 per cent of the annual consolidated turnover (as per the last audited financial statements) where no related party shall vote to approve.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Directors can be executive or non-executive. Executive directors, such as managing and full-time directors, perform day-to-day management duties for the company in addition to being Board members.

The MD is entrusted with substantial management powers under the company’s AOA, other agreements, or resolutions passed by the shareholders or the Board. Full-time directors in the employment of the company are responsible for discharging duties as per their terms of employment and are usually assigned duties related to finance, human resources and legal compliance.

Non-executive directors are directors simpliciter who participate in the Board decision-making process and discharge other duties that may be entrusted upon them by the Board or the shareholders.

IDs take part in the decision-making process at the Board, audit, remuneration and CSR committee meetings (where their presence is mandatory). They bring about ‘independence’ to the decision-making process and generally ensure the company’s compliance with the corporate governance norms, as well as acting as a whistle-blower in the shareholders’ interest and in the larger public interest.

Owing to the varied roles of the directors, the Companies Act follows the concept of ‘officer who is in default’ as persons responsible for the breach of the Companies Act’s provisions. The MD, whole-time director and key managerial personnel (KMP) (a role akin to that of MD, but who need not necessarily be a Board member) are the persons primarily responsible as ‘officer who is in default’ and in their absence and in the absence of any other director who has been entrusted with that specific duty, all of the company’s directors become liable.

The Companies Act mandates that a majority of the directors comprising the audit committee must be persons having the ability to read and understand financial statements, and as stated in question 25, the Listing Regulations further require listed companies to ensure that all members of its audit committee are able to read and understand financial statements; and at least one member has accounting or related financial management expertise.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Among others, decisions that cannot be delegated include:

• making calls to shareholders with regard to unpaid share monies;

• approving the buy-back of securities;

• issuance of securities, including debentures;

• approving financial statements and the Board’s report;

• diversification of the business of the company;

• amalgamation, merger or reconstruction of the company;

• takeover or acquisition of a controlling or substantial stake in another company;

• filling in casual vacancies of directors;

• making political contributions;

• appointment or removal of KMP;

• appointment of internal and secretarial auditors;

• sanctioning contracts in which directors are interested;

• receiving notice of directors’ interests or shareholdings;

• appointment of an MD who is already MD in another company;

• making loans and investments in certain cases;

• approving a declaration of solvency in a voluntary winding up; and

• approving the advertising text for attracting deposits.

The Board, as it is under a fiduciary duty, cannot delegate functions that require judgement or discretion on its part. Further, items reserved under the company’s AOA or by the shareholders in a general meeting for the Board cannot be delegated.

Apart from the above decisions, the Board can delegate certain specified powers to committees of directors, the MD, the company’s executive or non-executive directors, the manager or any other principal officer of the company by means of a Board resolution.

Further, the powers of a company’s MD, who is entrusted with substantial management powers (including the power exercisable by the Board, which the shareholders intend to delegate to the MD), are often prescribed in the company’s AOA.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

‘Non-executive directors’ are not per se defined in the Companies Act or otherwise. The term is commonly used to refer to directors who are directors simpliciter and do not hold any managerial positions, apart from being a Board member.

The Companies Act requires listed companies to have at least one-third of their Board made up of IDs. Further, unlisted public companies with paid-up share capital exceeding 100 million rupees or turnover exceeding 1 billion rupees or loans, debentures and deposits exceeding 500 million rupees are required to have at least two IDs on the Board.

The Companies Act defines ‘independent director’ as a non-executive director who, among other factors:

• does not have any pecuniary relationship, other than remuneration as such director or having transactions not exceeding 10 per cent of his or her total income or other prescribed amount, with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates during the two immediately preceding financial years, which may affect the independence of the director;

• is not related to promoters or directors of the company or its holding subsidiary or associate company;

• has not been an executive of the company in the immediately preceding three financial years;

• is not a partner or executive or was not a partner or executive, during the preceding three years, of:

• the statutory audit firm or the internal audit firm that is associated with the company; or

• legal firms and consulting firms that have a material association with the company; and

• is not a substantial shareholder of the company, owning 2 per cent or more of the voting shares along with his or her relatives.

The Listing Regulations makes it mandatory for listed companies to have at least half of their Board made up of IDs if the Board chairman is an executive director, or a non-executive director who is a promoter or is related to the promoters or holds a managerial position at Board level or a level below that. In other cases, where the Board chairman is a non-executive director not falling into the category discussed above, listed companies are required to have at least one-third of their Board made up of IDs. The Listing Regulations further provide that IDs must be provided suitable training to familiarise them, inter alia, with the company, the nature of the industry in which the company operates, their role, rights and responsibilities in the company and the business model of the company; the details of such training imparted are to be disclosed by the company in its annual report.

Unlike executive directors, IDs are not responsible for day-to-day company management. They actively participate in the Board, audit, CSR and NRC decision-making process (where their presence is mandatory). They instil external and wider perspective, bring independence to the decision-making process and generally ensure compliance by the company with corporate governance norms. IDs are also expected to act as whistle-blowers and act in the shareholders’ and the public interest for the implementation of corporate governance norms. IDs of a company are required to hold and attend at least one meeting in a year without the attendance of non-independent directors and members of the management to review the performance of non-independent directors and the Board as a whole and the chairman, and assess the quality, quantity and timeliness of flow of information between the company’s management and the Board.

The Companies Act provides stringent qualifications for an ID and provides for detailed guidelines for appointment, roles and responsibilities of IDs with a view to ensure that they work in an objective manner in the Code for Independent Directors. While there is no minimum age requirement for IDs under the Companies Act, in view of the nature of their responsibilities, it is essential that a person sought to be appointed as an ID must have legal competence, relevant experience and expertise, and therefore must not be less than 18 years of age.

The Amendment Regulations have amended the definition of the term ‘independent director’ under the Listing Regulations to specifically exclude persons who constitute the ‘promoter group’ of a listed entity. The ID should also not be a non-independent director of another company on the Board of which any non-independent director of the listed entity is an ID. These amendments will come into force on 1 October 2018. The Amendment Regulations further requires every ID is required to submit a declaration at the first meeting of the Board in which he or she participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in circumstances that may affect his or her status as an ID, that he or she meets the criteria of independence and that he or she is not aware of any circumstances or situation that could impair his or her ability to discharge his or her duties with an objective judgment and without external influence. The Board of the listed entity should take on record such declaration and confirmation after undertaking due assessment of the veracity of the same.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Board composition

Public and private companies are required to have a minimum of three and two directors, respectively, and a maximum of 15 directors. The Companies Act has also introduced the concept of a ‘one-person company’, which is required to appoint only one director. A company’s AOA may specify a higher minimum number of directors on the Board, and a company can appoint more than 15 directors by passing a special resolution.

Listed companies and public companies with paid-up share capital of 1 billion rupees or turnover exceeding 3 billion rupees are required to appoint at least one woman director.

Further, listed companies have to ensure that at least one-third of their Board comprises IDs, and public companies with paid-up share capital exceeding 100 million rupees, or turnover exceeding 1 billion rupees or aggregate outstanding loans, debentures and deposits exceeding 500 million rupees are required to have at least two IDs on their Board.

Further, a person cannot be appointed as director in more than 20 companies at a time, out of which not more than 10 can be public companies. For determining the limit of directorships of 20 companies, the directorship in a dormant company is not included. As regards listed companies, a director cannot be a member of more than 10 committees or a chairman of more than five committees across all companies in which he or she is a director.

The Listing Regulations requires the Board of a listed company to have an optimum combination of executive and non-executive directors with at least one woman director and not less than 50 per cent of the Board comprised of non-executive directors. Further, if it has a non-executive chairman, one-third of its directors are required to be IDs; this is 50 per cent if it has an executive chairman.

Banking companies are subject to additional requirements as prescribed under the Banking Regulation Act 1949 (the BR Act) and the guidelines issued by the Reserve Bank of India (RBI) for directors’ qualifications and composition of Board.

The AOA of a company may confer on the Board the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director. Further, the Board if authorised by the AOA of the company or a shareholders’ resolution, may appoint a person as an alternate director for a director of the company, in his or her absence from India for a minimum period of three months, provided such person is not already an alternate director for another director of the company or holding directorship in the same company. The Board of public companies are empowered to fill any casual vacancy on the Board that may arise upon the office of a director getting vacated during his or her term in the normal course, subject to regulations in the AOA.

The Amendment Regulations have amended the Listing Regulations to the effect that:

• a person cannot be appointed or continue as an alternative director for an ID with effect from 1 October 2018;

• the Board of the top 500 listed entities by market capitalisation should have at least one independent woman director by 1 April 2019 and the Board of the top 1,000 listed entities by market capitalisation should have at least one independent woman director by 1 April 2020;

• there should be minimum six directors in the top 1,000 listed entities by market capitalisation by 1 April 2019 and in the top 2,000 listed entities, by 1 April 2020; and

• a person cannot be a director in more than eight listed entities with effect from 1 April 2019 and in not more than seven listed entities with effect from 1 April 2020. Further, a person cannot serve as an ID in more than seven listed entities, and a person who is serving as a whole-time director or MD in any listed entity shall serve as an ID in not more than three listed entities.

Directors’ qualification

The Companies Act only permits natural persons to be directors. It does not prescribe any nationality requirements for appointment of directors; however, all companies are required to have at least one director who has stayed in India for at least 182 days in the previous calendar year. The Companies Act prohibits the following from being appointed as directors:

• any person of unsound mind;

• an undischarged insolvent;

• any person who has applied to be registered as an insolvent, or has been convicted by a court of an offence involving ‘moral turpitude’ and has been sentenced to imprisonment for at least six months in respect thereof, and a period of five years has not elapsed from the date of expiry of the sentence;

• any person who has failed to pay calls on his or her shares for more than six months, or is subject to a court order disqualifying him or her, or is already a director in a public company that has failed to comply with certain filing requirements or has failed to repay a deposit, debentures or the payment of dividends and such failure has not been remedied within one year of being appointed as a director; or

• any person who has been convicted for an offence dealing with a related-party transaction under the Companies Act in the preceding five years.

The MD, whole-time director and manager cannot be below the age of 21 years or above the age of 70 years (although a person who has attained the age of 70 years can be appointed by passing a special resolution). A person who has attained the age of 18 years can enter into contracts and can be appointed as a director. A director must obtain a director identification number or any other identification number as may be prescribed by the central government, which will be treated as director identification number for the purposes of the Companies Act, before being appointed as a director.

Private companies, through their AOA, may provide for more director disqualification grounds. Further, there are additional qualifications applicable to IDs (see question 22), managers, managing and full-time directors, in relation to, inter alia, age and criminal record.

Board composition disclosure

Every company is required to keep a register of its directors and KMP at its registered office, and it must report any changes in directorship to the ROC within 30 days. Information on composition of the Board also forms a part of the company’s annual return that is filed with the ROC. Every director is required to make disclosures of his or her directorship in all companies or any changes therein to companies in which he or she is a director. Also, a listed company must disclose its Board composition in its corporate governance report as part of its annual report under the Listing Regulations.

The director of a company is required to disclose his or her concern or interest in any company(ies) or bodies corporate, firms, or other association of individuals, at the first Board meeting in which he or she participates as a director and thereafter at the first Board meeting in every financial year or whenever there is a change in disclosures already made.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Companies Act prohibits the appointment of the same person as the chairman of the company as well as the MD or CEO of the company, unless the AOA provides otherwise or the company does not carry on multiple businesses. The Listing Regulations provide that a listed company may appoint separate persons to the post of chairman and MD or CEO; however, this is specified as a discretionary requirement, and listed companies may decide their own policy in this regard, subject to compliance with the Companies Act.

The Amendment Regulations have amended the Listing Regulations to the effect that the top 500 listed entities by market capitalisation should ensure that the chairman of the Board of such listed entity should be a non-executive director, should not be related to the MD or the CEO.

The Listing Regulations require certification by the CEO (or the chief financial officer (CFO) of the company) on certain operational matters and on adherence

In the Indian context, MD, who is a person entrusted with substantial management powers of a company, is equivalent to the CEO. The CEO or manager (and MD) are recognised as KMP by the Companies Act, who need not necessarily be directors of the company. While the Board chairman is primarily responsible for regulating the conduct of the Board meetings, the MD is responsible for managing the day-to-day affairs of the company and exercising powers as may be entrusted to him or her by the Board, shareholders or under the AOA.

Generally, closely held Indian companies have a ‘chairman and managing director’ who acts both as a CEO and Board chairman.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Audit committee and nomination and remuneration committee

Under the Companies Act, listed companies and public companies with paid-up capital exceeding 100 million rupees, or turnover exceeding 1 billion rupees, or aggregate outstanding loans or borrowings or debentures or deposits exceeding 500 million rupees have to constitute an audit committee and an NRC.

As per the Companies Act, the audit committee has to consist of at least three directors with IDs forming a majority, and a majority of its members must have the ability to read and understand financial statements. The Listing Regulations require every listed company to constitute an audit committee with a minimum of three directors, of which two-thirds and the chairman should be IDs; all members should be able to read and understand financial statements; and at least one member should have accounting or related financial management expertise. The prior approval of the audit committee is necessary for all RPTs.

In case of transactions other than those referred to in section 188 of the Act and where the audit committee does not approve the transaction, it should make its recommendation to the Board. In case any transaction involving any amount not exceeding 10 million rupees is entered into by a director or office of a company without obtaining approval of the audit committee and it is not ratified by the audit committee within three months from the date of transaction, such transaction will be voidable at the option of the audit committee and if the transaction is with the related party to any director or is authorised by any other director, the director will indemnify the company against any loss incurred by the company. These requirements are not applicable to a transaction, other than transactions referred to in section 188 of the Act, between a holding company and its wholly owned subsidiary company.

As per the Companies Act, the NRC should consist of three or more non-executive directors out of which at least half must be IDs. The chairman of the company (whether executive or non-executive) may be appointed as a member of this committee but cannot chair this committee. The Listing Regulations require listed companies to constitute an NRC with at least three non-executive directors and at least 50 per cent of the directors should be independent. The NRC is to be chaired by an ID.

The Amendment Regulations have amended the Listing Regulations to the effect that the quorum for a meeting of the NRC should be either two members or one-thirdof the members of the committee, whichever is greater, including at least one ID in attendance. Also, the NRC should meet at least once in a year. Further, the roles of NRC have been enhanced to include recommending to the Board all remuneration, in whatever form, payable to senior management.

The Amendment Regulations have amended the Listing Regulations to the effect that the role of the audit committee has been enhanced to include reviewing the utilisation of loans or advances from or investment by the holding company in the subsidiary exceeding 1 billion rupees or 10 per cent of the asset size of the subsidiary, whichever is lower.

Stakeholders’ relationship committee

Any company that consists of more than 1,000 security holders is required to constitute an SRC to consider and resolve the grievances of security holders of the company.

As per the Companies Act, the SRC should consist of a chairman who should be a non-executive director and such other members as the Board of the company may decide. The Listing Regulations require that listed companies should constitute an SRC whose chairman must be a non-executive director.

The Amendment Regulations have amended the Listing Regulations to the effect that at least three directors, with at least one being an ID, should be members of the SRC. Further, the chairman of the SRC should be present at the AGMs to answer queries of the securities holders, and the SRC should meet at least once in a year. The roles of the SRC have also been enhanced to look into various aspects of interest of the security holders of the listed company. Such roles include resolving the grievances of security holders of listed entities, and review of measures taken for effective exercise of voting rights by shareholders.

CSR committee

Every company with net worth exceeding 5 billion rupees or turnover exceeding 10 billion rupees or net profit exceeding 50 million rupees is required to constitute a CSR committee.

As per the Companies Act, the CSR committee should consist of three or more directors, out of which at least one director should be IDs. As per the Companies (CSR Policy) Rules, 2014, unlisted public companies or private companies that are not required to appoint an ID should have their CSR committees without such director. Further, a private company having only two directors on its Board should consist its CSR committee with two such directors.

Other committees

In addition, the Board may constitute directors’ committees or other expert committees to assist them and to discharge their functions.

As per the Listing Regulations, the top 100 listed companies, determined on the basis of market capitalisation, also have to constitute an RMC, consisting of a director as the chairman, and senior executives of the company as members. The Amendment Regulations have amended the Listing Regulations to the effect that the RMC should meet at least once in a year. Further, the roles of the RMC have been enhanced to include looking after the cybersecurity functions of listed companies.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

A company must have at least four Board meetings in a year, such that not more than 120 days intervene between two consecutive Board meetings. The Listing Regulations impose a similar condition of there not being a gap of more than 120 days between two Board meetings.

The directors can participate in Board meetings either in person or through video conferencing or other prescribed audiovisual means. In case where there is quorum in a Board meeting through physical presence of directors, any other director can participate through video conferencing or other audiovisual means in such meeting on specified matters.

The Amendment Regulations have amended the Listing Regulations to the effect that the quorum for Board meetings of the top 1,000 listed entities by market capitalisation with effect from 1 April 2019 and of the top 2,000 listed entities by market capitalisation with effect from 1 April 2020 should be one-third of the total strength of the Board or three directors, whichever is higher, including at least one ID. The participation of the directors by video conferencing or by other audiovisual means will also be counted for the purposes of this quorum.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

As per the Listing Regulations, listed companies are required to submit quarterly and annual compliance reports to the stock exchanges containing specified information regarding the Board, including the composition of the Board and Board committees, remuneration of directors and RPTs approved by the Board, among other things. Furthermore, listed companies are required to have a separate section in the annual report of the company containing a detailed compliance report on corporate governance aspects.

As per the Companies Act, all companies are also required to provide details with regard to the Board and committees in the Board report (which is mandatory under the Companies Act and is to be presented by the Board at the AGM). The Companies Act additionally requires companies to submit in general meetings a directors’ responsibility statement and a declaration by the IDs verifying their independence based on the prescribed criteria. Companies that are required to constitute an NRC have to also submit the company’s policy on directors’ appointment and remuneration including criteria for determining qualification and independence of directors.

The Amendment Regulations have amended the Listing Regulations to the effect that:

• a listed entity is required to submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of RPTs on a consolidated basis in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website; and

• the annual report (prescribed under Schedule V of the Listing Regulations) should also include a disclosure of transactions of the listed entity with any person or entity belonging to the promoter or promoter group holding 10 per cent or more shareholding in the listed entity in specified format in relevant accounting standards for annual results.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration

Private companies have full flexibility as regards determining directors’ remuneration and the process to be followed in this regard.

Listed public companies and other specified public companies must have an NRC, which would recommend a policy to the Board on the remuneration of directors, KMP and other employees. Public companies are required to determine remuneration payable to directors though their AOA or a shareholders’ resolution passed in a general meeting. As per the Companies Act, the total remuneration payable by a public company to its directors, including the MD and full-time director in a financial year cannot exceed 11 per cent of the net profits of the company in that financial year. Further, the remuneration payable to any one MD, full-time director or manager cannot exceed 5 per cent of the net profits of the company in that financial year without obtaining the approval of the shareholders of the company in respect of such remuneration in a general meeting. Non-executive directors’ remuneration is subject to an overall cap of 1 per cent of net profit, if the company has a MD, full time director or manager, and 3 per cent of the net profit in other cases. As per the Companies Act, a loss-making public company can only pay fixed remuneration to a managerial person and any payment exceeding such limits requires the approval of central government. No such prior approval is required to determine the remuneration that may be paid to a managerial person who is functioning in a professional capacity and possesses at least graduate level qualification with expertise and specialised knowledge in the field in which the company operates, provided such person does not hold any shares or interest in the company, its holding and subsidiary companies and is not related to any director of such company, its holding or subsidiary companies including for a minimum period of two years preceding his or her appointment.

Listed companies are required to disclose in their Board’s report the ratio of the remuneration of each director to the median employee’s remuneration and as per the Listing Regulations, all fees or compensation of the non-executive directors, including IDs, shall be fixed by the Board and require shareholders’ approval (except for sitting fees), and remuneration details of all directors are required to be disclosed in the annual report of the listed entity.

The Amendment Regulations provides that approval of shareholders by special resolution is required to be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds 50 per cent of the total remuneration payable to all non-executive directors. Further, the fees or compensation payable to executive directors who are promoters or members of the promoter group will be subject to approval of the shareholders by special resolution in general meeting if the annual remuneration payable to such executive director exceeds 50 million rupees or 2.5 per cent of the net profits of the listed entity, whichever is higher, or where there is more than one such director, the aggregate annual remuneration of such directors exceeds 5 per cent of the net profits of the listed entity. Approval of the shareholders in this case will be valid only till the expiry of the term of such director.

Length of director’s service contract or appointment

As per the Companies Act, two-thirds of a public company’s directors are liable to vacate their position by rotation within a maximum period of three years from their appointment date. MDs, full-time directors or managers can be appointed for a maximum period of five years at a time and in certain events the remuneration payable to managing or full-time directors or managers can be determined by the shareholders for a period of three years at a time.

Loans

As per the Companies Act, a public company is prohibited from advancing any loan to directors or providing guarantees or any other security in relation to a loan taken by its directors or any person in whom the directors may be interested, either directly or indirectly, except as a part of the conditions of service extended by the company to all its employees, or pursuant to a scheme approved by the members of the company by a special resolution. Finance companies may extend loans to their directors provided the interest charged by them is not below the RBI-prescribed threshold.

Additionally, a company requires Board approval, and in certain situations even shareholders’ approval, through a special resolution when it is entering into any contract or arrangement with a director of the company, as a director is a ‘related party’ to the company under the Companies Act. The provisions of the Companies Act pertaining to loans made or guarantee given or security provided by a company do not apply, amongst others, to any loan made by a holding company to its wholly owned subsidiary or any guarantee given or any security provided by a holding company in respect of any loan made to its wholly owned subsidiary; or any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company.

Banking companies are subject to further requirements in relation to the aforementioned, as have been prescribed under the BR Act and the guidelines issued by the RBI. The grant of loan by a banking company to its directors is restricted and the determination of terms of directors’ appointment and payment of remuneration to directors is subject to the approval of the RBI. The RBI has clarified that the approval process will involve an assessment of whether the compensation policies and practices followed by the concerned banking company are in accordance with the principles and implementation standards on sound compensation practices issued by the Financial Stability Board, an international body based in Basle, Switzerland monitoring the global financial system.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The Companies Act and the Listing Regulations define ‘senior management’ as officers of the listed company who are members of the core management team of a company (excluding the Board) and are one level below the executive directors, including all functional heads.

CEOs, CFOs and company secretaries (who are employees and need not necessarily be directors), form the senior management. These appointments are also included within the definition of KMP in the Companies Act.

While the Companies Act regulates the remuneration payable by public companies to its directors and manager, it does not similarly restrict remuneration payable to other KMP. The NRC of a company is required to formulate and recommend to the Board a policy regarding remuneration of directors, KMP and other employees and ensure that remuneration to KMP and senior management involves a balance between fixed and incentive that reflects the short and long-term performance objectives appropriate to the working of the company and its goals. In terms of the Code for Independent Directors, IDs should weigh in on appropriate levels of remuneration for KMP and senior management.

Unlike directors, the appointment and remuneration of senior management is governed by the terms of their appointment and employment. There are no formal guidelines on matters pertaining to the advancement of loans to senior managers or other transactions between the company and senior managers. Therefore, companies are free to determine their policies in this regard. The terms of appointment and payment of remuneration to its senior officials by banking companies, however, remain subject to the approval of the RBI, as detailed in question 28.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

The Companies Act permits a company to obtain insurance on behalf of its KMP to indemnify them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust. The company can pay the premium and it would not be considered as a part of the remuneration of the director or officer; however, in the event that the director or officer is found guilty, the premium paid on any such insurance is to be treated as a part of their remuneration under the Companies Act.

The Amendment Regulations have amended the Listing Regulations to the effect that, effective 1 October 2018, the top 500 listed entities by market capitalisation should undertake directors and officers’ insurance for all their IDs of such quantum and for such risks as may be determined by the Board.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

As discussed in question 30, Indian companies can indemnify directors for liabilities related to negligence, default, misfeasance, breach of duty or breach of trust as regards the company. Further, as provided under the model AOA to the Companies Act, the company is required to, at its own cost, indemnify every officer of the company against any liability incurred by him or her in defending any proceeding (civil or criminal) in which judgment is given in his or her favour or in which he or she is acquitted or discharged.

These liabilities are different from those incurred by directors in the ordinary course of managing the company’s affairs, in good faith and within their authority. While dealing on behalf of a company in good faith, directors have been treated as the company’s agents and have accordingly been provided with safeguards as available to agents generally under the Indian Contract Act 1872, including a right to seek indemnity from the principal (the company).

Companies ordinarily insert specific provisions in the AOA providing for directors’ indemnities, to the extent not prohibited under the Companies Act.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The Companies Act does not permit the preclusion or limitation of directors’ liability. However, as discussed in questions 30 and 31, directors can be suitably insured and indemnified by companies against liabilities, to the extent not prohibited under the Companies Act.

33 Employees

What role do employees play in corporate governance?

The Companies Act requires listed companies, companies that accept public deposits and companies that have borrowings exceeding 500 million rupees from banks and public financial institutions to establish a ‘vigil mechanism’ for directors and employees to report genuine concerns from a corporate governance perspective. The vigil mechanism is required to provide adequate safeguards against victimisation of persons who report concerns, and where necessary must provide direct access to the chairman of the audit committee.

The Listing Regulations incorporate the whistle-blower concept and provide that a listed company should have a vigil mechanism for directors and employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct. The vigil mechanism should provide for adequate safeguards against victimisation of any person who acts as a whistle-blower, including direct access to the chairman of the audit committee, in appropriate and exceptional matters.

Sometimes, individuals go out of the organisational hierarchy and make information available to the public or other external authorities, in order to effectively carry out the whistle-blowing function.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Companies Act requires listed companies, and public companies with paid-up share capital exceeding 250 million rupees, to disclose the manner in which formal annual evaluation has been undertaken by the Board of its own performance and the performance of the committees constituted by the Board and individual directors in the Board’s report. The aim of Board evaluation is to improve governance standards and update company practices, to ensure the growth of the company.

The NRC of each such company and the IDs have been made responsible for carrying out the evaluation of each director’s performance; however the Companies Act does not provide for the mode, manner and process to be followed for such evaluation. Directors on the Board of government companies are exempt from the evaluation requirement, provided that they are required to be evaluated by the ministry or governmental department that is administratively in charge of such a company as per its own methodology.

The Listing Regulations additionally require the Board of listed companies to undertake an evaluation of the performance of the IDs on the Board. The Amendment Regulations have amended the Listing Regulations to the effect that such evaluation of the IDs will include performance of the directors and fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management. The entire Board is required to participate in the evaluation of each ID, except for the individual ID being evaluated. The NRC of listed companies has been tasked with formulating the criteria for evaluation of performance of IDs, as well as the Board as a whole, which evaluation criteria is to be disclosed by the company in its annual report. The Board of listed companies is required to monitor and review the evaluation framework for the Board.

The ICSI published a ‘Guide to Board Evaluation’ in April 2015 (before the Listing Regulations came into effect) to provide guidance to companies on how to evaluate the performance of its Board with suggested parameters and sample models for evaluation. ICSI recommends that the evaluation process should include an analysis of the time spent by the Board in considering matters, and whether the terms of reference of various committees set up by the Board have been met, in addition to verifying compliance with the Companies Act, and also recommends involving an external expert for such evaluation, to add a level of independence to the exercise.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The company is required to file its charter documents and any amendments thereto with the RoC, and they can be inspected and copies obtained online by any person registered with the MCA portal at http://mca.gov.in/mcafoportal/viewPublicDocumentsFilter.do upon payment of a nominal fee of 100 rupees.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Companies must make periodic filings of the company’s audited accounts, the Board’s report, auditor’s report and annual return with the RoC.

Additionally, inter alia, when the company passes certain resolutions, there are changes in directorships, the creation or satisfaction of charges on the assets, changes in authorised or paid-up share capital or changes in the registered office address, the company must file such information with the ROC.

Further, companies are also required to file with the ROC, inter alia, certain notices or advertisements issued by the company, the orders of the Tribunal, charter documents and amendments thereto.

Indian RoC filings are electronically effected through the MCA portal at http://mca.gov.in/mcafoportal/showEformUpload.do and can be inspected by any person registered with the portal upon the payment of a nominal fee of 100 rupees. Certified copies of filings can also be obtained.

The Companies Act also requires companies to make disclosures to its shareholders, by incorporating information into the general meeting notices, the Board’s report and auditors’ report. For certain corporate actions, the stakeholders’ and other authorities’ disclosure is required to be made by way of notices and advertisements.

Listed companies are subject to additional disclosure requirements under the Listing Regulations, the Takeover Code and Insider Trading Code, for better implementation of corporate governance initiatives.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

See questions 28 and 29. For public companies, the remuneration payable to managing or full-time directors or managers can be determined by the shareholders for a period of three years at a time.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Under the Companies Act, each shareholder can nominate him or herself or another person as a director appointee for consideration of the shareholders at a general meeting by providing the company with at least 14 days’ notice and depositing a fee of 100,000 rupees with the company. The rules framed under the Companies Act provide that the company shall inform its shareholders of every nomination notice at least seven days before the general meeting, either individually through email or written notice to the shareholders, along with a notification on the website of the company, or through newspaper advertisements of such nominations, at the company’s expense. Upon a resolution passed by simple majority (unless otherwise provided in the AOA) in the general meeting, the nominee stands elected as a director. The company is required to refund the deposit to the nominating shareholder if the proposed person gets elected as a director, or gets more than 25 per cent of the total votes validly cast on the resolution at the general meeting.

The requirement of deposit of amount is not applicable in cases of appointment of an ID or a director recommended by the NRC, if any, or a director recommended by the Board of the company (if the company is not required to constitute an NRC).

Commonly, significant investors or joint venture partners have the right to nominate Board members via ‘pooling arrangements’ and other provisions inserted to that effect into the AOA.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Companies typically engage with their shareholders at their AGM. The introduction of electronic voting and postal ballot facilities for a large number of matters requiring shareholder approval have enabled greater participation of small shareholders in decision making, including by eliminating the considerable time and cost expended by shareholders to attend general meetings.

The directors of a company are expected to attend all general meetings of a company, and if any director is unable to attend a general meeting, the chairman of the meeting is required to explain the reason for such absence at the meeting. Specifically, the chairman of the NRC, audit committee and the stakeholders committee, if constituted by a company, are required to attend general meetings of the company, and in their absence, another member of the above committees duly authorised by the relevant chairman must attend the general meeting. This standard has been introduced by the Companies Act and ICSI to ensure that at least one member of each of these committees is present at every general meeting to address shareholders’ queries, if any, concerning their respective committees.

On 7 November 2016 the India-UK Financial Partnership, which was formed in July 2014 to provide policy inputs to both governments in the financial sector, presented a paper titled ‘Responsible Shareholder Engagement – An Indian Stewardship Code’ to Mr Arun Jaitley, the Finance Minister of India. The report states that good corporate governance and effective investor stewardship are essential for corporate success and that institutional investors, in particular, have a fiduciary duty to actively and appropriately represent the interests of their investors, who are typically small investors, to the companies in which they hold investments. Specifically in regard to listed companies, the paper recommends the development of an ‘Indian Stewardship Code’ to be adopted by public and private mutual funds, insurance companies and foreign investors which will introduce a ‘voting plus’ and ‘comply or explain’ framework to create responsible shareholder engagement in India and a constructive and mutually beneficial two-way dialogue between shareholders and the Boards of listed Indian companies.

In March 2017, the Insurance Regulatory and Development Authority pioneered in India a stewardship code applicable for insurers. However, there is no common stewardship code in India yet that would be applicable to all institutional investors.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Under the Companies Act, the Board’s report should disclose the composition of the CSR committee, the details of the CSR policy developed and implemented by the company on CSR initiatives taken during the year, and the reasons for not spending the amount earmarked for CSR activities in a financial year (in case the company fails to spend such amount). The Board’s report should also include an annual report on CSR containing specified particulars. Companies should also disclose the contents of their CSR policies on their website, if any, in the prescribed manner.

The Listing Regulations require the top 500 listed entities based on market capitalisation (calculated as on 31 March of every financial year) to include in their annual report a business responsibility report describing the initiatives taken by them from an environmental, social and governance perspective, in the format as specified by the Board.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no specific requirement to disclose the pay ratio between the CEO’s annual total compensation and the annual total compensation of other workers. However, the Companies Act read with the relevant rules require every listed company to disclose, inter alia, the following in the Board’s report:

• ratio of the remuneration of each director to the median remuneration of the company’s employees for the financial year;

• percentage increase in remuneration of each director, CFO, CEO, company secretary or manager, if any, in the financial year;

• percentage increase in the median remuneration of employees in the financial year;

• number of permanent employees on the rolls of the company;

• average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification for the same and point out if there are any exceptional circumstances for increase in managerial remuneration; and

• affirmation that the remuneration is as per the remuneration policy of the company.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no prescribed requirement for companies to disclose ‘gender pay gap’ information.

Update and trends

Certain new developments have taken place during the past year in relation to corporate governance in India. These include the following:

• The Companies Act has been further amended through the Companies (Amendment) Act, 2017, with effect from 9 February 2018 and 7 May 2018.

• The notified provisions relate, among others, to:

• under the explanation of the definition of ‘associate company’, the definition of ‘significant influence’ has been substituted by a new definition and a new definition of ‘joint venture’ has been introduced. Now, ‘significant influence’ means control of at least 20 per cent of total voting power, or control of or participation in the business decisions under an agreement, and ‘joint venture’ means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

• the EGM of a company, other than of the wholly owned subsidiary of a company incorporated outside India, should be held at a place within India;

• the requirement for placing the matter relating to the appointment of an auditor of the company for ratification by members at every AGM has been done away with; and

• in case there is a quorum in a meeting of the Board through physical presence of directors, any other director may participate through video conferencing or other audiovisual means in such meeting on specified matters.

• The President of India gave his assent to the Fugitive Economic Offenders Ordinance, 2018 on 21 April 2018 following cabinet approval of the same. Although the Fugitive Economic Offenders Bill, 2018 was introduced on 12 March 2018 during the budget session, it could not be taken up for consideration. This proposed law seeks to deter economic offenders, against whom an arrest warrant has been issued in respect of a scheduled offence, from evading the process of Indian law by remaining outside the jurisdiction of Indian courts. It is also expected to help banks and financial institutions achieve higher recovery from the financial defaults committed by fugitive offenders. Cases or offences involving a total value of 1 billion rupees or more will come under the purview of this proposed law.

• SEBI had constituted the Kotak Committee in June 2017 with the aim of improving standards of corporate governance of listed companies in India. This committee submitted its report to SEBI on 5 October 2017. SEBI accepted certain recommendations of the Kotak Committee and the same have been incorporated in the Listing Regulations (as detailed out in our responses to the questions above).

The year 2017 witnessed an unprecedented number of cases in India where shareholders dissented against the Board and the management of the relevant companies. The issues that were most scrutinised by the shareholders of different companies were related to appointment of directors and their remuneration.

In one case, a company proposed an RPT where the company wanted to sell one of its properties to the chairman of the company and some of his relatives at a price that was much less than the market value. Most of the institutional investors as well as non-institutional investors voted against the proposal, and the proposal eventually failed to pass.

In another case, a company proposed to make an investment in one of its loss-making subsidiaries. Most of the institutional investors voted against the proposal. However, the proposal was passed because the promoters and non-institutional investors voted in favour of the proposal.

In yet another case, the co-founder of the company alleged lapses of corporate governance against the chairman and members of the Board. While the Board and the management tried to defend the allegations, the ultimate result was the departure of the chairman, the CEO and two other IDs from the Board.

Therefore, it can be seen that shareholders of Indian companies are taking more active roles in the running of the companies and putting their views forward in case they feel that certain proposed decisions could impact the company or such shareholders.

Shardul S Shroff

shardul.shroff@amsshardul.com

Rudra Kumar Pandey

rudra.pandey@amsshardul.com

Vishal Nijhawan

vishal.nijhawan@amsshardul.com

Amarchand Towers

216 Okhla Industrial Estate, Phase III

New Delhi 110 020

India

Tel: +91 11 4159 0700 / 4060 6060

Fax: +91 11 2692 4900

www.amsshardul.com

Italy

Fiorella Federica Alvino

Ughi e Nunziante – Studio Legale

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The primary regulation is the Italian Civil Code (ICC). Further, Legislative Decree No. 58 of 24 February 1998 – the Italian Financial Act – is applicable to listed companies. Listed companies may choose to comply (under the ‘comply or explain’ principle) with the provisions of the Corporate Governance Code issued by the Corporate Governance Committee of the Italian Stock Exchange in 2006, amended in 2010 and in July 2015 (the Code).

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary entity responsible for making rules and enforcing laws is parliament, but, in some cases established by the Italian Constitution, laws may also be adopted by the government and the ministries. Further, regulations are issued by authorities, such as the Italian Stock Exchange, the Italian stock market regulatory authority (Consob) and the Bank of Italy.

Particular groups and associations whose views are taken into consideration on the enactment of new regulations and laws include the Italian Confederation of Industries, trade unions, the listed companies’ association (Assonime), consumer associations and associations related to particular sectors.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

In SpAs adopting the traditional system or the one-tier system, as well as in Srls, the shareholders’ meeting shall appoint and remove directors, using the majority principle. However, in Srls, management is usually entrusted to the quotaholders, unless otherwise provided in the company’s by-laws.

Under article 2351 of the ICC, each share gives the right to vote. Other than as provided in special laws, the by-laws may provide for the creation of shares without voting rights, with voting rights limited to specific matters or with voting rights subordinated to the occurrence of certain conditions not merely dependent on the exercise of individual rights. The value of such shares cannot be higher in aggregate than one-half of the capital.

Under paragraph 4 of the above-mentioned article, shares carrying multiple voting rights can be issued, but each multiple voting share can have up to a maximum of three voting rights.

According to article 2380-bis of the ICC, board activity is characterised by autonomy and exclusivity. The shareholders cannot, therefore, interfere with the management of the business or take formal steps to require the board to pursue a particular course of action; they can only remove the directors at a shareholders’ meeting or choose not to re-elect them when their tenure expires.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

In SpAs adopting either the traditional system or the one-tier system, the ordinary shareholders’ meeting shall:

• approve the annual financial statements;

• appoint and remove directors and auditors and the subject to whom the audit of the statutory accounts is entrusted;

• establish the directors’ and auditors’ remuneration, if not established in the by-laws;

• resolve on the directors’ and auditors’ liability;

• resolve on other matters attributed to the meeting by law or the by-laws; and

• approve the procedural rules, if any, for the meeting.

In SpAs adopting the two-tier system, the ordinary shareholder shall:

• appoint and remove the members of the supervisory board;

• establish their remuneration;

• resolve on their liability;

• resolve on the distribution of profits; and

• appoint the subject to whom the audit of the statutory accounts is entrusted.

In SpAs the extraordinary shareholders’ meeting shall resolve on amendments to the by-laws, the appointment, the replacement and the powers of the liquidators and on any other matter attributed to it by law.

In Srls, the quotaholders resolve on:

• the approval of the financial statements and the distribution of profits;

• the appointment of the directors, if provided by the by-laws;

• the appointment of the auditors and the subject to whom the audit of the statutory accounts is entrusted, if necessary;

• the amendments of the by-laws;

• the decision to enter into a transaction that may involve amendments to the company’s purpose or to the quotaholders’ rights; and

• other matters attributed to them through the by-laws and on every other matter the directors or the quotaholders representing at least one-third of the capital submit for their approval.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In SpAs, the principle ‘one share, one vote’ normally applies. However, the by-laws may provide for the creation of classes of shares without voting rights, with voting rights limited to specific matters or subordinated to certain conditions. In any event, the value of such shares cannot be greater in aggregate than half the share capital. Further, in companies that do not have recourse to the risk capital market, the by-laws may provide that voting rights shall be limited to a maximum amount or that they must be staggered. The by-laws may provide also for shares with multiple voting rights (up to a maximum of three votes for each share).

In Srls, the vote of each quotaholder is valid in proportion to its quota.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

SpA

Shareholders’ meetings are duly assembled with the presence of as many shareholders as represent at least half of the company’s share capital, excluding shares without voting rights. The ordinary meeting passes resolutions by an absolute majority of the attendees unless a higher majority is required by the by-laws.

An extraordinary meeting passes resolutions with the vote in favour of as many shareholders as represent more than half the share capital of the company unless a higher majority is required by the by-laws. Extraordinary meetings of companies that have recourse to the risk capital market are duly assembled when as many shareholders as represent at least half of the capital or a higher percentage provided for in the by-laws are present and such a meeting passes resolutions with a vote in favour of at least two-thirds of the share capital present at the meeting.

If the shareholders present do not represent the proportion of capital required for a quorum, the meeting must be called again. At the second meeting, the ordinary shareholders’ meeting passes resolutions on the matters that should have been dealt with at the first meeting, regardless of the part of capital represented by shareholders in attendance, while an extraordinary meeting is duly assembled with the presence of shareholders representing more than one-third of the share capital and passes resolutions with a vote in favour of at least two-thirds of the share capital present at the meeting.

To participate in the meeting, if the shares are in registered form, the company shall record in the shareholders’ book those shareholders who have attended the meeting or who have deposited their shares. In any event, the by-laws may allow for attendance at the meeting through telecommunications or the expression of a vote by correspondence.

Srl

The by-laws may provide that quotaholders adopt decisions through written consultation or on the basis of consent expressed in writing: the documents must be signed by the quotaholders and the subject matter of the resolution, as well as the consent to it, must be made clear.

Otherwise, the quotaholders’ meeting must be called, in the manner established in the by-laws, when required by the directors or by quotaholders representing at least one-third of the capital. The quotaholders’ meeting must also be called in the event of decisions regarding amendments to the by-laws, decisions to enter into transactions that cause a substantial change in the corporate purpose or a significant change in the rights of the quotaholders, and decisions regarding the reduction of capital for losses.

Generally in Srls, decisions are validly adopted with the presence of as many quotaholders as represent at least half the capital and decisions are passed by an absolute majority of the attendees. However, decisions regarding amendments to the by-laws or decisions to enter into transactions that cause a substantial change in the corporate purpose or a considerable change in the rights of the quotaholders are adopted with the vote in favour of quotaholders representing at least half of the capital.

Further, if provided by the by-laws, quotaholders may attend the meeting through telephone or video conferencing.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Once directors have been appointed, the shareholders’ meeting can no longer give binding orders to the directors regarding the performance of management acts. In SpAs, the directors or the management board shall call a shareholders’ meeting without delay when requested by as many shareholders as represent at least one-tenth of the company’s share capital (or one-twentieth, if the company participates in the venture capital market) or a lower percentage provided for in the by-laws. If the directors, the management board, the auditors, the supervisory board or the control committee, in their stead, fail to proceed, the calling of the meeting is ordered by a decree of the president of the court, if the refusal to call the meeting is unjustified. However, the calling of a meeting at the request of the shareholders is not allowed on matters that the meeting resolves pursuant to law upon the proposal of the directors or on the basis of a project or of a report prepared by them.

In Srls, the quotaholders’ meeting must be called if requested by a number of quotaholders representing at least one-third of the capital.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Under Italian law, general and specific duties are provided for directors and not for controlling shareholders. There are specific provisions concerning the challenge of shareholders’ resolutions in which the controlling shareholders can decide the vote.

In SpAs, any adopted shareholders’ resolution that is not in compliance with the law or the by-laws may be challenged by shareholders who were not present, or dissented or abstained from the vote (as well as by the directors, the supervisory board or the auditors). Apart from the not present, dissident or abstained shareholders, shareholders who own as many shares with voting rights with reference to the specific resolutions as represent on aggregate at least one per thousand of the capital in companies having recourse to the risk capital market and 5 per cent in other cases; the by-laws may reduce or exclude such a requirement. Shareholders who do not represent the required portion and those who are not entitled to challenge the resolution are entitled to damages caused to them by the non-compliance of the resolution with law or with the by-laws.

In Srls, management is usually entrusted to the quotaholders, unless otherwise provided in the by-laws. Quotaholders who do not participate in management of the entity have the right to receive news on the business from the directors and to consult, through professionals in their trust, the company’s books and the documents relating to the management. Each quotaholder may promote an action for liability against the directors and may also request, in the event of serious irregularities in the management of the company, that a precautionary order of revocation of the directors be adopted.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

In SpAs and Srls, only the company is liable for the company’s obligations. However, in the event of insolvency, for obligations incurred during the period in which the shares or quotas are held by a sole shareholder or quotaholder, such a person has unlimited liability when payment-in on capital has not been made pursuant to law or until the notice formalities are complied with as required by law.

Further, members have unlimited liability in a general partnership, a limited partnership and a partnership limited by shares and, therefore, the company’s bankruptcy entails the members’ bankruptcy.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Directors of listed companies must refrain from actions or transactions that could counteract the achievement or the aims of the offering for the period from the date of notice of the offering until closure of the offering or until the offering expires, unless approved by the shareholders’ meeting.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

In SpAs, the by-laws can grant to directors the power to increase capital one or more times up to a specified amount and for a maximum period of five years. The minutes of the board of directors’ resolution increasing the capital shall be drawn up by a notary and must be filed and registered at the registry of enterprises.

In the case of a capital increase, newly issued shares and debentures convertible into shares shall be offered under option to shareholders in proportion to the number of shares owned by them. However, no option right is given with regard to newly issued shares that must be paid by contributions in kind and, if it is in the interests of the company, the option right can be denied or limited.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The by-laws may subject the transfer of shares or quotas to special conditions, such as pre-emption rights in favour of the other shareholders or quotaholders or the consent of the corporate organs or of the other shareholders or quotaholders, and may prevent their transfer for a period of time. In an SpA, the prohibition on transferring shares is valid for no longer than five years from the date of incorporation of the company or from the time when the prohibition is introduced, while in an Srl, there are no time limits, but the quotaholder or his or her heirs are entitled to withdraw from the company at any time.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Repurchases are allowed and may be provided in share transfer agreements.

14 Dissenters’ rights

Do shareholders have appraisal rights?

In an SpA, shareholders who did not participate in the following resolutions are entitled to withdraw from the company:

• amendments to the company’s purpose that lead to a significant change in the company’s activities;

• transformation of the company;

• transfer abroad of the company’s registered office;

• revocation of liquidation;

• elimination of one or more of the reasons for withdrawal provided for in the by-laws;

• changes to the criteria for the determination of the value of shares in the event of withdrawal; and

• amendments to the by-laws concerning voting or participation rights.

Further, in companies established for an unlimited duration, which are not listed on regulated markets, the right of withdrawal is granted at any time.

Moreover, the by-laws may provide for the withdrawal right in the following cases:

• extension of the life of the company;

• introduction or removal of liens on circulation of the share certificates; or

• additional circumstances when the company does not have recourse to the risk capital market.

The by-laws of an Srl determine when the quotaholders are entitled to withdraw from the company and the related methods. In any event, quotaholders who have not consented to the change of the corporate purpose or to the type of company, to its merger or demerger, to the revocation of the status of liquidation, to the transfer of the legal address abroad, to the cancellation of one or more causes for withdrawal provided in the by-laws and the completion of transactions that cause a substantial change to the purpose of the company established in the by-laws or in a relevant change to the rights attributed to the quotaholders, are entitled to withdraw. Further, if it is a company without a term, the right of withdrawal may be exercised by quotaholders at any time.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Most listed companies adopt the traditional system. One-tier and two-tier systems are rare in Italy.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The management of the company is the exclusive responsibility of the directors and their primary duty and responsibility is achieving the corporate purpose.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The directors shall fulfil the duties imposed upon them by the law and by the by-laws with the diligence required by the nature of the appointment and by their specific competence. They are jointly liable towards the company for damages caused by the non-observance of such duties, except for functions vested solely in the executive committee or in one or more directors. Moreover, directors are liable towards company creditors for non-observance of their duties concerning the preservation of the company’s assets.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

SpA

An action for liability of the directors can be brought pursuant to a resolution of the shareholders’ meeting and may be started within five years of the termination of a director’s office.

Further, a company action may also be exercised by shareholders representing at least one-fifth of the capital or such different percentage indicated in the by-laws, which in any event cannot be greater than one-third and, in companies having recourse to the risk capital market, may be brought by shareholders representing one-twentieth of the capital.

An action for liability against directors may also be brought by creditors when the company’s assets prove insufficient for the satisfaction of their claims.

Finally, individual shareholders and third parties are entitled to compensation for damages if they are directly damaged as a result of malice, fraud or negligence of the directors. In this case, the action may be brought within five years of the act that damaged the shareholder or the third party.

In companies adopting the two-tier system, an action for liability against directors may be brought by the shareholders, as explained above, or by the supervisory board.

Srl

An action for liability against directors may be brought by each quotaholder. Further, any quotaholder or third party who has been directly damaged by wilful or negligent acts of the directors is entitled to compensation for damages.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Under the ICC, directors shall fulfil the duties imposed upon them by law and by the by-laws with the diligence required by the nature of the appointment and by their specific competences.

The same rules apply to the members of the management board in companies adopting the two-tier system.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Different skills of the directors may be taken into consideration by the shareholders’ meeting when appointing them and may also be indicated in the relevant resolution. Further, directors’ specific competences are evaluated for determining their duties.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board of directors fixes the content, the limits and the methods for the exercise of the delegated powers; it may always give directives to the delegated bodies and bring back to the board transactions falling within the delegation received. In any event, the following functions cannot be delegated:

• the issue of bonds, if delegated to the board;

• the drafting of financial statements;

• an increase in the share capital, if delegated to the board;

• a reduction of the share capital for losses or if it falls below the legal limit; and

• a drafting of merger or demerger projects.

The same rules apply to the members of the management board in companies adopting the two-tier system.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

For listed companies, the Code provides that the board of directors shall be made up of executive and non-executive directors with an adequate competence and expertise, establishing only that the number, competence, authority and time availability of non-executive directors shall be such as to ensure that their judgement may have a significant impact on the board’s decisions.

Under the Code, the following are qualified as executive directors:

• the managing directors of a listed company or one of its subsidiaries having strategic relevance, including the relevant chairmen when they are granted individual management powers and when they play a specific role in the establishing of the business strategies;

• the directors vested with management duties within the listed company or in one of its subsidiaries having strategic relevance, or in a controlling company when the office also concerns the listed company; and

• the directors who are members of the executive committee of the listed company, when no managing director is appointed or when the participation on the executive committee, taking into account the frequency of the meetings and the scope of the relevant resolutions, effectively entails the systematic involvement of its members in the day-to-day management of the listed company.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

According to paragraph 4 of article 2380-bis of the ICC, if the by-laws make no provision for the number of directors, but indicate only the maximum and minimum number, the number is determined by the shareholders’ meeting.

Both a sole director or a number of directors may be appointed in unlisted SpAs, but a board of directors must be appointed in listed companies.

The board of directors selects the chairman from among its members, unless he or she is appointed by the meeting.

The number of members of the board of directors is normally selected according to the requirements of the company concerned. In Italy, small and medium-sized companies normally have a board of directors composed of three or five members; in listed companies the average is 11 members. Companies in the financial sector have a higher number of directors.

Persons disabled from their rights, bankrupts and those who have been convicted with a sentence entailing legal sanction, even temporary, from public office or are unable to exercise managerial functions, cannot be appointed directors or management board members and, if appointed, shall forfeit their office. These are known as causes of ineligibility.

Special laws provide for numerous causes of incompatibility with the office of the director (eg, civil servants, holders of government positions, members of parliament cannot sit on a board of directors). Lawyers can sit but they cannot be assigned executive or managing powers. The causes of incompatibility, separate from the causes of ineligibility cited above, mean only that the person concerned must choose between the positions; thus the resolution appointing them is not null and void.

In companies adopting one-tier systems, at least one-third of the members of the board must hold the requirements of independence, which are:

• not having been deprived of their rights, bankrupted or convicted with a sentence entailing interdiction, even temporary, from public office or being unable to exercise managerial functions;

• not being a spouse or related to the directors of the company, the company, the relatives and those who are related by blood or marriage within the fourth degree to the directors of companies controlled by it, of companies that control it and of companies under common control; and

• not being related to the company or to companies controlled by it or to companies that control it or companies under common control by an employment relationship or by a regular consultancy contract or by other economic relationship that may prejudice the independence, as well as, if provided by the by-laws, requirements provided for in codes of conduct drafted by trade associations or by companies managing regulated markets.

For listed companies, the Code provides that the board shall be made up of executive and non-executive directors, as well as that an adequate number of non-executive directors (in any case, not less than two) shall be independent, in the sense that they do not maintain, nor have recently maintained, directly or indirectly, any business relationships with the listed company, or persons linked to it, of such a significance as to influence their autonomous judgement.

For listed companies, the by-laws must always provide for mechanisms appointing the board of directors that assure a balance between men and women (the ‘pink share’). The gender less represented must obtain at least one-third of the elected positions. The same criterion is also valid for the oversight committee in the two-tier system.

According to article 2386 of the ICC, if in the course of the fiscal year a vacancy for one or more directors occurs, the others provide for their replacement by resolution approved by the board of statutory auditors, provided that the majority is always constituted by directors appointed by the meeting. The directors so appointed remain in office until the next meeting.

If vacancies of a majority of the directors appointed by the meeting occur, those who remain in office shall call a meeting to provide for filling the vacancies.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There are no mandatory rules on this. However, since the chairman and the CEO exercise different functions, the best practice recognises the separation between them.

In fact, with regard to listed companies, the Code provides that it is appropriate to avoid the concentration of corporate offices in one single individual. However, in the event that the chairman of the board of directors is the CEO of the company, the Code suggests that the board designates a lead independent director, who represents a reference and coordination point for the requests and contributions of non-executive directors and, in particular, of those who are independent.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

In companies adopting the one-tier system, a management control committee must be established within the board of directors. Unless otherwise provided in the by-laws, the board of directors shall determine the number and the appointment of the members of the committee.

However, the members of the committee cannot be less than three in companies that have recourse to the risk capital market.

The committee is formed by directors having the requirements of good repute and professional experience provided for in the by-laws, and the requirement of independence, who are not members of the executive committee and to whom powers or specific appointments are not delegated and who in any event do not perform functions pertaining to the management of the company or of the companies that control it or are controlled by it. At least one member of the committee must be selected from subjects registered in the register of accounting auditors.

The Code provides that listed companies shall establish among its members one or more committees with proposing and consultative functions. In particular, the board of directors shall:

• evaluate whether to establish a nomination committee among its members made up, for the majority, of independent directors;

• establish a remuneration committee among its members, made up of non-executive directors, the majority of whom are independent; and

• establish an internal control committee, made up of non-executive directors, the majority of whom are independent. If the listed company is controlled by another listed company, the internal control committee shall be made up exclusively of independent directors. At least one member of the committee must have adequate experience in accounting and finance, to be evaluated by the board of directors at the time of his or her appointment. However, committees may be avoided and, therefore, their duties shall be performed by the board if certain conditions established by the Code are met.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The law requires at least one board of directors’ resolution per year for the annual approval of financial statements.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Directors shall draft minutes for each board of directors’ meeting, which must evidence the attending directors, the resolutions adopted and the directors dissenting or abstaining. Further, when a director is appointed (or is removed), his or her appointment must be filed at the registry of enterprises, also indicating his or her powers to act on behalf of the company.

In listed companies, the corporate governance report to be published annually must indicate, inter alia:

• agreements between companies and directors, members of the control body or supervisory council that envisage indemnities in the event of resignation or dismissal without just cause or if their employment contract should terminate as the result of a takeover bid;

• rules applying to the appointment and replacement of directors and members of the control body or supervisory council, and to amendments to the by-laws if different from those applied as a supplementary measure; and

• the existence of delegated powers regarding share capital increases or powers of the directors or members of the control body to issue security-related financial instruments or to authorise the purchase of the company’s own shares.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Under article 2389 of the ICC, directors are entitled to receive a remuneration for their activities. The directors’ fee is established under the by-laws and if it is not provided therein, it may be established at the time of their appointment by the shareholders’ meeting (in the one-tier and traditional administration system under article 2364, paragraph 1, No. 3 and 2389 of the ICC respectively) or by the supervisory board (in the two-tier system unless otherwise indicated in the by-laws).

Should the compensation not have been established (and there is no evidence that the directors have waived it), the directors may ask the court to set an appropriate amount.

Generally speaking the compensation is composed of: a fixed amount; a variable amount relating to the achievement of specific goals; special treatments when the termination occurs; and benefits like the personal use of certain company assets or an insurance policy for civil liability.

Remuneration may also be represented in whole or in part by profit sharing or by the attribution of the rights to subscribe shares of the future issue at a predetermined price.

The remuneration of directors vested with special appointments (for example, chairman or managing directors) in compliance with the by-laws is decided by the board of directors, after having heard the board of statutory auditors.

As regards listed companies, the Code provides that the remuneration of directors and key management personnel shall be established in a sufficient amount to attract, retain and motivate people with the professional skills necessary to successfully manage the listed company, as well as that shall be defined in such a way as to align their interests with pursuing the priority objective of the creation of value for the shareholders in a medium to long-term time frame.

With regard to directors with managerial powers or performing functions related to business management, as well as with regard to key management personnel, a significant part of the remuneration shall be linked to achieving specific performance objectives, possibly including non-economic objectives, identified in advance and determined in line with the guidelines contained in the general policy. The remuneration of non-executive directors shall be proportional to the commitment required from each of them, also taking into account their possible participation in one or more committees.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The minimum amount of the managers’ remuneration is determined by the applicable national collective bargaining agreement.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

There are no provisions of law on this point. However, it is common practice for a company to take out liability insurance coverage in order to limit the personal liability of directors and managers.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Under the ICC, in SpAs, the company can waive the exercise of its rights or of actions for liability against directors and settle them, provided that such waiver and settlement are approved by an express resolution of the shareholders’ meeting and provided that there is not an opposing vote of the minority of the shareholders’ representing at least one-fifth of the company’s capital, or one-twentieth in companies having recourse to the risk capital market or the lower percentage provided by the by-laws. Shareholders who have started the action may also abandon it or settle it. Any compensation for the waiver or settlement must be for the benefit of the company.

In companies adopting the two-tier system, the supervisory board may waive or settle a liability action against the management board’s members provided that such decisions are approved by the absolute majority of shareholders and that shareholders representing the above-mentioned percentages do not oppose it.

In Srls, liability actions against directors may be the object of a waiver or a settlement by the company provided that the majority of the quotaholders representing at least two-thirds of the capital vote in favour and that quotaholders representing one-tenth of the capital do not oppose them.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Under article 2393, paragraph 6 of the ICC, SpAs may waive liability actions against the directors and settle the legal proceeding provided that the waiver and the settlement have been resolved by the shareholders’ meeting and the waiver has not been opposed by shareholders who represent at least one-fifth of the share capital (one-twentieth for listed companies). There is also the possibility for shareholders (representing at least one-fifth of the share capital) to waive or settle the liability action promoted autonomously against directors (according to article 2393-bis, paragraph 6 of the ICC).

Srls may waive the liability action against the directors provided that the decision has been approved by quotaholders representing at least two-thirds of the share capital and the decision has not been opposed by quotaholders representing at least one-tenth of the share capital.

However, the above-mentioned waivers are valid only regarding the company and the shareholders or quotaholders concerned without prejudice to third parties’ rights (for example, the company’s creditors).

In addition, it is common in practice that the shareholders’ meeting grants the board members and executives a discharge for liability relating to the content of the financial accounts and grants the former board members and former executives a discharge for liability relating to their work.

33 Employees

What role do employees play in corporate governance?

There are no rules or provisions on an employee’s role in corporate governance.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

There are no specific provisions or practices that require evaluation of the board, its committees or directors.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The deed of incorporation and the by-laws must be filed at the registry of enterprises. These documents are available to anyone at the registry of enterprises’ office where the company has its registered office.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Listed companies and the persons that control them shall make the following available to the public and to Consob, without delay:

• any inside information of a precise nature relating to its financial instruments and that, if made public, would be likely to have a significant effect on the prices of those financial instruments and directly concerns the company and their subsidiaries;

• information on compensation plans based on financial instruments in favour of members of the board of directors or the management board, employees and collaborators not linked to the company by an employment contract and of members of the board of directors or the management board, employees and collaborators of parent companies or subsidiaries;

• information regarding major holdings that exceed the percentage provided by Consob; and

• information regarding shareholders’ agreements.

Listed companies shall also publish the following information in the yearly corporate governance report:

• the capital structure;

• any restriction on the transfer of securities;

• significant direct and indirect holdings;

• if known, the holders of any securities with special control rights and a description of such rights;

• the mechanism for the exercise of voting rights in any employee share scheme where voting rights are not exercised directly by the employees;

• any restrictions on voting rights;

• shareholders’ agreements;

• any significant agreement to which the company is party and which take effect, alter or terminate upon a change of control of the company, and the effects thereof;

• agreements between companies and directors, members of the control body or supervisory board that envisage indemnities in the event of resignation or dismissal without just cause, or if their employment contract should terminate as the result of a takeover bid;

• rules applying to the appointment and replacement of directors and members of the control body or supervisory board, and to amendments to the by-laws;

• the existence of delegated powers regarding share capital increases or powers of the directors or members of the control body to issue security-related financial instruments or to authorise the purchase of own shares;

• adoption of a corporate governance code of conduct issued by regulated stock exchange companies or trade associations, giving reasons for any decision not to adopt one or more provisions, together with the corporate governance practices actually applied by the company over and above any legal or regulatory obligations;

• the main characteristics of existing risk management and internal audit systems used in relation to the financial reporting process;

• the operating mechanisms of the shareholders’ meeting, its main powers, shareholders’ rights and their terms of exercise, if different from those envisaged by legal and regulatory provisions applicable as supplementary measures; and

• the composition and duties of the management and control bodies and their committees.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

See question 28.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Yes. However, if the proxy solicitation is promoted in listed companies under article 136 of Consob Regulation No. 11971/1199, its expenses shall be borne by the subject promoting such solicitation.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Shareholders and quotaholders may be appointed as company directors (according to article 2380-bis and article 2475, paragraph 1 of the ICC respectively). As a consequence, these directors may be granted executive powers in order to perform specific activities.

In addition, note that it is forbidden (according to article 2342, paragraph 5, of the ICC) for shareholders to make contributions consisting of services and works while (under article 2464, paragraph 6 of the ICC) the quotaholders may undertake the obligation to perform works or services as contributions and for the company’s benefit, provided that they take out an insurance policy or a bank guarantee by which the obligations undertaken are guaranteed.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Consob Regulation adopted through Resolution No. 20267/2018 – issued in compliance with Directive 2014/95/EU – requires that certain companies, banks and insurance companies employing more than 500 employees and owning certain other size requirements (total of the annual balance sheet exceeding €20 million or annual net turnover exceeding €40 million) publish a statement on non-financial information, including environment, social matters, HR issues, compliance with human rights and actions carried out against bribery. Listed companies publish the above-mentioned declaration together with the annual financial report availing of the same publication telematic system to be used for others’ mandatory communications. Non-listed companies publish the non-financial statement on their website and send it to Consob. The Supervisory Board and audit companies carry out surveillance activity on compliance with disclosure obligations on non-financial matters.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

No, Italian companies are not required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

No, Italian companies are not required to disclose gender gap information.

Update and trends

In the past year, the corporate governance of Italian listed companies is continuing to show significant changes under the impulse of legislative innovations and market pressure. Data on control model and ownership structure of listed banks show a reduction of the average weight of major shareholders and a rising presence of foreign institutional investors. In recent years, gender diversity in listed companies has been steadily advancing, with a larger role also in listed banks.

A recent issue is represented by the management of cybersecurity threats. In fact, cyber criminals are growing increasingly sophisticated in their attacks. Internal auditors rank this issue among their top three challenges, and more than 80 per cent of senior executives, in recent studies, said cybersecurity is also a boardroom concern.

Fiorella Federica Alvino

ffalvino@unlaw.it

19 Via Bernardino Zenale

20123 Milan

Italy

Tel: +39 2 762 171

Fax: +39 2 784 140

www.unlaw.it

Japan

Takeshi Watanabe

Anderson Mōri & Tomotsune

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The Companies Act, its subordinate rules and rules of stock exchanges govern issues relating to incorporation, organisation, operation and administration of corporations. In addition, the Financial Instruments and Exchange Act and rules of stock exchanges regulate disclosure of information by listed corporations. Further, the Japan Corporate Auditors Association has published a Code of Kansayaku Auditing Standards as standards for corporate auditors in the conventional ‘corporate auditor-type’ governance structure. The Corporate Governance Code published jointly by the Financial Supervisory Agency and the Tokyo Stock Exchange became effective from 1 June 2015 through amendment of the rules of the stock exchanges. Most of the rules of stock exchanges are mandatory rules but the provisions in the rules relating to the Corporate Governance Code apply on a ‘comply or explain’ basis.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

There are no specific government agencies or other bodies responsible for enforcing the statutes except for the courts. Commentaries authored by officials of the Department of Justice are sometimes relied upon, however. The rules of stock exchanges are enforced by the exchanges through a listing agreement between the exchange and the listed company. There are no well-known shareholder rights protection groups whose views are considered.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Directors of a stock corporation are elected at the general meeting of shareholders by a simple majority of votes (where shareholders hold at least a majority (or lesser number set forth in its articles of incorporation but at least one-third) of voting rights present) unless otherwise provided for in its articles of incorporation. A director of a stock corporation can be removed at the general meeting of shareholders by a simple majority of votes unless also otherwise provided for. Shareholders of a stock corporation do not have the direct power to decide the course of action of the corporation except for certain material actions, such as mergers and corporate splits. They can do so only through the appointment of directors and proposals at general meetings of shareholders. A stock corporation can issue special shares that have voting rights only in respect of items specified in the articles of incorporation. Thus, shareholders with limited voting rights cannot appoint or remove directors if the items listed in the articles of incorporation do not include such an appointment or removal. Further, the articles of incorporation can specify items that require the approval of a meeting of holders of a specific type of shares. Therefore, if the articles of incorporation provide that the appointment or removal of directors requires the approval of a specific type of shareholder, such shareholders have the right of veto in respect of the appointment or removal of directors.

Non-public stock corporations can issue a class of shares that carries exclusive power to appoint a certain number of directors, but this type of share is not permitted for public corporations.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The scope of decisions reserved to the shareholders differs depending on the type of governance structure adopted by corporations. The following shows the scope for corporations that have adopted the corporate auditor-type governance structure:

• appointment and dismissal of directors, statutory accounting advisers, corporate auditors (corporate auditors do not exist in corporations that adopted the committee-type governance structure) and accounting auditors;

• payment of dividends and disposition of loss (with certain exceptions);

• payment of dividends in kind;

• determination of remuneration for directors, statutory accounting advisers and corporate auditors;

• discharge of liabilities of directors, statutory accounting advisers, corporate auditors, executive officers and accounting auditors (unless the articles of incorporation give such authority to the board of directors);

• amendment of the articles of incorporation;

• issuance of shares at especially favourable prices;

• issuance of stock options at especially favourable prices;

• change of types of corporations;

• mergers;

• corporate splits;

• statutory share transfers (a procedure to create a wholly owning parent above an existing corporation by operation of law);

• statutory share exchanges (a procedure under which one corporation becomes a wholly owned subsidiary of another corporation by operation of law);

• transfers of all or a material part of its business;

• leases of all the business;

• entrustment of all the business to another party;

• agreements to share all the profit with another party;

• acceptance of the entire business of another corporation;

• acquisition of material assets within two years of its incorporation;

• authorisations to purchase its own shares for counter value with certain exceptions;

• acquisition of special shares that are specified as shares that may be acquired by the issuing corporation in its entirety by a resolution of shareholders;

• consolidation of shares;

• capital reductions;

• reductions of legal reserves; and

• dissolution of the corporation.

While there is no requirement for a non-binding shareholder vote, the management of companies sometimes obtain shareholders’ resolutions as support for their actions.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Under the Companies Act, a stock corporation may adopt the unit system for its shares where one voting right is granted to one unit of shares. For example, if a corporation’s articles of incorporation provide that 1,000 shares of common stock constitute one unit, a shareholder that owns 2,000 common shares has two votes for his or her shares. The number of shares constituting one unit for one class of shares can be different from that for another class of shares. So, if the corporation sets different numbers for different classes of shares, it can effectively give disproportionate voting rights. In addition, a corporation can issue shares with limited voting rights (namely, shares that do not have voting rights in respect of the items specified in the articles of incorporation of the corporation). Lastly, the articles of incorporation of the company may provide that certain matters that are subject to approval of a general meeting of shareholders or approval of the board of directors also require approval of the meeting of a certain class of shareholders.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

In order to attend and vote at a general meeting of shareholders, a shareholder must have his or her name registered in the register of shareholders of the corporation. Once his or her name is registered, it will remain on the register until the shareholder transfers the relevant shares to a third party and such transfer is logged in the register. A shareholder may delegate authority to another person to act as a proxy. However, under their articles of incorporation many corporations require that such other person also be a shareholder. A shareholders’ resolution can be passed if all the shareholders agree in writing. As such written resolution requires unanimous agreement, practically speaking a listed corporation cannot pass a written resolution. A stock corporation can designate more than one place to have a shareholders’ meeting, but audio and visual connection must be established in all places.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

A shareholder that has been holding 3 per cent or more of the entire voting rights for the previous six months has the right to require that directors of the corporation convene a general meeting of shareholders (the scope of qualified shareholders can be expanded by the articles of incorporation). If directors fail to convene a general meeting of shareholders without delay, the requesting shareholder may convene a meeting after obtaining the approval of the court. A shareholder who has been holding 1 per cent or more of the entire voting rights, or 300 or more voting rights for the previous six months, has the right to require the corporation to include its proposals (including a list of director candidates) in the agenda of the general meeting of shareholders by sending written notice to that effect to the corporation eight weeks prior to the date of the meeting (the scope of qualified shareholders can be expanded by the articles of incorporation). Shareholders do not have the right to require the board to circulate their dissenting statements.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

There are no specific provisions in the Companies Act or established court precedents that establish the duties of controlling shareholders. However, a resolution of a general meeting of shareholders can be nullified through a resolution nullification suit if the resolution is unduly tainted as a result of the exercise of voting rights by one or more shareholders having special interest in the resolution. A resolution nullification suit must be filed with the court within three months of the date of the relevant shareholders’ meeting.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Theoretically speaking, a shareholder could be held responsible for the acts or omissions of the company if a director representing the company commits a tort when he or she is an employee of the shareholder and acts under control of that shareholder, or a director representing the company and the relevant shareholder jointly commit a tort. However, a shareholder will not be held responsible solely for the exercise of (or failure to exercise) his or her voting rights even if the voting is a decisive factor in the general meeting of shareholders.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Many listed Japanese corporations have adopted various types of anti-takeover devices. Most of them are structured to enable the board of directors to issue stock acquisition rights that cannot be exercised by a hostile acquirer. The validity of these devices has, however, not been fully tested by the courts. Recently, there is a trend to abolish this type of anti-takeover device in response to demands from institutional investors.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

In the case of listed corporations, as long as the issue price is nearly equal to the market price, the board can issue new shares without shareholder approval under the Companies Act. However, the rules of the Tokyo Stock Exchange require:

• an independent party opinion confirming necessity and appropriateness of the issuance; or

• shareholder approval if:

• the number of the new shares is 25 per cent or more of the outstanding shares; or

• the issuance results in a change of controlling shareholder.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

No share transfer restrictions enforceable by the corporation itself are allowed in the case of listed corporations. Agreements among large shareholders sometimes contain this type of provision. In the case of non-listed corporations, the Companies Act allows a corporation to have a provision in its articles of incorporation where the transfer of shares requires approval of the board of directors. If a shareholder of such a corporation wishes to sell his or her shares, but the board of directors does not approve such a transfer, the shareholder may require the board of directors to appoint a purchaser who is acceptable to them.

If a listed corporation amends its articles of incorporation to include such a provision, its shares are delisted in accordance with stock exchange listing rules.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

A corporation may not directly force its shareholders to sell their shares to it unless such a compulsory repurchase is specifically provided for in its articles of incorporation as a characteristic of the relevant shares. But a corporation can effectively force its shareholders to sell their shares through attaching such repurchase provision by the resolution of a shareholders’ meeting in which a large shareholder has a controlling stake. Further, a shareholder holding 90 per cent or more may force the other shareholders to sell their shares to itself under the special provisions in the Companies Act.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Yes. Shareholders have appraisal rights in cases of mergers, corporate splits, statutory share exchange, statutory share transfer and certain changes of the terms of shares.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The conventional Japanese governance structure is one-tier. The board of directors consists of all the directors of the corporation including directors who can represent the company (namely, representative directors). In addition, a listed corporation has a board of corporate auditors consisting of at least three corporate auditors (in the case of a corporation with a stated capital of ¥500 million or more or with total debts of ¥20 billion) or at least one corporate auditor (in the case of other corporations) whose duty, in both cases, is to audit the directors’ conduct. The Companies Act also allows two types of two-tier governance structures. One is a committee-type structure consisting of the board of directors (appointed by the shareholders), its three committees (audit, nomination and compensation) and executive officers appointed by the board. The other is an audit committee-type structure consisting of the board of directors and an audit committee. Members of the audit committee are directors separately elected as such at the shareholders’ meeting.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

In the case of corporations that have adopted the conventional corporate auditor-type governance structure, the board of directors determines all management matters unless they are specifically reserved for a general meeting of shareholders under the Companies Act (such as a merger) or they are delegated by the board to a representative director (a director with power to represent and bind the corporation, who is also a member of the board). The Companies Act specifically requires a board resolution if a corporation wishes to conduct any material actions including, but not limited to, the following actions:

• disposition or acceptance of important assets;

• borrowing of substantial amounts of money;

• appointment and dismissal of managers and other important employees;

• establishment, change and abolition of branches and material organisations;

• determination of material items relating to issuance of bonds;

• determination of a corporate governance system; and

• discharge of liabilities of directors, statutory accounting advisers, corporate auditors, statutory executive officers and accounting auditors authorised by the articles of incorporation.

The board may not delegate these items to a director. In the case of corporations that adopt the committee-type governance structure, the board may, and normally does, commission most of the powers to executive officers appointed and supervised by the board. In the case of corporations that adopt the audit committee-type governance structure, the board may delegate most of the decision-making powers to individual directors if the majority of its directors are outside directors or the articles of incorporation contains provisions to allow such delegation.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors is the decision-making body of a corporation. Each director owes fiduciary duties to the corporation. Therefore, he or she may not act for the benefit of a major shareholder if such an action is against the interests of the shareholders as a whole. Further, directors are required by the Companies Act to exercise the duty of care of a prudent manager in performing their duties.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

A corporate auditor (a person elected at the general meeting of shareholders) of a corporation that adopted the conventional corporate auditor-type governance structure may apply to the court seeking injunctive relief if the conduct of a director goes beyond the objectives of the corporation or violates the law or the articles of incorporation, or such conduct is threatening and such conduct would cause material damage to the corporation. Members of the audit committee of a corporation that adopted the committee-type governance structure and members of the audit committee of a corporation that adopted the audit committee-type governance structure also have the same power. A shareholder who has held shares in the corporation for the preceding six-month period may also apply for injunctive relief if there is a possibility that such conduct by a director would cause ‘substantially material’ damage to the corporation.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Each director owes fiduciary duties to the corporation. A director is also required to exercise the duty of care of a prudent manager in performing his or her duties. A director may not engage in business that competes with the business of the corporation unless that director first obtains the board’s approval. Further, a director may not enter into a transaction with the corporation unless he or she first obtains board approval. Even if a director obtains board approval in connection with a transaction with the corporation, he or she is still liable for any damages incurred by the corporation as the result of such a transaction.

20 Board member duties

To what extent do the duties of individual members of the board differ?

As a general rule, the duties of individual members of the board do not differ from each other irrespective of the difference of skills or experience. In the case of a corporation that has adopted a conventional corporate auditor-type governance structure, however, there is no separation of the functions of directors and those of officers in charge of the day-to-day management of the corporation. So, in most corporations, each director also serves as an officer in charge of a specific aspect of management of the corporation. In this sense, the duties of individual members of the board may differ. In the case of a corporation that has adopted a committee-type governance structure, the members of each committee perform additional duties. The same applies to members of the audit committee in a corporation that has adopted the audit committee-type governance structure.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

In the case of a corporation that adopted the conventional corporate auditor-type governance structure, in principle, the board acts as a management body as well as a supervising body. But the board may delegate its responsibilities to each director except for material matters regarding the business of the corporation (including but not limited to those specifically identified in the Companies Act) and the following matters:

• disposition or acceptance of important assets;

• borrowing of a substantial amount of money;

• appointment and dismissal of managers and other important employees;

• establishment, change and abolition of branches and material organisations;

• determination of material items relating to the issuance of bonds;

• determination of corporate governance system; and

• discharge of liabilities of directors, statutory accounting advisers, corporate auditors, statutory executive officers and accounting auditors authorised by the articles of incorporations.

In the case of a corporation that adopted the committee-type governance structure, the board is expected to act mainly as supervising body and can delegate management decisions to statutory executive officers except for the limited number of items specified in the Companies Act. The board is also required to determine the following items:

• management policy;

• items necessary for operation of the audit committee;

• allocation of duties among statutory executive officers and matters relating to relationship among plural statutory executive officers;

• identification of the director to whom statutory executive officers should request convocation of a meeting of the board of directors; and

• determination of framework to assure appropriate management of the corporation.

In the case of a corporation that adopted the audit committee-type governance structure, the board can delegate management decisions to individual directors except for the limited number of items specified in the Companies Act if the majority of its directors are outside directors or the articles of incorporation contain provisions to allow such delegation. The board is also required to determine the following items: management policy; items necessary for operation of the audit committee; and determination of a framework to assure appropriate management of the corporation.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

If a listed corporation, which has adopted the conventional corporate auditor-type governance structure, does not have an outside director, it must explain, at the annual general meeting of shareholders, why it is appropriate not to have an outside director. In other words, the Companies Act strongly recommends that listed corporations have at least one outside director. An ‘outside director’ is defined as a director who:

• is not an executive director, statutory executive officer, manager or other employee of the corporation or any of its subsidiaries;

• has not served as executive director, statutory executive director, manager or other employee of the corporation or any of its subsidiaries for the last 10-year period immediately preceding the appointment as a director;

• is not a director, statutory executive officer, manager or other employee of its parent corporation;

• is not an executive director, statutory executive officer, manager or other employee of any of the subsidiaries of its parent corporation; and

• is not a related to any of the directors, statutory executive officers, mangers or other important employees of the corporation.

There are some additional rules relating to qualification of ‘outside’ directors. In the case of a corporation that has adopted the committee-type governance structure, it has to establish three committees (audit, nomination and compensation committees) and appoint one or more executive officers. Each committee must consist of at least three directors (a majority of whom must be outside directors). None of the members of the audit committee may hold the position of statutory executive officer, executive director, manager or employee of the corporation or any of its subsidiaries or statutory accounting adviser of any of the subsidiaries. In the case of a corporation that adopted the audit committee-type governance structure, it has to establish an audit committee. The audit committee must consist of at least three directors (a majority of whom must be outside directors). Each member of the audit committee of this type of corporation is a director elected as such member at the general meeting of shareholders. None of the members of the audit committee of this type of corporation may hold the position of executive director, manager or other employee of the corporation, or the position of statutory accounting adviser or statutory executive officer of any of the subsidiaries of the corporation. Legally, the responsibility of the outside directors is the same as that of those not classified as outside directors, provided, however, that a corporation can adopt articles of incorporation authorising the corporation to enter into an agreement with each of the outside directors and non-executive directors to limit the maximum amount of monetary liability of such directors. Stock exchange rules require a listed corporation to have at least two independent officers. An ‘independent officer’ is defined as an outside director or corporate auditor whose interest will not conflict with that of general shareholders.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Articles of Incorporation of a Japanese stock corporation provide the minimum or maximum number of directors. Further, under the Companies Act, a corporation with the board of directors (a listed corporation always has the board) must have at least three directors. Vacancies must be filled with the resolution of the general meeting of shareholders.

The Corporate Governance Code requires that a listed corporation should have such composition of directors as necessary to effectively perform their roles and responsibilities (from knowledge, experience and capacity perspectives). Listed companies are required to disclose their responses to this requirement in their Corporate Governance Reports.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Companies Act does not require the separation of the functions of board chairman and CEO or president. In a corporation that has adopted the corporate auditor-type governance structure or audit committee-type governance structure, the board of directors appoints one or more representative directors from among themselves. A representative director represents and may legally bind the corporation. Customarily, one of the representative directors is the president and another is the chairman. If there is a chairman, he or she customarily serves as chairman at board meetings. If there is no chairman, the president customarily serves as chairman at such meetings. The position of chairman at meetings is customarily provided for in the articles of incorporation or the regulations of the board of directors of the corporation. In a corporation that adopted the committee-type governance structure, the board appoints statutory executive officers, who run the day-to-day business of the corporation, and the representative statutory executive officer or officers, who represent the corporation and can legally bind it. Statutory executive officers may be elected from among the directors. One of the representative statutory executive officers customarily uses the title of CEO.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

In the case of a corporation that has adopted the corporate auditor-type governance structure, board committees are not mandatory. Although the corporation may have internal board committees, they are not legally recognised bodies under the Companies Act. In the case of a corporation that has adopted the committee-type governance structure, the corporation has to set up the nomination, audit and compensation committees and appoint one or more executive officers. Each committee has to consist of at least three directors (a majority of whom must be external directors not also serving as executive officers). None of the members of the audit committee may be a statutory executive officer, executive director, manager or employee of the corporation or any of its subsidiaries or statutory accounting adviser of any of the subsidiaries. The nomination committee has the power to determine proposals to be submitted to the general meeting of shareholders as to the appointment and removal of directors. The audit committee has the power to audit the performance of directors and statutory executive officers and to determine proposals to be submitted to the general meeting of shareholders as to appointment, removal or non-renewal of outside accounting auditors. The compensation committee has the power to determine the compensation payable to directors, statutory executive officers and statutory accounting advisers. In the case of a corporation that has adopted the audit committee-type governance structure, it has to establish an audit committee. The audit committee must consist of at least three directors (a majority of whom must be outside directors). Each member of the audit committee of this type of corporation is a director elected as such member at the general meeting of shareholders. None of the members of the audit committee of this type of corporation may hold the position of executive director, manager or other employee of the corporation or the position of statutory accounting adviser or statutory executive officer of any of the subsidiaries of the corporation.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The Companies Act requires that each representative director and each executive director of a corporation that adopted the corporate auditor-type governance structure or the audit committee-type governance structure reports on how he or she has been carrying out the business to the board of directors at least once every three months. Therefore, the meeting of the board of directors must be held at least once every three months. In the case of a corporation that has adopted the committee-type governance structure, similar obligations are imposed on executive officers. Therefore, the meeting of the board of directors must be held at least once every three months.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The governance structure of the corporation is registered in the commercial register. The corporation’s commercial register is a public record. If it is necessary for a shareholder of a corporation or a shareholder of the parent of a corporation to exercise his or her rights, he or she can access and make copies of the minutes of the board meetings after obtaining court permission. A creditor of a corporation can also apply for court permission if such access is necessary to claim compensation for damages incurred against a director, statutory accounting adviser, corporate auditor or statutory executive officer of the corporation.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

In a corporation that has adopted the corporate auditor-type governance structure, the remuneration of directors must be approved at a general meeting of shareholders unless there are relevant provisions in its articles of incorporation. Most stock corporations approve the maximum aggregate amount of remuneration payable to the entire group of directors and give the board of directors the power to decide how it is allocated among the directors. The board of directors generally delegates such power to the president and representative director. In a corporation that has adopted the audit committee-type governance structure, the remuneration of directors who are to serve as members of the audit committee must be approved at a general meeting of shareholders separately from that payable to directors who are not to serve as members of the audit committee. The directors who are also members of the audit committee have the right to express their opinion on the remuneration payable to audit committee members at the general meeting of shareholders. The audit committee member director elected by the audit committee may express opinion on the remuneration payable to directors who are not audit committee members. In a corporation that has adopted the committee-type governance structure, the remuneration of the directors must be approved by the compensation committee. The Corporate Governance Code requires that a listed corporation should have compensation structure that will enhance its sustainable growth by combining compensations linked to its mid-term and long-term performance or combining cash compensation and stock plans.

In a corporate auditor-type governance corporation, the length of directors’ service shall be two years or less. In an audit committee-type governance corporation, it shall be two years for audit committee member directors while it shall be one year or less for other directors. It shall be one year in a committee-type governance corporation. Even if the service contract provides for a longer term, such provision will not limit the power of the general meeting of shareholders to replace the directors upon expiry of the two-year period. For the corporation to advance a loan to its director or to enter into a transaction with its director, the relevant director is required to obtain a board resolution in respect of such a loan or transaction.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

No law, regulation, listing requirement or practice exists that affects the remuneration of directors. Loans to directors and other transactions between the company and directors must be approved by the board of directors (or general meeting of shareholders if the company has not adopted a board system). Board approval is also required for loans to, and transactions with, statutory executive officers in cases where corporations have adopted a committee-type governance system.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O insurance is permitted and has recently become common practice. The company can pay the premiums.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no explicit provision prohibiting the company from indemnifying directors in respect of liabilities incurred against a third party in their capacity as directors. But such indemnities are not common. If the articles of incorporation of the company contain a specific provision, the board may discharge a certain portion of the directors’ liabilities against the company itself, which exceeds the amount calculated based upon the formula specified in the Companies Act. The corporation can enter into a contract with its outside directors or non-executive directors, limiting their liabilities against the company to a certain amount if it is so authorised in its articles of incorporation.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

A two-thirds vote at the shareholder meeting can limit the liability of directors and officers to certain statutorily calculated amounts (except in the case of certain types of liability) unless the relevant damages incurred by the company are caused by gross negligence of the relevant director or officer. This power can be delegated to the board of directors by amending the articles of incorporation of the company. Liabilities of outside directors, non-executive directors and auditors can be limited by a liability-limiting agreement if the articles of incorporation contain a provision permitting such an agreement.

33 Employees

What role do employees play in corporate governance?

Legally, employees do not play any role in corporate governance in Japan. As a minimum matter of course, in many instances, the management of a corporation consults the union or the representative of employees when they wish to conduct major corporate restructuring.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Under the Corporate Governance Code, which is enforced only on a ‘comply or explain’ basis, the board of directors is required to analyse and evaluate effectivity of the board management every year and disclose the outline of the result of such analysis and valuation to the public. While such valuation must be made through self-evaluation of each director, the purpose of such self-evaluation is purely for evaluation of the entire board.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The articles of incorporation are the only constitutional document of a stock corporation. There are no by-laws or corporate charters. Under the Companies Act, the articles of incorporation are only available to shareholders and creditors. In the case of a listed corporation, its articles of incorporation are publicly available at the head office and major branches of the corporation and the office of the relevant stock exchange, because the articles of incorporation are one of the attachments to a securities registration statement and annual securities report, which a listed corporation must file every year.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

A listed corporation is required to file an annual securities report setting forth the business results of the corporation with the appropriate local finance bureau within three months of the end of its fiscal year via the electronic corporate disclosure system, EDINET. It must also file a quarterly report within three months of the end of each quarter. Such reports are available to the public via EDINET. Further, stock exchange rules require timely disclosure by listed corporations of major events or decisions of the listed corporation.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

In the case of the corporate auditor-type governance structure, a resolution of the general meeting of shareholders is required for a Japanese listed corporation to pay remuneration to its directors or corporate auditors unless it is already provided for in its articles of incorporation. Once the maximum amount of the aggregate amount of remuneration payable to directors and to corporate auditors are so approved, no further resolution is required unless such maximum amount needs to be amended. In the case of the audit committee-type governance structure, such amount payable to audit committee member directors and to other directors must be separately determined. In the case of the committee-type governance structure, remuneration of the directors and executive officers is determined by the remuneration committee. So, in this case, shareholders do not have any direct power to determine the remuneration of directors and executive officers.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

A shareholder or a group of shareholders who have held 1 per cent or more of the outstanding voting rights for the previous six months can ask the directors to present a proposed agenda, including appointment of directors to the general meeting of shareholders, by giving eight weeks’ notice.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

In Japan, listed companies’ engagement with their shareholders is relatively limited. But when there is a proposed resolution that is not very popular among the shareholders, the company sometimes contacts shareholders to urge them to cast positive votes at its shareholders’ meeting. Such actions are often conducted by persons within its general affairs bureau under the supervision of directors.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

The Corporate Governance Code requires that a listed corporation must cultivate corporate culture that respects the rights of various stakeholders such as employees, customers, counterparties, creditors and surrounding society and establish management policy that respects such stakeholders’ rights. The code requires that listed corporations publicly disclose such management policies.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

No such pay ratio disclosure is required. But if total compensation value payable to one director is ¥100 million or more, then his or her name, amount of the compensation and other information must be disclosed in its Annual Securities Report.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

No such disclosure is required.

Update and trends

Amendments to the corporate-governance-related rules in the Companies Act are being discussed in the Companies Act Working Group in the Legislative Council of the Ministry of Justice. The outline of proposed amendments was put on public comment procedures on 28 February 2018. In it, there are:

• proposals enabling listed companies to distribute convocation notices for general shareholders meetings only via electronic measures (currently, they must be physically distributed);

• proposals to amend the timing of such convocation notices;

• proposals to limit representative directors’ ability to determine other directors’ compensations;

• proposals to expand the disclosure rules for directors’compensations;

• proposals to expand outside directors’ power; and

• proposals to legally require listed corporations to have at least one outside director.

As these are only proposals, whether and how these proposals are to be enacted is still uncertain.

Takeshi Watanabe

takeshi.watanabe@amt-law.com

Otemachi Park Building

1-1-1 Otemachi

Chiyoda-ku

Tokyo 100-8136

Japan

Tel: +81 3 6775 1034

Fax: +81 3 6775 2034

www.amt-law.com

Kenya

Stephen Njoroge Gikera, Punit Vadgama and Nancy Muringo

Gikera & Vadgama Advocates

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The guidelines on corporate governance practices by public listed companies in Kenya is statutorily provided for in the Companies Act 2015 and enforced by Capital Markets Authority through the Capital Markets Authority Act, Cap 485A Laws of Kenya.

For public listed companies, the point of reference on statutory law, governing corporate governance is embodied in the two acts as well as other regulations.

These include Kenya’s Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya 2012 (the Guidelines), which are the result of a combination of ideas from corporate governance codes from different jurisdictions.

These guidelines were heavily borrowed and developed from works done in several jurisdictions through many task forces and commit- tees including but not limited to the United Kingdom, Malaysia, South Africa, the Organisation for Economic Co-operation and Development and the Commonwealth Association for Corporate Governance. Other regulations aimed at ensuring disclosure of listed companies are Nairobi Securities Exchange Listing Manual, Capital Markets (Licensing Requirements) (General) Regulations 2002, Capital Markets (Securities) and the (Public Offers, Listing and Disclosures)Regulations 2002.

The Capital Markets Authority Guidelines adopt the ‘comply or explain’ principle, which is based on the assumption that the market will monitor compliance with the code and either penalise non-compliance by lowering share prices or observe that non-compliance is justified in the circumstances of the particular company (MacNeil, I and Li, X, 2006).

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

As indicated above, the primary government agency tasked with the responsibility of making the rules and enforcing them is the Capital Markets Authority. This is a statutory body formed in 1989, which was legally created under the Capital Markets Act, Cap 485A.

It is also important to note that the Nairobi Stock Exchange is fur- ther responsible for the regulation of listed members and the conduct of listed companies through its various rules and regulations.

However, for the period between 2007 and 2008, the NSE powers of enforcement were a fallacy and this led to massive scandals and non-compliance with the code by several listed companies. This situation has currently been gratefully remedied.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Section 3.3 (iv) of the Guidelines provides for the best practices relating to the rights of shareholders and more so, with regard to election of the directors once nomination and appointment of the directors has been done by the Nominations Committee of said listed company as per the provisions of section 3.1.3 of the Guidelines.

According to section 132(1) as read together with section 256(3) of the Companies Act 2015, a single resolution for nomination and elec- tion of directors ought to be made by simple majority of shareholders (ie, more than two-thirds of the shareholders for ordinary resolutions and at least 75 per cent for passing special resolutions).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Division 5 of the Companies Act, 2015 outlines the following transac- tions that require shareholder approval:

• credit transactions (section 155);

• directors’ long-term service contracts (section 157);

• substantial property transactions (section 158); and

• loans to directors (section 164).

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Disproportionate voting rights are allowed in the case of class rights.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The only requirement for shareholders to participate in general share- holders’ meetings or to vote is to have at least one vote per share or 100 shillings of stock.

Body corporate memberships may appoint representatives who are authorised to vote on their behalf.

Only private companies are allowed to act by written consent with- out a meeting so long as 95 per cent of the quorum is present to pass said resolution.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Shareholders have a right to convene general meetings by their own motion or through court order and said request must be put to the directors if the said members constitute at least 10 per cent of total shareholders having voting rights or owning share capital. The share- holders are further required to put a written statement of the resolution where assenting or dissenting to the board of directors who then must convene the meeting within 21 days.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Yes, controlling shareholders owe fiduciary duty to non-controlling shareholders; however, the law has placed no enforcement mechanism should the same be breached.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

The management of the company is responsible for the acts or omis- sions of the company. Shareholders’ responsibility is therefore limited.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Yes, anti-takeover devices are permitted. These are in the form of white knights, killer bees and shark repellents.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The board is not permitted to issue new shares without shareholder approval. Pre-emptive rights to acquire newly issued shares are only limited for the rights-based issuance of shares.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Restrictions on transfer of fully paid shares are permitted for private companies as compared to publicly listed companies. They may vary in each company. The most common restriction is that shareholders’ approval or directors’ approval must be sought prior to the transfer of said shares.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Yes, compulsory share repurchases are allowed where the articles of association stipulate for the same. This is especially the case in situa- tions where a parent company wants to maintain control over its sub- sidiary and wants to restrict transfer to outsiders.

Further, compulsory repurchase is allowed where the seller who wants to dispose of his or her shares cannot find a member or shareholder within the company to purchase them. The shares cannot be converted into unpaid shares, hence the need for them to be compulsorily repurchased.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Yes, shareholders have to appraisal rights.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for listed companies is the one-tier board, which has both managerial and supervisory responsibilities in one unified board of directors.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The Companies Act defines the limit of authority by the chief executive and other top executives. It further outlines the structure and organisation of the company.

The board primarily ensures that the company complies with the with all relevant laws, regulations and codes of best business practice.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

As the chief runners of the company, the board serves as a representative of the shareholders and effects decisions to serve their best interests.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

As they are officers of the company, they are liable and can therefore be prosecuted by those to whom they owe duties.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Yes. They are bound to act with the care and diligence based on the experience, skill and general knowledge that a director has.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The board is required to have members who fully participate in mat- ters and policies concerned with the company while the independent directors are provisioned to be neutral voices in the board and are not to be involved in matters concerned with the day-to-day running of the company.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The delegation of responsibilities to management, board committee or board members or other persons is governed by the company’s articles of association. The scope of what can be delegated is further limited to the specialisation or expertise needed in the area.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

There is no minimum number as the board is constituted of a perfect balance of executive and non-executive members. Independent direc- tors are members who have no direct duties in the company and are therefore supposed to bring in independent and judgement of issues under discussion in the board. At least one-third of the members should be independent directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

As stipulated by the Companies Act, a public company can only have a minimum of two directors, while a limited liability can have a mini- mum of one. They are both, however, required to have one neutral member. Appointments are made during general meetings through which shareholders make appointments to the board.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Act stipulates that there should be a clear separation of the role and responsibilities of the chairman and chief executive to ensure a balance of power of authority and provide for checks and balances such that no one individual has unfettered powers of decision-making.

Where such roles are combined a rationale for the same should be disclosed to the shareholders in the annual report of the company.

Every person who is a chairman of a public listed company shall not hold such position in more than two public listed companies at any one time.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

There are three main mandatory committees, that is:

• a nominating committee, which proposes and assesses the per- sons suitable to be appointed to the board as executive and non-executive directors before the shareholders vote their appointment;

• a remuneration committee, which serves to independently remu- nerate directors of the company depending on their corporate per- formance; and

• audit committees that act to ensure accountability of the company. At least three independent directors will constitute the commit- tee, with one independent director serving as chairman and who is answerable to the board.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The board is mandated to meet as frequently as possible. The board of directors must hold at least one board meeting per year. It ensures that the board monitor and evaluate the implementation of strategies, policies and management performance criteria and the plans of the corporation.

In addition, the board should constantly review the viability and financial sustainability of the enterprise and must do so at least once every year.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Yes, disclosure of board practices is required under the Capital Markets (Securities) and the (Public Offers, Listing and Disclosures) Regulations 2002 and the Corporate Governance Code for Issuers of Securities to the Public 2015.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration is based on their performance in corporate matters related to the policy and practice of the company. The company’s act clearly outlines these details.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Development of appropriate staffing and remuneration policy includ- ing the appointment of chief executive and the senior staff, particularly the finance director, operations director and the company secretary as may be applicable.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Section 194-196 of the Act provides for allowance of directors’ liability insurance. The company is allowed to pay premiums.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Indemnities are usually not common in practice. Insurance is limited to cover director’s right in defending himself or herself in criminal or civil proceedings on behalf of the company with exception made to negli- gence, default, breach of duty or trust.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The Act is strict on the limitations that are attached to directors and their duties.

33 Employees

What role do employees play in corporate governance?

The board is tasked with putting into place whistle-blowing mechanisms for its employees with regard to good corporate governance practices. This helps streamline any discrepancies observed by employees.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Evaluation of board, its committees or directors is done through cor- porate governance audits conducted by an appointed consultant usu- ally a qualified company secretary practitioner. The scope of the audit is determined by the board and disclosure of the results is limited to the board.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Yes, the corporate charter and by-laws are publicly available and are kept in a registry in the custody of the company secretary.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Private companies are not entitled by law to disclose information relat- ing to their operations. Public companies, however, are mandated to publish their annual reports and financial statements during the annual general meetings.

These reports are, however, disclosed bi-annually to the Capital Markets Authority in the case of listed companies.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

No. An independent remuneration committee is established to deter- mine the individual respective remuneration of executives.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Yes. Shareholders are responsible for electing directors during meet- ings and have the ability to change directors based on performance and in accordance with the mandate of the company.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Companies engage with the shareholders via the chairman of the board of directors. This is normally done in meetings. In the case of extra com- munication, the company secretary is called upon to address the share- holders to pass on the relevant information.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Disclosure on CSR is not a legal requirement, but despite this, it is a common trend that companies in Kenya do disclose their CSR activities in their annual reports and websites.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The NSE in late December 2017 issued a directive that directors were obligated to disclose their pay to the regulator and shareholders as at four months after the accounts period closed.

Some CEOs in Kenya did in the last year disclose their take home salary in a view for transparency and said information would be matched against company performance.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The only legal requirement is that of diversity within the board.

We however note that the World Economic Forum Report 2017 revealed that a Kenyan woman is paid 55 Kenya shillings for every 100 Kenya shillings paid to a man for doing a similar job.

Update and trends

The new development insofar as corporate governance is con- cerned is the area of corporate governance audits. The government directed that all listed companies, parastatals and cooperatives must undergo legal audits once a year per Mwongozo regulations.

This subsequently means that corporate governance audits must be carried out by certified members of the Institute of Certified Secretaries on board members of the aforementioned institutions.

Gikera & Vadgama Advocates

Stephen Njoroge Gikera

sgikera@gvalawfirm.com

Punit Vadgama

pvadgama@gvalawfirm.com

Nancy Muringo Njeru

nnjeru@gvalawfirm.com

56 Muthithi Rd, Behind Trv Building Westlands

Po Box 720-00621, Nairobi

Kenya

Tel: +254 20 3740262/3

info@gvalawfirm.com

www.gvalawfirm.com

Luxembourg

Frédéric Lemoine and Chantal Keereman

Bonn & Schmitt

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Corporate governance in Luxembourg is primarily based on statute law, which consists mainly of the Civil Code, the Law of 10 August 1915 on Commercial Companies, as amended (the Companies Act) and, for listed companies, the rules and regulations of the Luxembourg Stock Exchange (the Rules and Regulations). The statute law contains only very general governance rules or principles. The Luxembourg Stock Exchange (LSE) has published a set of principles on corporate governance, which first came into effect on 1 January 2007. A fourth revised version was published in December 2017 (the LSE Principles). They were drawn up to provide guidelines for the best practice in corporate governance for all Luxembourg companies listed on the regulated market of the LSE. Luxembourg companies, the shares of which are admitted for trading on a regulated market operated by the LSE, must apply the LSE Principles, whereby they are asked to comply with the recommendations included therein or explain why they are departing from them.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

In general, the LSE is the primary institution for making and enforcing such rules. Monitoring solely by the market would not have been sufficient, thus, a combined approach has been chosen, handing over the monitoring of compliance with the LSE Principles to the companies’ shareholders, the boards of directors and the LSE.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

The Companies Act organises the management of a company under a single-tier system (ie, board of directors) or a two-tier system (ie, management board and supervisory board).

Single-tier system

Directors are appointed by the shareholders in a general meeting. They shall be appointed for a term set by the general meeting of shareholders, however their term of office may not exceed six years. Directors may be removed at any time by the shareholders in a general meeting.

Two-tier system

Members of the supervisory board are appointed and removed by the shareholders in a general meeting. They shall be appointed for a term set by the general meeting of shareholders. The duration of their office may not exceed six years. They may be removed at any time by the shareholders in a general meeting. Members of the management board are appointed by the supervisory board unless the articles of association reserve such competence to the general meeting of shareholders. The duration of their office may not exceed six years. They may be removed by the supervisory board or by the general meeting of shareholders, if provided by the articles of association.

Directors are elected and removed by a resolution of the general meeting of shareholders adopted by a simple majority of the votes.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The general meeting of shareholders has powers reserved to it under the Companies Act. An amendment to the articles of association, an increase in the capital of the company and a reduction of the capital require the approval of the general meeting of shareholders (both by a two-thirds majority of the votes cast at an extraordinary general meeting, the quorum for which is at least 50 per cent of the issued share capital). An increase in the commitments of the shareholders requires a unanimous vote of the shareholders in a general meeting.

At least one general meeting of the company must be held in the Grand Duchy of Luxembourg every year, within six months of the end of the financial year. The annual accounts, the auditor’s report and the directors’ report (which are available for prior inspection) must be approved by the annual general meeting of shareholders by a simple majority of the votes cast. The annual dividend is also approved by the shareholders’ annual general meeting, though, if provided for in the articles of association of a company, the board of directors may proceed to the payment of interim dividends.

Further, in cases of mergers, divisions or liquidations, the approval of the general meeting is also required, generally, by a two-thirds majority and a 50 per cent quorum.

The Companies Act does not set out specific matters that are required to be subject to a non-binding vote.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Luxembourg corporate law is governed by the ‘one share, one vote’ rule. However, where shares are of unequal value or where there is no indication of value, each share, unless otherwise provided for in the articles, shall ipso jure carry the right to a number of votes proportionate to the corporate capital represented by it, with one vote being allocated to the share that represents the lowest proportion.

The articles of association may provide that the board of directors or the management board, as the case may be, can suspend the voting rights of any shareholder in breach of his or her obligations as foreseen in the articles or the subscription deed.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

There are no special legal requirements to attend shareholders’ meetings or to vote. The articles of association may, however, provide rules in this respect. Shareholders can, if the articles of association allow, attend the general meeting by any telecommunications method that allows the identification of the shareholder and guarantees their effective participation in the meeting.

It is also possible for companies to allow their shareholders to vote in advance by post.

The Law of 24 May 2011 on the exercise of certain rights of shareholders in listed companies provides, in principle, that only shareholders holding shares of the listed company on the record date may participate and vote at a general meeting of shareholders. The record date is set at midnight (Luxembourg time) on the date falling 14 days before the date of the general meeting of shareholders. Shareholders of a listed company may now freely transfer their shares at any time before the general meeting of shareholders and are no longer subject to transfer restrictions and blocking of shares prior to the meeting. The articles of association of a listed company may authorise shareholders to vote by correspondence or electronically prior to a shareholders’ meeting by means of a voting form provided by the company.

Pursuant to the Law of 6 April 2013 on dematerialised securities, the holders of dematerialised securities may participate in the general meeting provided that they hold these securities at the latest on the 14th day before the meeting at midnight, Luxembourg time.

The shareholders may not act by written consent without a meeting. However, shareholders in private limited liability companies having less than 60 shareholders (except in the event of amendments to the articles of association), may cast their votes in writing upon receipt of the text of the decision to be adopted.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

In a public limited liability company, shareholders representing one-tenth of the capital of the company may request the holding of a meeting, with an agenda indicated by them. Such meeting must be convened by the board of directors so as to be held within one month of the request. In addition, one or more shareholders representing together at least 10 per cent of the capital of the company may request the addition of items to the agenda of the shareholders’ meeting if such request is sent to the registered office of the company by registered mail at least five days prior to the holding of the meeting.

In a private limited liability company, general meetings may be convened by the members representing more than half of the capital.

In listed companies, one or more shareholders representing together at least 5 per cent of the share capital are entitled to request that additional items be put on the agenda of any shareholders’ meeting and to submit draft resolutions for items on the agenda. Requests for both must be in writing and addressed, by letter or electronic means, to the address mentioned on the shareholders’ convening notice and reach the company at the latest on the 22nd day preceding the date of the meeting.

The agenda items requested by the sufficient shareholding percentage may include director nominations, even against the wishes of the board. Shareholders may not, however, force the board to circulate any kind of statements as they shall be under duty not to divulgate any information that they have concerning the company, the disclosure of which might be prejudicial to the company’s interests, except where such disclosure is required or permitted by a legal or regulatory provision applicable to the company or is in the public interest.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders do not owe any particular duty to the company or to the non-controlling shareholders under the Companies Act. However, pursuant to the Law of 19 May 2006 on takeover bids, if a shareholder acting alone or in concert acquires securities of a company whose securities are admitted to trading on a regulated market that, when added to any existing holdings of those securities, give him or her voting rights representing one-third of all of the voting rights attached to the issued shares in the company, such person is, in principle, obliged to make a bid for the remaining shares as a means of protecting the minority shareholders of that company. Also, the Law of 11 January 2008 on transparency requirements for issuers of securities, as amended, provides that a shareholder shall make a notification to the company, where Luxembourg is the home member state of the company and the shares of the company are admitted to trading on a regulated market, if the shareholder acquires or disposes of shares so that the proportion of shares held by that shareholder reaches, exceeds or falls below the thresholds of 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, one-third, 50 per cent or two-thirds. The Law of 21 July 2012 on mandatory squeeze-out and sell-out finally provides that the majority shareholder, when it acquires or disposes of securities resulting in attaining, falling below or exceeding a previously attained threshold of 95 per cent, must notify the company and the Luxembourg Supervisory Commission of the Financial Sector as soon as possible and no later than four business days thereafter.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

In Luxembourg, companies may be set up by limited or unlimited members. Unlimited members will be jointly and severally liable without limitation for all obligations of the company. Examples of corporate forms that may have unlimited members include general partnership (SNC), limited partnership (SCS), cooperative company (SC), partnership limited by shares (SCA), temporary association and equity association. The liability of limited shareholders is limited to the amount of share capital they have subscribed. Examples of corporate forms that have only limited members are the public limited liability company (SA) and the private limited liability company (SARL).

Limited shareholders of an SCA or SCS are prohibited from carrying out any act of management with regard to third parties. They will be jointly and severally liable for any commitments of the SCA or SCS in which they participated despite the aforementioned prohibition. Such a limited member will also be jointly and severally liable towards third parties for commitments in which he or she did not participate, if he or she has regularly managed the business of the SCA or SCS in relation to third parties. The Companies Act lists certain management acts for which the liability of the limited shareholder is not unlimited in relation to third parties.

Under Luxembourg bankruptcy law, in the event of the bankruptcy of a company, shareholders may be held liable if they behaved as de facto directors and carried out acts that contributed to the insolvency of the company.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Under Directive 2004/25/EC on takeover bids (the Takeover Directive) the target’s board should remain passive before the takeover bid (the ‘board-passivity’ rule). In addition, the Takeover Directive provides that restrictions on the transfer of shares, or on the voting rights of a target company (whether statutory or contractual), are not effective in relation to the bidder during the acceptance period for a bid (the ‘breakthrough’ rule).

The law implementing the Takeover Directive gives Luxembourg companies the choice as to whether to apply the board passivity and breakthrough rules.

Companies that apply the board passivity and breakthrough rules can be exempted from applying those rules if they become the object of a takeover bid launched by a company not applying those rules, provided authorisation is given at a general meeting of shareholders of the target company.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The board is only permitted to issue new shares if so authorised. Authorisation to increase the capital on one or more occasions up to a specified amount (the authorised capital) may be granted to the board of directors or the management board by the company’s articles of association or by the general meeting of shareholders by means of an amendment to the articles of association. The authorisation shall be valid only for a period of up to five years from publication of the constitutive instrument or the amendment of the articles or, if so provided by the articles, from the date of the constitutive instrument or the instrument amending the articles. It may be renewed on one or more occasions by the general meeting of shareholders deliberating in accordance with the requirements for amendments to the articles, for a period which, for each renewal, may not exceed five years. Shareholders generally have pre-emptive rights to acquire newly issued shares in the proportion of the capital represented by their shares. However, if new shares are issued within an authorised share capital increase, the articles may authorise the board to withdraw or restrict pre-emptive rights.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The transfer of fully paid shares in an SA may not, in principle, be restricted. However, clauses such as pre-emption rights, rights of first refusal or prior board approval are acceptable, to the extent that the transferability of the shares is not absolutely restricted. Lock up provisions must be limited in time. Corporate units of an SARL may not, however, be transferred to non-members unless members representing three-quarters of the corporate units agree on the transfer; however, the articles of association may lower this majority to half of the corporate units.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

A compulsory share repurchase is, in principle, not acceptable under Luxembourg law. As an alternative, the voting and dividend rights may be restricted in certain circumstances.

In listed companies, if following a takeover bid made by a shareholder (alone or in concert), a shareholder becomes a majority shareholder or a majority shareholder acquires additional securities, the remaining shareholders may require their securities be sold out by the majority shareholder under certain conditions laid down by the Law of 21 July 2012 on mandatory squeeze-out and sell-out.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Generally, shareholders do not have appraisal rights by law. Only the members of an SC may resign under certain conditions in the case of a merger. However, the articles of a company can grant shareholders appraisal rights.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for (listed) companies organised under Luxembourg law is one-tier. In this case, a company is only managed by a board of directors, which is vested with the broadest powers to act in the name and on behalf of the company.

The two-tier structure was introduced into Luxembourg corporate law by the Law of 17 August 2006. In a two-tier system, the company is managed by two corporate bodies: a management board, which is in charge of the day-to-day management of the company, and a supervisory board, which is in charge of controlling the management board.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors or the management board can take any action necessary or useful to realise the corporate object of the company, except the powers reserved to the shareholders’ meeting by the articles of association or by law. Any limitations to the powers of the board of directors or the management board resulting either from the company’s articles or from a decision of the competent corporate bodies are not enforceable towards third parties, even if they are published.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors or the management board represents the company. The directors or the members of the management board must act with loyalty, honesty and in good faith for the exclusive benefit and in the corporate interest of the company. The notion of corporate interest is thereby not limited to the interests of the shareholders, but also entails the interests of employees, minority shareholders, third parties and creditors.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The liability of the directors or the members of the management board and of the supervisory board in the performance of their mandate is conceived as a contractual liability with regard to the company. The shareholders cannot sue the directors as individuals; it must be a collective decision.

However, there is an exception to this general rule. Where there is a violation of Luxembourg corporate law or a violation of the articles of association of the company, the directors, the members of the management board and the supervisory board are jointly and severally liable with regard to the company and any third parties, including individual shareholders, if the individual shareholders or third parties have suffered a distinct and independent prejudice. The directors and the members of the management committee shall be discharged from such liability in the case of a violation to which they were not a party provided no misconduct is attributable to them and they have reported such violation, as regards members of the board of directors, to the first general meeting and, as regards members of the management committee, during the first meeting of the board of directors after they had acquired knowledge thereof.

The foregoing rules do not restrict the ability of the company’s individual shareholders and third parties to sue on the basis of general tort rules when the directors have engaged in tortious conduct (as opposed to a mere management fault).

19 Care and prudence

Do the board’s duties include a care or prudence element?

The directors or the members of the management board must exercise their duties with as much care, diligence and skill as would be displayed by a reasonable person in the same circumstances. If the directors or the members of the management board are professionals, one might expect a higher standard, namely that which would be displayed by a reasonably competent member of the same profession.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The standard of care is that of a reasonable person acting in the same circumstances. Hence, if the director or the member of the management board is a professional, a higher standard of care (customary for such profession) can be expected.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board of directors or the management board may delegate the day-to-day management of the company and the power to represent the company to one or more directors, members of the management board as the case may be, managers, officers, or other agents acting either alone or jointly, except such persons who are members of the supervisory board (two-tier system). If authorised by the articles of association of the company, the board of directors may also delegate its management powers to a management committee or to a managing executive officer. However, such delegation may not comprise the general policy of the company or the whole of the actions reserved to the board of directors pursuant to the law.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The Companies Act does not contain any provisions on independent directors. It merely states that directors are obliged to report any conflict of interest to the board of directors and subsequently to the next general meeting.

The LSE Principles recommend having an appropriate number of independent directors depending on the nature of the company’s business activities and on the structure of its shareholder base. The guideline recommends having at least two independent directors. To be considered independent, a director must not have any significant business relationship with the company, close family relationship with any executive manager, or any other relationship with the company, its controlling shareholders or executive managers that is liable to impair the independence of the director’s judgement.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The Companies Act does not contain any provisions on the criteria that an individual director or the board as a whole must fulfil or related disclosure requirements.

Depending on the corporate form, the board of directors submits to different rules relating to the minimum number of seats. For example:

• an SA may be managed by one director as long as it has a single shareholder. In the case of plurality of shareholders, the SA shall be managed by a board of directors comprising at least three directors, irrespective of whether they are shareholders; and

• an SARL shall be managed by one or several managers appointed by the shareholders’ general meeting. If several managers are appointed, they may constitute a board of managers, irrespective of whether they are shareholders.

The size of the board is determined by the shareholders’ general meeting in accordance with the Companies Act and the articles of association. The Companies Act does not define a maximum number of seats.

The shareholders’ general meeting has the power to appoint directors on newly created directorships. Besides the general meeting in case of a vacancy, the board of directors of an SA has the power to co-opt a temporary director whose mandate shall be confirmed at the next general meeting.

The LSE Principles recommend that the board is composed of competent, honest and qualified persons. In their backgrounds and diversity, the members of the board represent a contrast of experiences and knowledge and, as far as possible, the board should have an appropriate representation of both genders, as well as geographical origin. In order to ensure effective deliberation and decision-making, a maximum of 16 directors may be considered as a reasonable limit. A list of the board members should be disclosed in the corporate governance chapter of the company’s annual report, which shall contain information regarding each board member’s level of independence. Every director shall undertake to dedicate the time and attention required to his or her duties and to limit the number of his or her other professional commitments to the extent required to be able to fulfil his or her duties properly.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The combination of the function of board chairman and CEO is not regulated by the Companies Act. The LSE Principles recommend that the board shall make a clear distinction between the duties and responsibilities of its chairman and the CEO and set this out in writing.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The board of directors may decide to create committees. The composition and the duties of such committees shall be determined by the board of directors and they shall exercise their activities under the responsibility of the board of directors. Companies that constitute ‘public interest entities’ in the sense of the Law of 23 July 2016, such as listed companies, credit institutions, insurance undertakings and pension funds, shall have an audit committee.

The LSE Principles provide in general terms that the board of directors shall ensure the setting up of special committees necessary in order to review specific issues determined and to advise the board of directors on these issues. Special committees shall be composed of at least three members. In addition, the LSE Principles recommend that the board shall establish an audit committee to assist in the areas of financial reporting, internal control and risk management; a nomination committee to assist in the selection of directors; and a remuneration committee to assist, among others, in drawing up of a remuneration policy, assess the performance of the executive management and submit proposals regarding their remuneration.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There must be at least one board meeting a year to approve the annual accounts and to convene the annual general meeting of shareholders. The Companies Act does not set a minimum number of board meetings a year, except for European companies where the board of directors or the management board shall meet at least once every three months at intervals laid down by the articles of association of the company to discuss the progress and foreseeable development of the business of the company.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

For listed companies, Appendix B of the LSE Principles sets out transparency requirements regarding the main aspects of the company’s corporate governance policy, such as a description of the company’s governance structure; the essential features of the corporate governance framework; the policy established by the board regarding transactions in the company’s securities and other contractual relationships; and a description of the risk management system.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Directors, as such, are not employees of the company and so general rules on mandates and corporate law will apply. The only rule to mention is on conflicts of interest (see question 22). In the event that directors should receive remuneration, this can be determined either by the articles of the company, by the directors themselves or by the general meeting. If the articles are silent on this topic, the general meeting has the right to decide on remuneration and to determine the modalities. The LSE Principles recommend the setting up of a remuneration committee to deal with these issues. Directors may not be appointed for a period exceeding six years but are eligible for reappointment after this period.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Senior management will normally be employees of the company. As such, the relationship is governed by Luxembourg labour law. The LSE Principles on remuneration policies will also apply if the company is listed.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Directors can have their potential liability insured with an insurance company. Such insurance contract is, in practice, often concluded by the company itself and covers the company’s regularly appointed directors. The insurance will cover the liability of the directors towards the company and third parties as well as the liability resulting from a management fault, a violation of the Companies Act or of the articles of association and from torts.

However, as a general matter, insurance law disallows claims if the damage was caused by a serious mistake, such as gross negligence or a wilful act of the insured.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Luxembourg law does not allow contractual limitations on directors’ liability or an arrangement between the company and its directors that, without actually limiting the liability of the directors, would have the same effect. Such indemnification arrangement would have the effect of excluding the company from the group of persons who by law are given the right to bring an action against the directors, which is illegal.

The situation is different if the company only agrees to indemnify the directors in the case of a third-party action against the directors. Third parties include the shareholders if, and to the extent, they have personally suffered from damage caused to the company. Far from affecting the composition of the group of persons entitled by law to bring an action against the directors, such an indemnification arrangement merely shifts some risk from the directors to the company.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Shareholders may not preclude or limit the liability of directors and officers towards the company or other shareholders but may agree that directors and officers are not liable towards themselves (see also question 31).

33 Employees

What role do employees play in corporate governance?

The board of directors of an SA employing at least 1,000 employees over a three-year period must be composed of a minimum of nine directors, one-third of whom shall represent personnel. Also, undertakings employing at least 150 employees over a three-year period must have a joint-works council, which has the right to be informed and consulted in certain defined cases, for example, in decisions that have a significant influence on the company’s structure or level of employment. Nonetheless, such provisions related to the joint-works council should be abrogated in the coming months.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

In accordance with the LSE Principles (which are applicable to listed companies only), the board of directors is required to discuss its operation, the effective fulfilment of its remit and compliance with good governance rules at least once every two years.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The articles of association and all amendments thereto are filed with the Register of Commerce and Companies and are published in the Official Gazette.

However, only extracts of the instruments or the deeds establishing SNCs, SCSs and special limited partnerships (SCSps) shall be published. The extract must contain, on pain of being declared inadmissible, some particulars such as:

• a precise designation of the members who are jointly and severally liable;

• the firm name or the denomination of the company, its object and the place where its registered office is located;

• the designation of the managers, their signatory powers and, as regards SNC, the nature and the limits of their powers; and

• the date on which the company commences and the date on which it ends.

The extract of company instruments shall be signed, in the case of notarial deeds, by the notary who retains the complete deed or in the case of private instruments, by all members who are jointly and severally liable.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Luxembourg companies must file their annual accounts and appendices with the Register of Commerce and Companies. This must be done within one month of their approval by the shareholders’ general meeting. In addition, any amendments of the articles of association must be filed. The same applies to resignations and appointments of directors and statutory or agreed independent auditors, as the case may be. Further publication, filing and storage requirements apply to periodic and ongoing information of issuers whose securities are admitted to trading on a regulated market pursuant to the Law of 11 January 2008 on transparency requirements for issuers of securities, as amended. Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse also requires that under certain conditions, inside information may be disclosed to the public.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

The general meeting of shareholders, to be held at least yearly, may resolve on the remuneration of directors. Further, the delegation of the day-to-day management within the one-tier system in favour of a member of the board of directors shall entail the obligation for the board to report each year the delegate’s salary, fees and any advantages granted to the general meeting of shareholders. In addition, the LSE Principles provide for the establishment of a remuneration committee from among the members of the board formulating a remuneration policy for directors and managers. The Law of 19 December 2002 regarding the Register of Commerce and Companies as well as accounting and annual accounts of companies, as amended, provides that the compensation of members of the supervisory board, and members of the board of management or of the board of directors are written on the annex of the annual accounts and only given on a global basis for each category of members.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

The directors are appointed by the shareholders’ general meeting. One or more shareholders who together hold at least 10 per cent of the capital may request that items such as the nomination of a director be put on the agenda. Such a request needs to be sent to the company at least five days before the general meeting.

The Law of 24 May 2011 reduces the aforementioned threshold to a minimum of 5 per cent of the capital in the case of listed companies. The request must reach the listed company at the latest on the 22nd day preceding the date of the meeting and the company must make a revised agenda available at the latest on the 15th day preceding the meeting. As a result, shareholders who are allowed to nominate directors may have their appointment included in the relevant convening notices and powers of attorney at the company’s expense.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Shareholders are invited to play an active role in the life of the company. Shareholders’ meetings shall have the broadest powers to adopt or ratify any action relating to the company. Even if an annual general meeting must be held at least every year in Luxembourg, the shareholders of the company representing one-tenth of the corporate capital may request, at any time, the management board, the board of directors, as the case may be, and the supervisory board and the statutory auditors to convene a general meeting within one month. As already mentioned in question 38, one or more shareholders representing together at least 10 per cent of the corporate capital may request that one or more additional items be put on the agenda of any general meeting.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

In accordance with the LSE Principles, the company shall integrate corporate social responsibility (CSR) aspects in its strategy for the creation of long-term value, and shall describe how the CSR measures are contributing thereto. The company shall present the CRS information in a dedicated report, in a specific section or in an appendix relating to sustainable development. It shall analyse the sustainability of its activities and shall provide clear and transparent non-financial information in support. The board of directors shall regularly consider the company’s non-financial risks, including in particular the social and environmental risks. The company shall publish a methodological memorandum, either in its CSR report or on its website, relating to the way in which significant factors have been identified and data have been established.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The articles of association may authorise the board of directors to delegate its management powers to a managing executive officer. The remuneration of the managing executive officer shall be determined by the articles or, in the absence of provisions in the articles, by the board of directors.

The company is managed by directors who may receive a salary or not. The articles of association may indicate which corporate organ is competent to grant the directors’ remuneration. In the absence of provision in the articles, the general meeting of shareholders may be competent to determine the amount of the remuneration.

The LSE Principles provide that the overall direct and indirect remuneration amounts received due to their position for all non-executive directors and for all executive directors and members of the executive management shall be disclosed in the remuneration report. A distinction shall be drawn between the fixed and variable portions of that remuneration. The company shall disclose the number of shares and options and the conditions of their exercise granted to those same groups of persons. It shall also disclose any other benefits granted, such as benefits in kind, contributions to pension schemes and severance payments.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

In the appointment of directors, the company will pay attention to the appropriate representation of both genders. Except the disclosure of the remuneration report as recommended by the LSE Principles, the company has no legal obligation to disclose specific gender pay gap information.

Update and trends

The LSE Principles have been revised in December 2017 in order to introduce a new principle on CSR. The revised LSE Principles became effective as of 1 January 2018. Therefore, companies will have to implement their CSR policy for the first time this year. From a legal perspective, we expect that companies will consult their advisers in order to ascertain with clarity the extent of their obligations under these revised LSE Principles and accordingly we believe that 2018 will see an increase in activity on this specific aspect.

The question of CSR is part of a broader debate on the issue of sustainability. Sustainability is a topic that will be more and more important in the near future and will become one of the priority items on the agenda to be discussed in board meetings. Indeed, the question of sustainability with its related environmental and social issues will have a non-negligible impact on the competitiveness of companies owing to the reputational risks that they can potentially cause.

In light of the foregoing, we expect interesting upcoming developments on this topic.

Frédéric Lemoine

flemoine@bonnschmitt.net

Chantal Keereman

ckeereman@bonnschmitt.net

148, Avenue de la Faïencerie

L-1511 Luxembourg

Tel: +352 27 855

Fax: +352 27 855 855

www.bonnschmitt.net

Macedonia

Kristijan Polenak and Tatjana Shishkovska

Polenak Law Firm

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The Law on Trade Companies (LTC), published in 2004, and the Securities Law (SL), published in 2005, are recognised as the primary sources of law relating to corporate governance.

The LTC allows for an adjustable structure in trade companies’ management, by letting the company opt between a one-tier or two-tier management structure, subject to the application of mandatory rules for certain joint-stock companies. The LTC is the general law that stipulates the manner of establishment, structure and functioning of the management bodies of the companies. The subsequent changes in the LTC have strengthened the position of the shareholders’ meeting, introduced independent directors and imposed the internal audit, as a separate organisational unit in the companies. With the frequent changes of the LTC, the protection of the shareholders remains the focus. The shareholders’ position is strengthened by granting them the right to challenge the interested-party transaction in a court procedure if, inter alia, the arm’s-length principle in entering such a transaction was not obeyed, as well as by stipulating the requirement for mandatory external auditor’s opinion as one of the conditions for approving an interested-party transaction for listed companies if certain thresholds are met.

The SL regulates the manner and conditions for the issuance and trading with shares, and sets the general legal framework of the capital market and of the licensed market participants, disclosure obligations of joint-stock companies with special reporting obligations, and other issues with regard to shares.

Another important law for corporate governance in Macedonia was the Takeover Law passed in 2002, which applied only to reporting companies. It regulated the manner and conditions for the purchase of shares by a person that has acquired or intends to acquire participation ensuring over 25 per cent of the voting rights deriving from the shares of a reporting company. In May 2013, the new Takeover Law was passed regulating the manner, the conditions and the procedure for takeover of shares issued by listed joint-stock companies and reporting companies, extending its application for a year after the companies delist or no longer meet the requirements for a reporting company. The new Takeover Law introduced thresholds of acquired voting shares of the target company for a mandatory bid. The trigger for a mandatory takeover bid is still acquisition of more than 25 per cent of the voting shares as the control takeover threshold. The additional takeover threshold is set as acquisition of an additional 5 per cent of the voting shares within a period of two years of the successful takeover, and the final takeover threshold is at least 75 per cent of the voting shares of the target company acquired in the takeover procedure, after which the obligation for submission of a takeover bid terminates.

Established as an autonomous and independent regulatory body with public authorisations prescribed by the SL, the Law on Investment Funds and the Takeover Law, the Securities and Exchange Commission (SEC) passed a number of secondary legislation deriving from the laws mentioned above, further regulating the corporate governance.

In addition, the Corporate Governance Code for Companies listed on the Macedonian Stock Exchange (MSE) is based on the OECD Corporate Governance Principles and provides for the ‘best-practice provisions’ for the managers, directors and shareholders of the companies listed on the MSE. Though voluntary in nature, the ‘comply-or-explain’ principle imposes an obligation for the listed companies to explain the level of compliance with the best-practice provisions and the reasons for non-compliance.

The MSE has also prescribed the Listing Rules for the companies, which sets out the basic conditions that have to be met for the listing on the MSE official market, as well as the ongoing disclosure requirements for the listed companies. The SL changes passed in January 2013 reintroduced mandatory listing for joint-stock companies that fall under the criteria set with the MSE Listing Rules. With this step the number of the listed companies, whose corporate governance is affected by the obligation to comply with the MSE Listing Rules and that continuously disclose and notify the MSE for any changes thereof qualified by SL and MSE Listing Rules as price-sensitive information, is significantly increased.

Mandatory listing was introduced as an interim measure to boost the capital market and applies until April 2018. Until then, all the companies that fulfil criteria for mandatory listing determined by the MSE Listing Rules on 31 December 2015 and 31 December 2016 are obliged by 30 April in the following year to file for request for listing on the mandatory-trading tier to the MSE. Furthermore, such companies cannot be excluded from the mandatory listing save in the case of liquidation or bankruptcy.

MSE Listing Rules are mandatory for all listed companies, and any default in complying with the Rules is sanctioned as a misdemeanour. Furthermore, MSE can render measures in case of non-compliance such as a warning and publication of the warning, suspension of the trading of the securities issued by the non-compliant company, transfer of the listed shares from one tier into another lower-trading tier and finally excluding the securities from listing. The last two measures cannot be rendered to listed companies on the mandatory-trading tier.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The assembly of Macedonia adopts the statutory rules on corporate governance, by passing laws on the basis of proposals by the government.

There is no central agency for enforcement of corporate governance rules in Macedonia. Instead, most of the mandatory corporate governance rules are enforced through private litigation in civil courts.

The SEC has certain powers of enforcement in the context of securities trading and the disclosure obligations of reporting companies, taking into consideration its authorisation to monitor the legality and the efficiency of the capital market and the protection of investors’ rights. The SEC acts ex officio or upon reports filed by shareholders or companies. The SL has introduced another mechanism for protection or implementation of the shareholders’ rights related to trade transactions on the MSE, by providing for arbitration. The MSE has adopted the Arbitration Rules for resolving these disputes. Arbitration in settlement of disputes in connection with the company’s charter is also stipulated with the LTC.

The MSE acts as a watchdog for the listed companies. The MSE Listing Rules have vested certain authorisations with the MSE if the listed company does not comply with the disclosure requirements or has contravened the Rules.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

The members of the board of directors in the one-tier system, and the members of the supervisory board in the two-tier system, are elected at the shareholders’ meeting by a majority of the voting shares from the quorum of the meeting, unless a greater majority is stipulated by the charter, in the manner and pursuant to the terms of the charter. If stipulated by the charter, the election of the members of the board of directors or the supervisory board may be carried out by cumulative voting, thus allowing the minority shareholders to have their nominee elected.

Executive members of the company are elected from among the members of the board of directors. The manner of election of the executive members of the board of directors is determined by the company’s charter. The resolution for election of the executive members of the board of directors may be adopted unanimously by all the members of the board of directors. One of the executive members of the board of directors may be appointed as executive director, chief executive officer or with other title that will be compatible with the performance of the function that the executive member of the board of directors has. If the board of directors has more than one executive member, the members of the board of directors, with majority of votes, determine which one of the executive members shall be responsible for employee-related matters and relations with the employees.

If the company opts for a two-tier management system, the management board members are elected by the supervisory board in a procedure stipulated by the company’s charter.

The shareholders’ meeting may remove all the members of the board of directors, the supervisory board or a member thereof prior to the expiry of their term of office. The resolution for removal requires the same majority of the voting shares as in the case of electing these members, unless the company charter stipulates a greater majority. The charter may also stipulate additional terms for adoption of the resolution.

An executive member of the board of directors may be removed at any time by the board of directors, with or without an explanation, in which case the member shall be suspended until the next general meeting at which it shall be decided whether that member will be removed prior to the expiry of the term of office.

Shareholders representing at least one-tenth of the voting shares may request a meeting of the board of directors to be called. The request shall be submitted to the president of the board. If the president fails to call the meeting within 15 days after the filing of the written request, the members of the board of directors may call the meeting in the manner further provided in the LTC, thus allowing for the shareholders to have initiative rather than actual power to convene the meeting.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The LTC makes a clear distinction of the corporate governance roles by vesting the powers of the shareholders’ meeting to only pass resolutions upon issues expressly set out by the LTC or the charter, and excluding matters related to the operational governance or the management of the company’s operations, which are under the competence of the management bodies, unless otherwise determined by the LTC.

The shareholders decide in particular about:

• the amendment of the charter;

• the approval of the annual accounts, financial statements and the annual report on the operations of the company for the preceding business year, and on the distribution of the profits and covering the losses;

• election and removal of members of the board of directors and of the supervisory board;

• approval of the operations and management of the company’s business by the members of the management body and supervisory board;

• alteration of the rights attached to particular types and classes of shares;

• increase or decrease of the company’s principal capital;

• issue of shares and other securities;

• appointment of the certified auditor to audit the financial statements, if the company is obliged to prepare them; and

• transformation of the company into another form of company and reorganisation and termination of the company.

The shareholders’ meeting approves interested-party transactions and major transactions, if the thresholds for these corporate transactions as stipulated for in the LTC or in the company’s charter are met.

There are no matters that are subject to a non-binding shareholder vote; however, the management board (ie, executive members of the board of directors) may differ resolving certain issues relating to corporate governance, which is subject to obtaining prior approval by the board of directors or the supervisory board to the shareholders’ meeting, when the board of directors or the supervisory board fails to grant its consent.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

The ‘one share, one vote’ principle applies to Macedonian joint-stock companies.

Preferred shares with disproportionate voting rights, owned by Macedonia (state-owned shares), may grant specific rights under the condition of their issuance. By the entry into force of the LTC they cannot be transferred to third parties, unless they are converted into common shares.

The company may issue preferred shares as voting shares or as non-voting shares, provided that the total nominal value of the preferred non-voting shares does not exceed 30 per cent of the principal capital of the company. The total nominal value of the preferred shares, including both voting and non-voting shares, cannot exceed the total nominal value of the common shares in the principal capital of the company.

Issuance of shares of the same type that confer different voting rights for an identical nominal value is prohibited.

Limits on the exercise of voting rights are determined within the LTC when the shareholders’ meeting resolves to exempt a shareholder personally from: a liability; payment of a receivable towards the company; or obligations. The shareholders’ meeting may also resolve to grant the shareholder certain advantages or privileges by the company, or initiate court or other proceedings against the shareholder. In such cases, the shareholder cannot exercise its voting right personally or through a proxy representative.

If the shareholders’ meeting is altering or restricting any right deriving from a certain type of shares, such resolution shall be considered valid if the shareholders holding that respective type of share give their consent through the adoption of a resolution for consent, passed with a majority determined by the LTC or the charter. These shareholders may vote or consent at a separate meeting or at the same shareholders’ meeting with other shareholders present, but through a separate vote.

Consent by the owners of preferred shares shall be required for a resolution that cancels a preferential right, as well as for the issue of preferred shares that have priority in the distribution of profit or when making payment of a part of the remainder of the liquidation or bankruptcy estate of the company.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Each shareholder that intends to participate in a shareholders’ meeting is obliged to report its attendance at the meeting (registration for attendance) prior to the commencement of the scheduled meeting, which can occur, at the latest, moments before the meeting is due to start.

A list of registered shareholders is prepared by the management body and it is compared with the excerpt of the book of shares obtained from the Central Securities Depository (CSD) not later than 48 hours prior to the scheduled general meeting. This list is then signed by each present shareholder or his or her proxy representative, and it certifies his or her presence at the meeting (certified participant). Following the certification of the list, the chairman of the shareholders’ meeting shall confirm that the meeting has an operating quorum.

The LTC stipulates the possibility for the reporting companies and listed companies to offer their shareholders at least one of the following means for participation in the shareholders’ meeting:

• direct transmission of the meeting;

• two-way live audio and video communication, which allows shareholders to address the shareholders’ meeting from any remote location; and

• electronic means for voting, before or during the meeting, without the necessity to authorise a proxy who would attend the session.

It can be stipulated in the company’s charter that the voting of the shareholders at the shareholders’ meeting may be performed by phone or another electronic device that is a part of the public communication network. In order to vote in such a way, the following must be determined with absolute certainty: the identity of each shareholder, the voting right, the communication network that will be used between the company and its shareholders that will make the voting available to each shareholder, and the means to record such voting. The shareholder who votes by phone or another electronic device is considered as present at the shareholders’ meeting (ie, he or she will be considered as part of the quorum of the shareholders’ meeting). The voting will be considered as null if the identity of the shareholder who voted by phone or other electronic device cannot be determined.

Voting by way of correspondence prior to the day of the shareholders’ meeting may be made available to the shareholders. Before allowing the shareholders to vote by correspondence, the company may first ask the shareholders to confirm their identity by submitting personal ID documentation in original or copy, and without the obligation for the relevant copy to be certified by notary public or by domestic or foreign state authority. The company may use its own system of registration of shareholders as substitute for the procedure of identification of shareholders described above.

The shareholders are entitled to exercise their voting rights either in person or to delegate them to an authorised proxy by written power of attorney. Unless otherwise stipulated by the LTC, the proxy is given in written form, verified by a notary public. This requirement does not apply in reporting companies and listed companies where shareholders may appoint a proxy in writing without an obligation to verify by a notary. In such a case, the shareholder has to immediately notify the company for granting the proxy, default of which shall be considered that the proxy has not been granted.

In certain cases, the right to vote may not be exercised if the respective decision would lead to a conflict of interests for a particular shareholder, or if the decision concerns a possible claim against that shareholder.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The management body of the company is entitled to convene a shareholders’ meeting, if the interests of the company so require. Though not directly entitled, the shareholders may submit a request to the management body for convening a meeting, if they hold at least one-tenth of the voting shares. The management body decides on the convening of the meeting within eight days of the receipt of such a request. If the request is submitted by shareholders who own a majority of the voting shares, then the failure of the management body or the supervisory board to convene a meeting within 24 hours of the request entitles the shareholders to file a request to the court. The right to convene the shareholders’ meeting by the court is granted to the shareholders if the management body has not decided to commence the meeting within the term of eight days.

Shareholders who individually or jointly own at least 5 per cent of the total number of voting shares may request an amendment to the agenda by adding new agenda items for the convened shareholders’ meeting, while simultaneously providing an explanation for the proposed item or proposing a draft resolution on the proposed item, within eight days from the date of publication of the agenda for the meeting. Such a request cannot be refused, except in certain cases strictly determined by the LTC, such as missing the deadline, or if the item does not fall under the competence of the shareholders’ meeting.

In exercising this right, the shareholders may propose, inter alia, agenda items, resolutions and director nominations to be put to a shareholder vote.

The corporate body that convened the shareholders’ meeting is obliged to send the request for the amendment of the agenda by adding new agenda items for the convened shareholders’ meeting to all shareholders (ie, to publish it in the same manner in which the invitations for convening the shareholders’ meeting were sent).

The body that convened the shareholders’ meeting, that is the person determined by the court to convene the shareholders’ meeting, shall send the request for including one or more points to the agenda of the convened shareholders’ meeting to all shareholders, and shall publish it in the same manner in which the invitations were sent, no later than eight days prior to the date of the shareholders’ meeting.

The LTC provisions governing the convening and holding of shareholders’ meetings in reporting companies and listed companies require for the company to publish, without delay, the agenda and materials for the meeting, including draft resolutions proposed by the shareholders, on its website. The public announcement for convening shareholders’ meetings in reporting companies and listed companies should contain a description of the procedures in accordance with which the shareholders participate and vote at the shareholders’ meeting, and in particular how they can include points in the agenda of the shareholders’ meeting and propose resolutions, how the shareholders can raise questions to the company regarding the points of the agenda of the shareholders’ meeting and information regarding the time period in which they can do so.

A shareholder or a group of shareholders holding at least 10 per cent of the principal capital of the company, based on suspicion of possible irregularities in the keeping of the trade books and the activities of the company (ie, suspicion that the company acts contrary to the provisions of the LTC), has the right to request the management body to convene a shareholders’ meeting of the company. At said meeting, an authorised auditor shall be appointed for performing audit, inspection, certification or related services within the scope of activities of the company regarding which the suspicion has been addressed in the request about the existence of possible irregularities. The shareholders may request the competent court to adopt a decision to appoint an authorised auditor if:

• the shareholders’ meeting is not convened within a period of eight days of the submission of the request referred to above;

• the shareholders’ meeting refuses to appoint an authorised auditor; or

• the shareholders’ meeting fails to adopt a decision for appointing an authorised auditor within a period of 60 days of the submission of the request referred to above.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

The LTC prohibits the controlling shareholder as a parent company from using its influence in order to mislead the subsidiary as a controlled company into undertaking harmful legal affairs, or undertake or fail to undertake actions, unless the parent company assumes the obligation to compensate the controlled company for any damages. If it fails to compensate the company for damages, then the controlling shareholder shall be jointly and severally liable with the controlled company with regard to the third party.

Enforcement action in such a case may be initiated in the name and on behalf of the controlled company or individually by the shareholders, regardless of the damages caused to them resulting from the damages caused to the controlled company.

If the parent company misleads the subsidiary as a controlled company to undertake legal operations or actions, thereby causing irreparable damage or bankruptcy, the parent will be jointly and severally liable for the claims that cannot be collected from the controlled company.

If the controlling shareholder misleads the company into undertaking a legal operation or action, or failing to undertake such an action or operation, thereby causing damage to shareholders of a controlled company, the controlling shareholder and the company shall be jointly and severally liable for the shareholder’s claims.

However, no liability for compensation shall arise if the management of the company has acted with due care and diligence, thus undertaking the legal transaction as any management of an independent company would have undertaken or failed to undertake an equivalent legal transaction or operation without being misled by the controlling shareholder.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders cannot generally be held responsible for the acts or omissions of the company. The company itself is only liable to third parties for the obligation it has incurred with all of its assets. Only in a few exceptional cases, which the LTC singles out as special liability of the shareholders for the obligations of the company, may they be held jointly and severally liable if there is a major violation of good faith principles or the company’s legal form has been used in order to carry out transactions and pursue objectives prohibited to them as individuals, or in an abusive manner to harm creditors, or the company’s assets were used as if they were their own, contrary to the law, or the company’s assets were decreased for their own benefit or for the benefit of a third party when they were aware or should have been aware that the company was not capable of settling its liabilities to third parties.

Piercing the corporate veil, except in these exceptional cases determined by the LTC, is not possible.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Anti-takeover devices are generally not permitted within the scope of the Takeover Law. Before a takeover bid is published, the management may implement a number of measures based on shareholders’ resolutions. These measures are designed to protect the company in the event of a hostile takeover and may include:

• converting ordinary shares into preference shares without voting rights (up to 50 per cent of the registered share capital);

• issuing new preference shares or convertible bonds; and

• providing for increased majority requirements for the removal of members of the management and supervisory boards.

The management body of the target company, in the course of conducting the takeover bid procedure, must act in the interests of the company as a whole and must not dissuade the holders of securities from the possibility of deciding on the advantages of the takeover bid. It should prepare a document expressing its opinion about the effect of the implementation of the bid over the employment and business operations of the company as stated in the takeover bid and the reasons on the basis of which it is adopted.

Once a takeover bid is published, and the management receives notification from the bidder, the Takeover Law imposes restrictions on the actions of the management body of the target company, by prohibiting, without a resolution passed by at least a three-quarters majority of the shareholders votes that represent the principal capital of the company at the time of the adoption of the resolution:

• an increase in its principal capital;

• the undertaking of activities other than the company’s regular operations;

• the undertaking of activities that might jeopardise the company’s future operations;

• the acquiring of treasury shares or securities resulting in the right to exchange or acquire treasury shares; and

• the performance activities that have the sole purpose to obstruct or aggravate the procedure and acceptance of the takeover bid.

The resolutions of the management on matters stipulated above adopted before the announcement of the intention to take over that are not completely implemented require additional approval by the shareholders’ meeting of the target company before their implementation by at least a three-quarters majority of the shareholders’ votes representing the registered principal capital, except in the case of resolutions that fall under the ordinary course of business of the company and whose implementation does not obstruct or aggravate the takeover bid.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

If provided in the company’s charter, the management body may be authorised to increase the principal capital up to a certain nominal value (authorised capital) by the issue of new shares, for a maximum period of five years following the registration of the company’s foundation, or five years following the entry of the resolution to amend the charter in the trade registry if such possibility was not stipulated by the charter.

The nominal value of the authorised capital may not exceed half of the principal capital at the time when the authorisation for the conditional increase of the principal capital was granted.

New shares may be issued only if the consent of the majority of the non-executive board of directors’ members or the majority of the supervisory board members is provided. In such a case, it is the provision in the company’s charter that has the legal effect of a resolution to increase the capital.

A pre-emptive right to subscribe for new shares exists in the LTC; however, the implementation of these provisions is postponed until Macedonia assumes full membership in the European Union. Therefore, for the time being, in general, the shareholders do not have a pre-emptive right to acquire newly issued shares. This right is granted in a limited number of cases, for example, when the shares are issued as a private offer if the assumptions stipulated in the law are met.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The LTC stipulates that shares are unlimitedly transferable and free to be traded with at the secondary securities market.

There are no statutory restrictions on the possibility to transfer shares, provided that encumbrances registered in the account of the shareholder maintained by the CSD may contain such restriction.

There are certain regulatory requirements that have to be met in order to have a valid and legal transfer, such as that the trade transactions should be carried out on the MSE, or requested documents for execution of non-trading transfers to the CSD must be presented.

Any encumbrance on shares restricting ownership rights and changes in the shares ownership rights are recorded in the CSD in the account of the shareholder, and may arise only from the act of issuance, a pledge, an effective court decision, an act of the SEC or an act issued by the Public Revenue Office.

Only shares that are free of any liens and restrictions may be the subject of settlement of transactions, except when the restriction applies to voting rights or dividends or another restriction that is not related to disposition and that is limited by a decision of a competent authority or an authorised person. If any right arising from the ownership of securities is restricted and evidenced in the shareholders’ book maintained by the CSD, such securities may not be part of the procedure of clearance and settlement.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

There are no compulsory share repurchase rules, save in the case of exercising dissenters’ shareholder rights in the case of a merger, accession and division, and during transformation of the company, when the company is obliged to repurchase the shares of the shareholders who have not accepted the offer to receive shares, as a mandatory buyback.

The company may acquire treasury shares by way of repurchase, either itself or through a third party acting in its name but on behalf of the company, the validity of which is subject to the following conditions:

• a resolution for the acquisition of shares by repurchase should be granted by the shareholders’ meeting, determining the manner of repurchase, the maximum number of shares to be acquired, the time period in which the repurchase shall be executed, which shall not be longer than a year from the date of adopting the resolution on the acquisition of the company’s treasury shares, and the minimum and maximum value that may be paid for the shares;

• the nominal value of the acquired shares, including the shares the company has previously acquired or which are in possession of the company, shall not exceed one-tenth of the principal capital;

• the acquisition of the company’s treasury shares shall not lead to the decrease of the assets of the company below the amount of the principal capital and the reserves, which, pursuant to the law or the charter, the company is obliged to maintain, and which shall not be used for payments to the shareholders; and

• only shares fully paid may be acquired via repurchase.

As an exemption, the company may acquire treasury shares when such acquisition is necessary in order to prevent serious and imminent damage to the company. The management body is authorised to adopt the resolution on such acquisition and is obliged to inform the shareholders’ meeting at its next meeting of the reasons and the objectives of the implemented acquisition of treasury shares.

The share repurchase shall be carried out without application of the requirements determined above:

• if, on the basis of a resolution of the shareholders’ meeting, the withdrawal of the shares is carried out in connection with the procedure for decrease of the principal capital;

• free of charge or when a bank, investment fund or other financial institution purchases shares in its own name out of the commission obtained from the purchase of the shares;

• as a consequence of the universal succession of the assets;

• in the enforcement procedure for settling of a company’s claim on the basis of a court decision;

• in the case of a merger, accession and division, and during transformation of the company, if the company is obliged to repurchase the shares of the shareholders who have not accepted the offer to receive shares (mandatory buyback);

• in the case of exclusion of a shareholder;

• on the basis of an obligation stipulated in law or on the basis of a court decision; and

• as compensation for a debt or in a procedure of reorganisation of the debtor in accordance with the Law on Bankruptcy.

The company may be authorised by its charter to issue shares with the right of the company to repurchase such issued shares within a certain time period. The repurchase shall be valid if the following conditions are met:

• the terms and the manner of repurchase must be stipulated by the company charter;

• the shareholders’ meeting shall adopt a resolution on the repurchase of such shares prior to their subscription;

• the shares should be paid up in full;

• the repurchase shall only be effected by funds that exceed the amount of the principal capital plus the reserves that may not be distributed to the shareholders under the LTC and the charter; and

• an amount that is not less than the nominal value of the issued shares shall be set aside into a reserve that shall not be distributed, under the LTC and the charter, except in the case of a decrease of the principal capital.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Under the LTC, shareholders have appraisal rights in certain situations – in the procedure for reorganisation of the company and the transformation of the company.

In certain cases of company reorganisation (acquisitions and mergers) and changes of legal form, a shareholder can sell his or her shares to the reorganised company for an appropriate cash compensation if the shareholder has formally objected to the reorganisation on the shareholders’ meeting. A company shall buy back the shares at a price based on the adopted balance sheet as determined in the resolution for the transformation of a company (offered price) from a shareholder who, by way of a written statement, objected to the reorganisation of the company.

In a case of reorganisation, the shareholders are entitled to a court examination of the exchange ratio if the ratio has been determined to be too low, in which an additional payment may be requested that shall not exceed 10 per cent of the nominal value of the exchanged shares.

The adequacy of the cash compensation must be reviewed by the official auditor of the reorganisation.

Any dissenting shareholder can file an application with the court in order to assess the appropriate sum.

In squeeze-out proceedings, the minority shareholders must be granted appropriate compensation for their shares, under the same conditions under which the takeover was carried out.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for listed companies is the one-tier structure.

Of the 107 companies listed on the MSE, 66 have a one-tier management system and the other 41 have a two-tier management system.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors manages the company within the scope of the authorisations provided for by the law and the charter and the authorisations expressly granted by the shareholders’ meeting. The board of directors has the broadest authorisations in managing the company within its scope of operations and acts, in all circumstances, on behalf of the company, except for matters falling within the authorisations explicitly granted to its non-executive members.

With the exception of the authorisations explicitly granted to the board of directors pursuant to the law, the executive members manage the company’s operations and have the broadest authorisations to undertake all matters related to the management, implementation of the board of directors’ resolutions and execution of the day-to-day activities of the company, as well as to act on behalf of the company in all circumstances. The board of directors entrusts the representation of the company in relations with third parties to its executive members. The non-executive members, in addition to the authorisations provided for by the LTC concerning the exercise of the right of supervision over the executive members’ management, is entitled to inspect and verify the books and documents of the company as well as its assets and, in particular, the petty cash of the company and its securities and goods.

In the two-tier management system, the management board undertakes all matters related to the management, the implementation of resolutions and the execution of the day-to-day activities of the company, as well as acting on behalf of the company in all circumstances, while the supervisory function is vested in the supervisory board.

There are certain issues that the executive members (ie, the management board) cannot resolve without obtaining prior consent of the board of directors or supervisory board, respectively. These concern the registered scope of activities or the establishment or termination of long-term cooperation or capital investments that involve more than 10 per cent of the income of the company, as well as essential internal organisational changes in the company, establishment and termination of branch offices, decrease or expansion of the scope of business operations and establishment and termination of a trade company participating in the principal capital of the company with more than one-tenth in the principal capital of the company.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The management board (ie, the executive members of the board of directors) represents the company in relation to third parties while the supervisory board (ie, the non-executive members of the board of directors) represents the company in relation to its management board (the executive members). All members of the management board (ie, the board of directors) are under a general duty to manage the company with the due care of a prudent and diligent manager and in the best interests of the company and all the shareholders. The supervisory board is also under a general duty to control the management, which it owes to the company and its shareholders.

The duties of the management board and of the supervisory board (ie, the board of directors) are primarily owed to the company and are carried out in the interests of all shareholders.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Members of the management body who violate their legal duties by failing to apply the care of a prudent and diligent manager are jointly and severally liable to the company for damages caused, unless the respective action was based on a legal and valid resolution of the general meeting, or the member of the management body has opposed such a resolution and voted against the course of action. Under specific conditions stipulated in the LTC, shareholders may file for a claim for the damages suffered by the company by the management bodies. The non-executive members of the board of directors, or the members of the supervisory board, shall be jointly and severally liable with the executive members of the board of directors or the members of the management board for the damage caused, if they failed to act with due care and diligence when giving their prior consent.

Neither the management body nor the supervisory board, however, can be held liable for the poor performance of the company based on entrepreneurial business decisions taken with the due care of responsible managers, even if these decisions subsequently turn out to be failures (business judgement rules).

19 Care and prudence

Do the board’s duties include a care or prudence element?

All members of the management bodies are under a general duty to fulfil their duties pursuant to the authorisations granted to them by the law or charter, in the interests of the company and all the shareholders with the due care of a prudent and diligent manager.

Set as a legal standard, due care and diligence determines the responsibilities of persons in charge of the management and supervision of companies and the care that these persons should apply while executing entrusted tasks in the company and the requirement that they act in a diligent manner (in the operations of the company) as skilled (professional) persons, pursuant to which they shall be liable for negligent behaviour while executing operations with which they have been entrusted, unless another law specifies that they shall only be liable for gross negligence.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Formally, all members of the management bodies represent and manage the company collectively and are jointly responsible for all business areas, irrespective of individual skills and experience. Internally, however, the members of the management bodies are in most cases entrusted with different operational responsibilities.

The Corporate Governance Code recommends making a provision for the division of duties within the management body or the supervisory board and describing the procedure of the management body or the supervisory board in the charter and other acts of the company. Also, it is recommended that the board of directors or the supervisory board should include in its regulations a paragraph dealing with its relations with the management board or executive directors, the external certified auditor and the shareholders’ meeting.

It further recommends that the management body or the supervisory board defines and proposes a profile of its members and the size and composition of the management body or the supervisory board, taking into account the nature of the business, its activities and the desired expertise and background of members of the management body or the supervisory board. At least one of the non-executive members of the board of directors or one member of the supervisory board must be a financial expert. The annual report should disclose the name of this member of the management body or supervisory board.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

A member of the management body or supervisory board may not transfer his or her authorisations to another member of the management body or supervisory board.

When performing duties granted pursuant to the law and the company’s charter, the member of the management body or the supervisory board may rely on information, opinions or reports prepared by independent legal advisers, independent authorised accountants and certified auditors and other persons, believed to be trustworthy and competent for the matters they perform, but this shall not exempt the member from the obligation to act with due care and diligence.

The executive members of the board of directors manage the operations of the company and have the broadest authorisations to undertake all matters related to the management, implementation of the decisions of the board of directors and realisation of the day-to-day activities of the company (save for the authorisations explicitly awarded to the board of directors in accordance with the LTC) and act on behalf of the company in all circumstances. For the purpose of exercising these authorisations, the executive members can appoint managerial persons who shall run the daily management of the activities of the company, in accordance with the decisions, directions and orders of the executive members of the board of directors.

In a two-tier management system, the members of the management board jointly represent the company in its relations with third parties, unless otherwise determined by the company’s charter. The management board, with an approval of the supervisory board, can authorise one or more members of the management board to represent the company. In that case, the other members of the management board shall be excluded from the representation. The supervisory board can at any time revoke the representation authorisation.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

A board of directors may have a minimum of three and a maximum of 15 members. The general rule is for non-executive members to outnumber executive members. If the board of directors has up to four non-executive members, at least one of them shall be an independent member. If the board of directors has more than four non-executive members, at least a quarter of them shall be independent members of the board of directors. The same ratio applies for the supervisory board structure.

‘Independent non-executive member’ means a natural person who, along with their family members:

• has not had any material interest or business relation with the company directly as a business partner, a member of the management body, supervisory body or an officer of the company within the five preceding years;

• has not, within the five preceding years, received and does not receive from the company any additional income to his or her salary;

• is not related to any of the members of the management body, supervisory board or the officers of the company; and

• is not a shareholder who owns more than one-tenth of the shares in the company or who represents such a shareholder.

The definition of the ‘non-executive member of the board of directors’ stipulates that such a member is a natural person, a member of the board of directors who has no executive function in the company and whose powers refer primarily to the general governance and supervision over the management of the company.

General governance and supervision over the management of the company is the distinction with the responsibilities of the executive directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

A board of directors may have a minimum of three and a maximum of 15 members, while in the one-tier management system, the number of the members of the management board and the supervisory board is at least three and at most 11 members in each management board and the supervisory board. Notwithstanding the above, the companies that have principal capital lower than €150,000 may appoint a manager instead of a management board. The structure of the board of directors (ie, the management board and the supervisory board) is determined by the company’s charter.

Prior to the election of a member of the board of directors or the supervisory board, certain disclosure requirements should be met by publishing, in writing, data regarding the age, gender, education and other professional qualifications, working experience and how it was gained, in which companies he or she is or has been a member of the management body or the supervisory board and other important positions held by him or her, the number of shares he or she owns in the company and in other companies, as well as loans and other liabilities owed towards the company.

Members of the management bodies of the reporting companies have an obligation to disclose to the SEC any shareholding they have in the company, as well as any further changes by submitting an ownership report.

Listed companies have further disclosure requirements for their members of the management bodies, related to the number of shares with voting rights as well as the percentage of the total number of shares issued by the company that they represent, within 14 days of their election, as well as ongoing disclosure requirements for the sale of company shares by the members of the management bodies of the value of €10,000 or higher during one trading day, the cumulative value of all purchases (or sales) of shares of the value of €10,000 or more within 30 calendar days, and every purchase or sale of shares representing 0.5 per cent of the total voting shares of the company.

The Central Registry of the Republic of Macedonia maintains a register on persons who cannot be members of management bodies. The negative criteria imposed by the LTC, which are the basis for entry in this registry, are related to previous managing functions in insolvent companies until bankruptcy proceedings have been initiated, as well as anyone who has been found guilty with enforceable court decisions of false bankruptcy or damaging creditors and who have been punished with a ban on performing such an activity, profession or duty, while the legal consequences of such a ban are still in force.

If certain members of the board of directors, that is the supervisory board, stop to perform their duties during their mandate, or there is an obstacle to their performing their duties, the other members continue with the work of the relevant board until the fulfilment of the empty spot by the shareholders’ meeting. If the number of members of the board of directors that is the supervisory board is decreased under the minimum determined with the charter, but no lower than the minimum required by the law, the board of directors that is the supervisory board may, in the period of 90 days from the day of termination of the function of the relevant member, fill the empty spot by the appointment of an acting director – a member of the board of directors that is the supervisory board until the following shareholders’ meeting. The resolutions passed by the board of directors (the supervisory board) during this period shall remain valid. If the number of members of the board of directors (supervisory board) decreases below the minimum required by law, the remaining members must, within a period of three days, convene a shareholders’ meeting in order for the number of members of the board of directors (supervisory board) to be in accordance with the law. If the shareholders’ meeting is not convened in this three-day period, then the meeting shall be convened by the non-executive members of the board of directors (that is the management board), within a period of three days from the expiry of the previously given period. If the number of the members of the board of directors (supervisory board) is not filled in the manner described above and within the deadlines provided by law, then any person with legal interest may request the court to appoint an individual who will convene the shareholders’ meeting for appointment of a member of the board of directors (supervisory board).

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Corporate governance rules in Macedonia require separation of the functions of board chairman and CEO. In companies with a one-tier management system, the president of the board of directors (board chairman) is elected from the non-executive members of the board of directors. One of the executive members of the board of directors may bear the title that is typically associated with the performance of his or her duties (general director, or chief executive director, or other appropriate titles), and the other executive members may bear the title that is typically associated with the performance of their duties, entrusted to them as executive members of the board of directors.

In the two-tier management system, the management board and the supervisory board have their own presidents. The president of the management board, appointed by the supervisory board, coordinates the work of the management board and assumes certain representative functions, and has a casting vote in the case of a tie, unless otherwise stipulated in the company’s charter.

The company’s charter may provide for additional rights and responsibilities of the presidents of the managing bodies and the supervisory board.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

In accordance with the LTC, the management body or the supervisory board may establish one or more committees from among its members and other persons. The committees shall neither decide on issues falling under the competence of the management body or the supervisory board, nor shall their rights and liabilities be transferable. The composition, terms, the scope and the manner of operations of such committees shall be regulated in detail by the charter and the by-laws of the company adopted in accordance with the charter. All activities of the committees shall be subject to approval by the management body or the supervisory board.

The Corporate Governance Code entitles the board of directors or the supervisory board to consider whether to appoint a selection and nomination committee, an audit committee and a remuneration committee. Its best-practice provisions stipulate that the members of the committees appointed by the board of directors or the supervisory board cannot be executive members of the board of directors or management board members. Within the committees, at least one of the members is an independent member of the board of directors or the supervisory board.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The LTC obliges the board of directors and the supervisory board to convene at least four regular meetings during the year, one every three months, provided that one of the meetings is convened within one month prior to convening the annual general meeting of shareholders.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The board of directors and the supervisory board must present a written report to the annual general meeting of the shareholders setting forth, inter alia, how and to what extent it has supervised the activities of the management body during the business year.

The executive members of the board of directors and the members of the management board submit a written report on the operations of the company to the board of directors or the supervisory board at least once every three months and they shall also submit annual accounts, annual financial statements and an annual report on the company’s operations, following the expiry of the business year.

Upon request by the non-executive members of the board of directors or the supervisory board, the executive members of the board of directors and the members of the management board shall prepare a special report on the state of affairs of the company or on particular issues related to its operations.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The statutory provisions determine that the shareholders’ meeting must pass a resolution specifying the monthly lump sum or lump sum per meeting of the non-executive members of the board of directors or the supervisory board members. The non-executive members of the board of directors or the supervisory board members have the right to reimbursement of all their expenses incurred (travel and other expenses), a right to life insurance and other types of insurance, as well as other rights related to the performance of their function (usage of the business premises, necessary assets for operation, etc).

The executive members of the board of directors and the members of the management board are entitled to a salary, or a monthly remuneration, a right to life insurance and other types of insurance, compensation of travel and other expenses and other rights. The executive members of the board of directors and the members of the management board may enter into managerial agreement with the company, determining in more detail their rights and obligations. Regarding specially entrusted matters, performed for the company by a member of the management body or a member of the board of directors, an additional bonus may be granted to that member and paid out of the operating costs.

The company may not grant a credit to a member of the management body or the supervisory board, their close family members, or to a member of the management body or the supervisory board of a controlled company or to their close family members. The prohibition shall not apply to the obligations assumed by the company pursuant to the managerial agreement if a resolution has been approved by the shareholders’ meeting to this effect with a two-thirds majority of the voting shares represented at the general meeting.

Members of the management bodies and supervisory board members are elected for a term as stipulated in the company charter, which cannot be longer than six years. If the company charter does not stipulate the term of office, then it is a legal assumption that they are elected for a term of four years. Each of the members may be re-elected, regardless of the number of terms of office they have been previously elected for, unless otherwise determined by the company’s charter.

Transactions between the company in which the members of the management bodies and the supervisory board members have an interest are considered interested-party transactions, for which a special corporate approval procedure applies. A default in the procedure for approving the transaction may lead to its nullity, and exposes the interested parties to liability for damages if the transaction is proved to be harmful for the company.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

There are no requirements regarding the remuneration of senior management. The company cannot grant credit to members of the board of directors, the supervisory or management board or their close family members. Exceptions are stipulated obligations undertaken with the managerial agreement, confirmed by a resolution of the shareholders’ meeting, with a two-thirds majority of the votes.

Transactions between the company and senior managers are subject to interested-party transaction provisions. General conflict-of-interest provisions apply.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

The company may agree to pay insurance premiums as part of its contractual arrangements with the directors or officers. Liability insurance is not restricted but is rare in practice. It is also subject to the availability of products by the local insurance companies.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Generally, only the company can be held liable by third parties for the actions of its management on behalf of the company. Personal liability of management body members in relation to third parties is very rare and mainly limited to damages from tort and breach of certain statutory management duties with gross negligence.

If a member of the management body grossly violates his or her obligation to act with due care and diligence, the creditors of the company may request compensation for damages if they fail to settle their claims against the company.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The LTC stipulates joint and several liability of the management body members for the damage caused as joint debtors towards the company if they violate their obligations and fail to operate and act with due care and diligence. If a member of the management body grossly violates his or her obligation to act with due care and diligence, the creditors of the company may request compensation for damages if they fail to settle their claims against the company. The non-executive members of the board of directors or the members of the supervisory board shall be jointly and severally liable with the executive members of the board of directors or the members of the management board for the damage caused if they failed to act with due care and diligence when giving their prior consent.

Liability in relation to the company cannot be precluded or limited, either in the charter or in a private agreement.

However, the member of the management body who acted on the basis of a resolution adopted by the shareholders’ meeting although he or she had pointed out that the resolution was contrary to the law, as well as the member of the management body who objected to the resolution by setting out his or her opinion in the minutes of the meeting of the management body in a separate manner and voting against the resolution, shall not be held liable.

Under the Law on Obligations, the company is liable towards third parties for the damage cause by its management bodies in the performance of their functions in the management of the company. If the damage is caused by wilful action or gross negligence, the company is entitled to compensation from the member of the management bodies who caused the damage to the third party.

Further, the liability of employees in relation to their company can be limited as long as the employee acts within his or her professional capacity. If these conditions are met, an employee can also be entitled to be discharged from third-party liability by the company. If the damage is caused by wilful action or gross negligence, the company is entitled to compensation from the employee who caused the damage to the third party. Because members of the management bodies (executive members or the management board members) are usually employees of the company, these principles apply to them.

33 Employees

What role do employees play in corporate governance?

When determining the management systems of the joint-stock company, the LTC stipulates that the participation of the employees in the management of the company shall be stipulated by law.

However, there is no such law adopted as yet, therefore the employees’ participation in the corporate governance is not yet regulated by Macedonian law.

There are provisions in the LTC that stipulate the possibility for the company in its charter to create a fund from which the employees can acquire shares in the company for free or at a discount price, up to one-tenth of the principal capital of the company. This option for the companies has been effective since 1 January 2012, and it was intended to have employees as active participants in the shareholding structure of the company through their participation in and voting at the shareholders’ meeting. However, up to the present time, there is no relevant practice to show whether this provision has been implemented by companies.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Corporate Governance Code for Companies listed on the MSE through its ‘best-practice provisions’ encourages periodical self-evaluation of the members of the management and supervisory board (ie, the board of directors) in listed companies.

There is no requirement to publicly disclose anything in relation to such evaluations.

In any case, the shareholders have the final say in evaluation of the members of the management body as a whole and for each member individually. The annual shareholders’ meeting is obliged to decide on approving the work and the management of the company by the members of the management body and the work of the members of the supervisory board. Voting on the approval of the work of members of the company’s management bodies is done separately for each member of the management bodies.

If the annual shareholders’ meeting does not approve the work of the management body or supervisory board or the work of the members thereof, it can decide to elect all the members of the management body or elect new members of these bodies to replace those whose work was not approved. This decision must be made at the same annual meeting.

Listed companies are obliged to publish the decisions on approval or non-approval of the work of the management body adopted at the shareholders’ meeting on the MSE.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The company is obliged to keep the charter and the other by-laws and all amendments thereto along with the consolidated texts at the company’s premises, and each shareholder is entitled to inspect the corporate documents of the company, in a manner set forth in the company charter.

A copy of the company charter may be obtained from the trade registry maintained by the Central Registry; however, there is no requirement to publicly disclose the by-laws of the companies.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The disclosure requirements of a company depend on the status the company has in accordance with the SL, whether it is a listed company, reporting company or joint-stock company that is not registered in the register of joint-stock companies with special reporting obligations maintained by SEC.

The information reporting companies disclose includes:

• the annual financial statements, the management reports and interim reports;

• the issuance of a new shares and dividends policy;

• information on certain shareholding thresholds being exceeded by a single shareholder (5 per cent of the voting shares), and information regarding the members of the management bodies, including their respective percentage ownership in the principal capital; and

• information about interested-party transactions entered into by members of the management board or the supervisory board and the affiliated entities of the company.

Reporting companies comply with the disclosure requirements by submitting to the SEC annual and semi-annual reports. Such a company must also immediately disclose any price-sensitive information, that is, all circumstances that are not yet public knowledge, but that may have a significant influence on the share price if they become public information (ad hoc disclosure). Listed companies must annually deliver to the MSE a comprehensive report outlining whether and to what extent the company complies with the recommendations of the Corporate Governance Code, and give reasons in the case that recommendations were not applied (compliance statement).

In general, listed companies are obliged to immediately publish:

• certain information on business operations (eg, signing or cancelling a significant contract that has a value of 10 per cent or more of the capital of the company, determined on the basis of the last audited annual financial statements);

• certain information related to the capital (increase or decrease of the principal capital, change of the rights deriving from the issued shares, etc);

• important changes in their financial situation (acquisition or disposal of 5 per cent or more of the assets of the company determined on the basis of the last audited annual financial statements, adopted decisions regarding interested parties transactions and the opinion of the auditor, if the value of the transaction or the cumulative value of interconnected transactions over the past 12 months is or exceeds 10 per cent of the assets of the company, etc);

• their dividend calendar;

• notifications regarding publicly held shares; and

• notifications regarding the shareholders’ meeting.

These companies should further publish a notification regarding all changes in ownership in which certain owners have acquired 5 per cent of the voting shares. This notification must state the identity of the new owners, the number of shares and the new percentage of voting rights. The LTC further stipulates that listed companies must publish a notification on every performed interested-party transaction, in at least one daily newspaper, on the company’s website and on the MSE website, immediately or the next business day, at the latest.

Further to this, the MSE Listing Rules stipulate specific disclosure obligations for certain companies depending on which trading tier on the official MSE market their shares are listed.

Joint-stock companies that are not listed on the MSE and are not registered as reporting companies are obliged to publish data concerning total revenues, before tax, profit for the business year, net cash flow, profit per share for the business year and dividend per share, changes in ownership structure over 10 per cent, reorganisation of the company, changes in management and governance, new issuance of shares as well as price-sensitive information on the web page of the MSE.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Under the LTC, the shareholders generally do not have a say in the determination of executive remuneration, the only exception being when deciding on the executive members or the manager’s right to participate in the profit. Such participation, as a general principal, consists of a share in the annual profit of the company (payment in cash, shares, royalties, bonuses or in another manner).

The approved participation in the annual profit of the company shall be calculated on the basis of the portion of the annual profit of the company that remains after the reduction of the realised profit for the amount of the total losses transferred from the previous years, and the amounts are set aside as legal and statutory reserves. A resolution contrary to this provision shall be null and void. Though not explicitly stipulated, from the manner in which the approved participation is determined, it is evident that the shareholders may resolve upon on the annual meeting of the shareholders.

Further involvement of the shareholders in the executive remuneration may be stipulated in the managerial agreement, by determining the situations when the financial condition of the company shall be deemed to be significantly deteriorated, owing to which the earnings of the executives present a burden to the company and on the basis of which the shareholders’ meeting, the non-executive members of the board of directors, or the supervisory board may reduce the total earnings and other rights of the member of the management body.

The remuneration of the members of the board of directors and supervisory board is subject to regulation in the charter or a shareholders’ resolution. There is no explicit provision determining the frequency of voting when resolving on the remuneration of the members of the board of directors and supervisory board.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Any shareholder may nominate directors in the joint-stock company. Considering the majority for election of the members of the board of directors in the one-tier system, and the members of the supervisory board in the two-tier system as a majority of the voting shares from the quorum of the meeting, it is most unlikely that without the required majority owned by the nominating shareholder the nominee would be elected. If stipulated by the charter, the election of the members of the board of directors or the supervisory board may be carried out by cumulative voting, thus allowing the minority shareholders to have their nominee elected.

The listed and reporting companies are required to publish and make available all resolutions that are proposed under each of the items of the agenda, as well as all the materials for the convened shareholders’ meeting on their official websites, including the proposed resolutions regarding the appointment or revocation of directors (ie, members of the board of directors in the one-tier system and the members of the supervisory board in the two-tier system).

For the companies that are neither listed on the MSE nor have reporting obligations, the requirement is to provide information on how the materials and documents for the convened shareholders’ meeting will be made available to the shareholders in the invitation (ie, the public announcement for convening the shareholders’ meeting).

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Shareholder engagement occurs in shareholders’ meeting sessions.

In accordance with the LTC, each shareholder has the right to raise questions on each of the points on the agenda, and the company is obliged to respond to questions raised by the shareholders, through its management bodies or a senior officer who covers the particular matter to which the question is addressed. The right of shareholders to raise questions and the obligation of the company to answer such questions can be preconditioned by the need to verify the personal identity of the shareholders raising the questions, maintain the order in chairing and operation of the shareholders meeting session, or to undertake actions in order to preserve the confidentiality of the work and the business interests of the company. The company can give a collective response to questions with the same content. Questions raised by shareholders are considered to be answered if the answers are available on the web page of the company in the questions and answers form.

The LTC provisions governing the convening and holding of shareholders’ meetings in reporting companies and listed companies require the public announcement convening shareholders’ meetings to contain a description of the procedures in accordance with which the shareholders participate and vote at the shareholders’ meeting, and in particular how they can include points in the agenda of the shareholders’ meeting and propose resolutions, how the shareholders can raise questions to the company regarding the points of the agenda of the shareholders’ meeting, and information regarding the time period in which they can do so.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

The companies are not required to provide disclosure with respect to corporate social responsibility matters. Corporate social responsibility matters may fall under the broader category of price sensitive information, and a listed company may disclose it following the general disclosure requirements under the Listing Rules. However, there is no sanction for default of disclosure with respect to corporate social responsibility matters.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The companies are not required to disclose such information.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The companies are not required to disclose ‘gender pay gap’ information.

Update and trends

Amendments to the Securities Law are in process in the assembly at the time of writing. Inter alia, these amendments stipulate extension of the term for mandatory listing for two more years (ie, up to 30 April 2020). Mandatory listing has proven beneficial for the capital market and raising awareness of transparency and disclosure. As stated in the proposed law on amendments, such a measure increased the number of listed companies from 32 at the end of 2012 to 116 by the end of 2013.

Kristijan Polenak

kristijan@polenak.com

Tatjana Shishkovska

tsiskovska@polenak.com

98 Orce Nikolov

1000 Skopje

Macedonia

Tel: +389 2 3114 737

Fax: +389 2 3120 420

www.polenak.com

Malaysia

Aaron Gerard Sankar and Annabel Kok Keng Yen

Lee Hishammuddin Allen & Gledhill

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Malaysia’s corporate governance framework is contained in several pieces of legislation and guidelines. Applicable laws and guidelines include:

• the Companies Act 2016 (CA 2016);

• the Financial Services Act 2013 (FSA 2013);

• the Capital Markets and Services Act 2007 (CMSA);

• the Malaysian Code on Corporate Governance 2017 (MCCG);

• Bank Negara Malaysia’s (The Central Bank of Malaysia) (BNM) Guidelines on Corporate Governance;

• Bursa Malaysia’s Main Market, Ace Market and Leap Market Listing Requirements; and

• the Code of Ethics for Company Directors issued by the Companies Commission of Malaysia (CCM).

CA 2016

The CA 2016, which came into force on 31 January 2017 (repealing the Companies Act 1965) applies to all companies and corporations in Malaysia, and can be said to be the primary statute on corporate governance in Malaysia.

The CA 2016 governs, among others, directors’ duties and liabilities, conflicts of interest involving directors and indemnification of directors. It further codifies the common law rules requiring directors to exercise their powers for a proper purpose, in good faith and in the best interest of the company.

The CA 2016 requires directors to disclose by notice in writing to the company:

• particulars of his or her shareholding in the company, and changes to such shareholding;

• interest in transactions involving the company; and

• conflicts or potential conflicts of interest.

Financial Services Act 2013

Financial institutions in Malaysia are required to comply with the corporate governance framework and internal controls pursuant to the Financial Services Act 2013 (FSA 2013).

Under the FSA 2013, the prior written approval of BNM is required before a person may be appointed as a chairman, director or chief executive officer (CEO) of a financial institution. Additionally, BNM is empowered under the FSA to stipulate fit and proper criteria applicable to financial institutions.

BNM has also issued Guidelines on Corporate Governance that apply to financial institutions (see below).

Malaysian Code on Corporate Governance 2017

There have been significant corporate governance developments in Malaysia, with the release of the Malaysian Code on Corporate Governance 2017 (MCCG). The MCCG, which was issued in April 2017, is a set of practices and guidelines issued by the Securities Commission of Malaysia (SC) for companies to strengthen corporate culture anchored on accountability and transparency. The MCCG adopts the ‘comprehend, apply and report’ approach, which is aimed at reinforcing mutual trust between companies and their stakeholders by promoting meaningful disclosures by companies to their stakeholders.

The MCCG applies to listed companies, but non-listed entities, including state owned enterprises, small and medium enterprises and licensed intermediaries are encouraged to adopt the practices in the MCCG to enhance their accountability, transparency and sustainability.

The MCCG is based on three key principles of good governance, which are:

• board leadership and effectiveness;

• effective audit and risk management; and

• integrity in corporate reporting and meaningful relationships with stakeholders.

The MCCG advocates the adoption of standards and practices that go beyond the minimum prescribed by statute. While it is not mandatory for companies to observe the MCCG 2017 practices, listed companies are required to disclose in their annual report how they have complied with the recommendations. Public companies are to provide meaningful explanations in their annual report as to how they have applied each practice in the MCCG, or in the event of a departure from a practice, the company must provide an explanation for the departure and disclose the alternative practice and how the application of the practice achieves the intended outcome.

BNM’s Guidelines on Corporate Governance

BNM’s Guidelines on Corporate Governance apply to financial institutions and prescribe, among others, key responsibilities of the board and senior management, requirements on minimum quorum and attendance at board meetings, and matters relating to composition of the board. Significantly, the guidelines provide that:

• the board must have a majority of independent directors at all times;

• the board must establish a written policy to address directors’ actual and potential conflicts of interest; and

• written approval of BNM must be obtained before a financial institution removes an independent director (save where such removal is as a result of a disqualification under the FSA) or before an independent director resigns.

Capital markets

Corporations listed on Bursa Malaysia are required to comply with listing requirements and rules prescribed by Bursa Malaysia (Listing Requirements), in addition to the CA 2016.

The Listing Requirements provide that boards of listed companies must establish both a nominating committee and an audit committee. Additionally, at least one-third of boards of listed companies must comprise independent directors.

Listed companies must also ensure that their board of directors provide a narrative statement of their corporate governance practices with reference to the MCCG in their annual report.

Code of Ethics for Company Directors

The Code of Ethics for Company Directors (Code of Ethics) was issued by the CCM to establish a standard of competence for corporate accountability in respect of directors of companies in Malaysia, which includes standards of professionalism and trustworthiness with a view of upholding good corporate integrity.

Among others, the Code of Ethics recommends that:

• directors should disclose immediately all contractual interests, direct or indirect, with the company;

• directors should not divert any business ventures being pursued by the company, or make use of confidential information obtained by reason of their office for their own advantage; and

• directors should at all times act with utmost good faith in any transaction involving the company and discharge their duties in a responsible manner.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The CCM is responsible for administration and enforcement of the CA 2016. Financial institutions are further regulated by BNM, while listed companies are regulated by the SC and Bursa Malaysia.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Under the CA 2016, directors of a company may be appointed by way of an ordinary resolution. In the case of a public company (which includes companies listed on Bursa Malaysia), a motion for the appointment of two or more persons as directors in a single resolution shall not be made unless a resolution that the motion shall be so made has first been agreed to unanimously by the meeting.

A director of a private company may, subject to its constitution, be removed by ordinary resolution. In the case of a public company, a director may be removed by ordinary resolution, subject to the following:

• special notice (of at least 28 days) shall be required for the resolution;

• where such director was appointed to represent the interest of a particular class of shareholders or debenture holders, the resolution to remove him or her shall not be effective until a successor has been appointed; and

• the director shall be given the right to make oral or written representation not exceeding a reasonable length on the resolution to remove him or her. The director may request for the written representation to be notified to shareholders.

Management supervision of a company vests with the board of directors, subject to controls contained in the CA 2016 and constitution (see below).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The CA 2016 provides that shareholders’ approval must be obtained for the following matters:

• issuance of additional shares of the company;

• appointment or removal of company directors;

• approval of directors’ remuneration in the case of a public company;

• appointment or removal of auditor in the case of a public company;

• amending and changing the company constitution (in which case a majority of three-quarters of shareholder votes would need to be obtained);

• any arrangement or transaction exceeding 250,000 ringgit or 10 per cent of the net asset value of the company between the company and:

• a director of the company;

• a substantial shareholder of the company, its holding company, or its subsidiary; or

• a person connected to such director or substantial shareholder, involving the acquisition or disposal of shares or non-cash assets from or to the company. The director or substantial shareholder in question must abstain from voting in the meeting in such a case;

• any arrangement or transaction involving the acquisition or disposal of substantial property or undertaking of the company; and

• alteration or reduction of share capital of a public company.

The CA 2016 does not stipulate that any matter be subject to a non-binding shareholder vote.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Unless otherwise provided by the constitution of a company, in the case of companies having a share capital:

• on a vote taken in a written resolution or on a poll taken at a general meeting, every shareholder has one vote in respect of each share held; or

• on a vote taken by show of hands, every shareholder has one vote.

Companies listed on Bursa Malaysia must ensure that resolutions intended to be moved at any general meeting are voted on by poll.

In respect of companies without share capital, every member shall have one vote.

Notwithstanding the above, companies are allowed to provide for different voting rights for different classes of shares in their constitution. The CA 2016 provides that if a company has different classes of shares, its constitution shall state prominently that its share capital is divided into different classes of shares and the voting rights attaching to shares in each class must be stipulated. If a company provides for non-voting shares, it must also ensure that the words ‘non-voting’ are displayed clearly in the descriptive title of the shares and on any share certificate, directors’ report or prospectus issued by the company.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Under the CA 2016, a share in a company, other than preference shares, confers on its holder the right to (among others):

• attend, participate and speak at a meeting;

• vote on a show of hands on any resolution of the company;

• one vote for each share on a poll on any resolution of the company;

• an equal share in the distribution of the surplus assets of the company; or

• an equal share in dividends authorised by the board.

The rights of preference shareholders are set out in the constitution of the company. Preference shareholders are not typically given the right to vote on resolutions unless the resolution relates to the rights of that particular class of preference shares held by the shareholder.

A shareholder is entitled to appoint a proxy to attend, speak and vote at a general meeting.

A resolution of a private company may be passed by written resolution.

The CA 2016 further provides that a company may hold a meeting of its members within Malaysia at more than one venue using any technology that allows all members a reasonable opportunity to participate.

For private companies, a member of the company holding more than 5 per cent of total voting shares may require the company to circulate a resolution that may then be properly moved as a written resolution. Resolutions to remove a director or auditor before the expiry of their appointment shall not however be made via written resolution.

The MCCG further recommends that listed companies with large numbers of shareholders use technology to facilitate greater shareholder participation at general meetings.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Under the CA 2016, meetings of shareholders may be convened by any member holding at least 10 per cent of the issued share capital of a company, or a lower percentage as specified in the constitution. If the case of a company without a share capital, any member holding at least 5 per cent in the number of shareholders may convene a shareholders meeting.

A meeting of a company or of a class of shareholders, other than a meeting for the passing of a special resolution, shall be called by notice in writing of not less than 14 days or such longer period as is provided in the constitution of the company.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders do not owe a statutory duty to non-controlling shareholders.

Non-controlling shareholders may however apply to court for an order under applicable provisions of the CA 2016, on grounds that:

• the company’s affairs are being conducted or the directors’ powers exercised in an oppressive manner or in disregard of the interests of shareholders; or

• some act or the company has been done or is threatened or that some resolution of the shareholders, debenture holders or any class thereof has been passed or is proposed, which unfairly discriminates or is prejudicial to one or more shareholders (including the shareholder seeking the order).

Additionally, a shareholder may, with leave of the High Court, initiate or defend a proceeding (commonly referred to as the statutory derivative action) on behalf of the company.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders of a company limited by shares are generally not liable for actions of the company, except as contributories on the winding-up of the company, to the extent of any unpaid amount on shares held.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

The Rules on Takeovers, Mergers and Compulsory Acquisitions 2016, issued by the SC (Takeover Rules) stipulate that during the offer period, or where the board of the offeree has any reason to believe that a bona fide takeover offer might be imminent, the board shall not take any action or make any decision (other than in the ordinary course of business) without obtaining the approval of shareholders at a general meeting on the affairs of the offeree that could effectively result in such takeover offer being frustrated or the shareholders being denied an opportunity to decide on the merits of a takeover offer.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The CA 2016 imposes an obligation on directors to obtain the approval of the company’s shareholders in a general meeting prior to the issuance of new shares. Members of the company are required to pass a resolution in a general meeting to authorise the directors to issue new shares.

However, directors are not required to obtain approval from shareholders in the event the issuance of new shares is made in furtherance of any of the following:

• the new shares are to be allotted to shareholders under an offer made to the shareholders in proportion to their shareholdings;

• the new shares are a bonus issue of shares to shareholders of the company in proportion to their shareholdings;

• the new shares are to be allotted to a promoter of a company that the promoter has agreed to take; or

• shares that are to be issued as consideration or part consideration for the acquisition of shares or assets by the company and shareholders of the company have been notified of the intention to issue the shares at least 14 days before the date of issue of the shares.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The CA 2016 provides that a private company shall restrict the transfer of its shares. Such restrictions typically relate to a director’s right to refuse registration of the transfer. A director may refuse transfer of shares exercised in good faith in the interest of the company. The constitution of the company may provide for pre-emptive rights.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Under the CMSA and Takeover Rules, an offeror has a right to compulsorily acquire the shares of minority shareholders where it has received 90 per cent acceptances in respect of the takeover offer (excluding shares already held at the date of the takeover offer by the offeror or persons acting in concert).

14 Dissenters’ rights

Do shareholders have appraisal rights?

There are no appraisal rights afforded to shareholders under law. Such rights may be provided for under the constitution of private companies.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Malaysian listed companies adopt a single-tier board system. The board is permitted to delegate certain functions to committees established by the board.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The primary responsibility of the board is to manage and supervise the management of the business and affairs of the company.

The board is also responsible for the following:

• preparing the financial statements of the company;

• causing accounts to be kept to sufficiently explain the transactions and financial position of the company, disclosing in a manner to enable the accounting records to be properly audited;

• in the case of public companies, holding the annual general meeting of the company for public companies; and

• making disclosure in the manner prescribed by the CA 2016, including disclosure in respect of shares held in the company and particulars of changes of such shareholding.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

Directors are obligated to act in the best interests of the company, notwithstanding that the director has been appointed as a representative of a shareholder.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Yes, the company may initiate action against a director for breaches of duty. A shareholder may also commence statutory derivative action on behalf of the company against directors.

It should also be noted that the CCM has the power to take enforcement action for breaches of the CA 2016 (including contravention of provisions relating to directors).

19 Care and prudence

Do the board’s duties include a care or prudence element?

The board is required to exercise reasonable care, skill and diligence when performing its duties.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The CA 2016 does not distinguish between executive and non-executive directors (all board members therefore owe the same duties to the company).

The CA 2016 requires that directors perform their duties with the standard of knowledge, skill and experience that may reasonably be expected of a director having the same responsibilities, along with any additional knowledge, skill and experience that the director has.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate its powers to a committee or the board, an officer, employee or expert. The board is, however, responsible for the exercise of the power by the delegatee as if the power had been exercised by the directors themselves, save where:

• the directors believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on the directors under this Act and the constitution of the company, if any; and

• the directors believed on reasonable grounds, in good faith and after making a proper enquiry, if needed, that the delegatee was reliable and competent in relation to the power delegated

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The Listing Requirements provide that public listed companies must ensure that their board comprises at least two independent directors or one-third of its board, whichever is higher. Financial institutions are required to have a board consisting of a majority of independent directors at all times. ‘Independent director’ is defined in the Listing Requirements as a director who is independent of management and free from any business or other relationship that could interfere with the exercise of independent judgement or the ability to act in the best interests of the listed company.

The MCCG further recommends that at least half of a board of directors should consist of independent directors. For large companies, the majority of the board should consist of independent directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The CA 2016 requires that private companies have a minimum of one director and that public companies a minimum of two directors. The minimum number of directors in a company must have their principal place of residence in Malaysia. A director of a company may not resign or vacate his or her position if, by virtue of this vacancy, the number of directors in the company falls below the minimum number.

The constitution of a company may however provide for a higher minimum number of directors on the board.

Any vacancy in the board may be filled by board themselves, and such person shall hold office:

• in the case of a public company, until the next annual general meeting; and

• in the case of a private company, in accordance with the terms of appointment.

Under the CA 2016, a person who satisfies the following may be appointed as a director:

• a natural person;

• at least 18 years old;

• not an undischarged bankrupt;

• not convicted of any offence relating to fraud or dishonesty punishable on conviction by imprisonment with three months or more;

• not convicted of any offence in relation to the promotion, formation or management of a corporation; and

• not convicted of any offence in relation to improper use of company assets, position and corporate opportunity or competing with the company.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The CA 2016 does not contain an express provision requiring the roles of board chairman and CEO to be separate. For financial institutions however, BNM’s Corporate Governance Guidelines require that the board chairman must not be an executive, and must not have served as a CEO of the financial institution in the past five years.

The MCCG recommends the separation of the roles of chairman and CEO.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The Listing Requirements require public listed companies to form an audit committee from among their directors. The fundamental duty of the audit committee is ensuring the integrity of financial reporting and that the financial statements give a true and fair view of the financial position and results of the company. The audit committee must also ensure compliance with all applicable legal and regulatory financial reporting requirements and accounting standards.

The nominating committees and auditing committees should comprise non-executive directors, of which a majority of those directors shall be independent.

Although the Listing Requirements do not mandate the establishment of a remuneration committee, the MCCG recommends that the board of directors should establish a remuneration committee to implement policies and procedures on remuneration including reviewing and recommending matters relating to the remuneration of board and senior management. Additionally, a remuneration committee should assist the board in developing and administrating a fair and transparent procedure for setting policy on remuneration of directors and senior management to ensure that remuneration packages are determined on the basis of the directors’ and senior management’s merit, qualification and competence, having regard to the company’s operating results, individual performance and comparable market statistics. The SC has recommended that such remuneration committee should consist of non-executive directors and a majority of them must be independent directors, drawing advice from experts, where necessary. Directors who are shareholders should abstain from voting at general meetings to approve their fees. Similarly, executive directors should not be involved in deciding their own remuneration.

A financial institution must establish the following board committees:

• board nominations committee;

• board remuneration committee;

• board risk management committee; and

• board audit committee

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no requirement for a minimum number of board meetings to be held each year.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Bursa Malaysia’s Main Market Listing Requirements

The Listing Requirements imposes on public listed companies a requirement to disclose, in their annual report:

• the total number of board meetings held during the preceding financial year;

• the number of board meetings attended by a director during the preceding financial year, and

• the audit committee report in respect of the financial year.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

There is no requirement for private or public companies to have service contracts for directors. That said, for public companies, where such a contract exists, the public company is required to keep a copy of the service contract at its registered office for inspection.

Remuneration of directors

The Listing Requirements provide, in relation to public companies, that fees payable to non-executive directors shall be by a fixed sum, and not by a commission on or percentage of profits or turnover. Salaries payable to executive directors may not include a commission on or percentage of turnover.

The MCCG recommends that the board has in place policies and procedures to determine the remuneration of directors and senior management that take into account the demands, complexities and performance of the company as well as skills and experience required, and that the board establishes a remuneration committee to implement its policies and procedures on remuneration.

Tenure of independent director

The MCCG further recommends that independent directors of a company are not allowed to hold office for more than nine years. Upon completion of the ninth year in office, the director may continue to serve on the board as a non-independent director.

However, if the board intends to retain an independent director beyond nine years, it should provide justification and seek shareholders’ approval annually.

If the board continues to retain the independent director after 12 years, the board should provide justification and seek annual shareholders’ approval through a two-tier voting process, as prescribed by the MCCG.

Loans to directors

As a general rule, a company is not allowed to give a loan to a director or enter into any guarantee (or provide security) in connection with a loan made to the director.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

There are no requirements or policies in respect to remuneration of senior management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Yes, directors’ and officers’ liability insurance is permitted, although within a relatively limited scope.

Additionally, companies may, with prior approval of the board, effect (and pay premiums for) D&O insurance in relation to:

• civil liability for any act or omission of a director;

• costs incurred by that director in defending or settling any claim; or

• costs incurred by that director in defending any proceedings that have been brought in which:

• he or she is acquitted;

• he or she is granted relief under the CA 2016; or

• where proceedings are discontinued or not pursued.

The above shall not, however, apply to any civil or criminal liability in the case where the director breaches his or her duty under the CA 2016.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Such indemnification is allowed, within the limits prescribed by the CA 2016.

Companies are permitted to indemnify an officer or director of the company for costs incurred in respect of proceedings (relating to liability in the capacity of officer or auditor) where judgment was given in favour of that officer or auditor, or in which the officer or auditor is acquitted.

Wider indemnities are more commonly provided by shareholders.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Any provision that seeks to exempt a director or officer of a company for liability in respect of negligence, breach of duty or breach of trust, is void. Save as prohibited by the CA 2016 or constitution of a company, breaches of duties of directors may be ratified by a resolution of shareholders. There can, however, be no ratification in respect of unlawful acts.

33 Employees

What role do employees play in corporate governance?

Employees are not required by law to play an active role in corporate governance. The MCCG, however, recommends that the board establishes a Code of Conduct and Ethics for the company (and, together with management, implements its policies and procedures), including implementing policies and procedures on whistle-blowing.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Listing Requirements requires public listed companies to state in the annual report a summary of their corporate governance practices during the preceding financial year, including:

• board leadership and effectiveness;

• effective audit and risk management; and

• integrity in corporate reporting and meaningful relationship with stakeholders.

The MCCG recommends that boards should undertake a formal and objective annual evaluation to determine the effectiveness of the board, its committees and each individual director. The board should disclose how the assessment was carried out and its outcome. For large companies, it is recommended that the board engages independent experts periodically to facilitate objective and candid board evaluations.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The constitution of a company is publicly available at the CCM.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Under the Listing Requirements, public listed companies are required to make immediate disclosure of material information regarding the company. ‘Material information’ means information that will be reasonably expected to have a material effect on the price or value of the listed securities, or the decision of an investor whether to trade in such securities. Examples of events that will need to be immediately disclosed by public listed companies include the entry into a joint venture agreement or merger, acquisition or loss of a contract, introduction of a new product and discovery, change in management, and borrowing of funds.

Additionally, public listed companies are required to issue quarterly reports setting out the interim financial results of the company and annual reports disclosing their audited financial statements together with the auditor and director’s reports of the public listed company.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Remuneration of executives and senior management of the company is typically determined by the board of directors. There is, however, a requirement in the Listing Requirements for the remuneration of directors of a listed company to be disclosed in the annual report.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Yes, directors may be nominated by the shareholders of the company (see question 3).

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Public companies in Malaysia are statutorily required to conduct annual general meetings where shareholders will have the opportunity to speak on issues before voting on matters requiring their approval.

There is, however, no requirement for private companies to have an annual general meeting under the CA 2016.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Listed companies are required to include in their annual report, a statement in relation to the management of material economic, environmental and social risks and opportunities, including the governance structure in place to manage the economic, environmental and social risks and opportunities.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no such requirement.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no such requirement.

Update and trends

On 24 April 2018, Bursa Malaysia launched BURSASUSTAIN, a comprehensive online portal designed as a one-stop knowledge and information hub on corporate governance and sustainability. In its official media release statement, Bursa Malaysia stated that the online portal hub is aimed at ‘providing a platform for users, such as listed issuers, investors and other key stakeholders, to have easy access to the latest information on corporate governance and sustainability’.

Aaron Gerard Sankar

ags@lh-ag.com

Annabel Kok Keng Yen

kky@lh-ag.com

Level 6, Menara 1 Dutamas

Solaris Dutamas, No. 1

Jalan Dutamas 1

50480 Kuala Lumpur

Malaysia

Tel: +603 6208 5888

Fax: +603 6201 0122

www.lh-ag.com

Mexico

Miguel Valle Salinas, Fernando González González and Laura Hernández Salas

González Calvillo SC

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main source of law is the General Law of Business Organisations (LGSM), which sets forth the legal framework and operational rules applicable to commercial corporations and companies, including corporate governance matters. Although the LGSM governs six types of commercial companies and corporations, in practice, the two most commonly used are stock corporations (SAs) and limited liability companies (SRLs).

The Securities Market Law (LMV) sets forth the legal framework and operational rules applicable to the following types of SAs:

• investment promotion stock corporations (SAPIs) (which shall be organised in accordance with the general provisions of the LGSM with a specific and more flexible regime with regard to a regular SA); and

• listed companies under the form of publicly traded corporations (SABs) or publicly traded investment promotion stock corporations (SAPIBs).

The General Provisions Applicable to Issuers and Other Participants of the Securities Market (the CUE), which set forth the specific regulatory rules under which listed companies and other market participants shall operate.

For the purposes of clarity, listed companies shall be understood as those SABs or SAPIBs in which shares are registered with the National Securities Registry and listed on the Mexican Stock Exchange.

In addition, it is important to note that it is mandatory for listed companies to comply with the listing rules provided under the applicable regulation.

There are specific corporate governance provisions applicable to certain regulated entities, such as banks, financial corporations, insurance companies and other financial institutions, which are set forth in the relevant laws and regulations governing those entities.

Additionally, there are voluntary codes, such as the Best Corporate Practices Code (CMPC) issued by the Mexican Business Coordinating Council, which contains recommendations addressed and applicable to all companies, whether commercial, civil or non-profit, regardless of their size or whether they are listed on the stock market. Despite the fact the CMPC is voluntary for non-listed companies, its compliance is mandatory for listed companies, pursuant to the CUE.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

In case of non-listed companies, there is no governmental agency responsible for enforcing corporate governance rules; however, compliance with this regulatory framework is monitored by shareholders, external auditors, credit rating agencies and lenders; in case of conflicts or disputes, the enforcing authority would be the competent judicial court (whether federal or local). The entity responsible for amending the LGSM or the LMV is the federal legislative power known as Congress of the Union, composed of the Chamber of Deputees and the Senate.

On the other hand, the National Banking and Securities Commission (CNBV) is the entity in charge of the surveillance of listed companies and similar that shall issue and amend any secondary regulations such as the CUE.

In Mexico there are no shareholder groups or specific proxy advisory firms whose views are often considered. Shareholders follow the advice of their boards and legal advisors.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders appoint and remove directors and approve the reports prepared by the board regarding the status of the company and its course of action. Unless otherwise provided in the by-laws of a certain company, the shareholders may appoint and remove members of the board of directors (or sole director) by a majority vote. Pursuant to article 144 of the LGSM, in case there are more than three members of the board of directors, the by-laws shall provide the rights of the minority shareholders to appoint members of the board, but in any case, the shareholders representing 25 per cent of the capital stock of the company have the right to appoint at least one member. In SAPIs, the shareholders representing 10 per cent of the capital stock of the company shall have the right to appoint at least one member of the board of directors, and the removal of such member by the remaining shareholders (that is the non-appointing shareholders) may only take place if the shareholders are going to remove all members of the board of directors.

Pursuant to article 182 of the LGSM, the shareholders’ meeting shall appoint, remove or ratify the members of the board of directors or sole directors, at least on a yearly basis.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Pursuant to the LGSM, the shareholders’ or partners meeting is the supreme body of any commercial entity, therefore, such body has full power and authority to approve any matter concerning the company’s affairs. Whereas some matters may be resolved by either the shareholders’ meeting or the management body (whether a board of directors or a sole director), the following decisions are reserved to the shareholders:

• the approval of financial statements and the annual report prepared by the management body the company;

• the appointment and removal of the members of the board of directors and the statutory examiner;

• extension of the company’s duration;

• early dissolution;

• increase or decrease of the capital stock;

• change of the corporate purpose;

• change of nationality;

• transformation;

• merger;

• issuance of preferential shares;

• share redemption or repayment;

• bond issuance;

• amendments to the by-laws; and

• any other decision reserved to the shareholders pursuant to the by-laws of the company.

Under Mexican law, there are no specific matters that shall be submitted to a non-binding shareholder vote; however, the by-laws of any company may include provisions regarding the voting restrictions applicable to certain type of shares.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Pursuant to article 91 VII (c) of the LGSM, companies may include in their by-laws provisions regarding the issuance of shares that:

• do not confer or confer limited voting rights;

• grant non-economic rights other than the right to vote or exclusively the right to vote; or

• grant the veto right or require the favourable vote of one or more shareholders, regarding the resolutions of the general shareholders’ meeting.

Whereas some restrictions for excluding shareholders from profit sharing apply for the SA and the SRL, there is no such restriction for SAPIs.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

In accordance with article 186 of the LGSM, a shareholders’ meeting shall be formally called through a notice published in the electronic system set forth by the Ministry of Economy, at least 15 calendar days in advance. However, pursuant to article 188 of the LGSM, the shareholders’ meeting shall be deemed legally installed when the totality of the shares representative of the capital stock of the company are present or duly represented in the shareholders’ meeting, regardless of the publication of the call.

Pursuant to article 192 of the LGSM, shareholders may be represented at the meetings by a proxy, who may be or may not be part of the company, but in any case, a proxy cannot be a member of the board of directors or a statutory examiner.

In addition to the foregoing, companies may include in their by-laws additional requirements for shareholders to participate or vote in the shareholders’ meeting (eg, shareholders shall present their share certificate or shall be duly registered in the shareholders’ registry book of the company).

Article 178 of the LGSM sets forth that the by-laws may provide that resolutions adopted outside a shareholders’ meeting, by unanimous consent of the shareholders, shall have, for all legal purposes, the same validity as if they were adopted in a shareholders’ meeting, to the extent they are confirmed in writing.

Shareholders’ meetings may be conducted remotely (including virtual meetings); however, the resolutions adopted in those meetings shall be approved by unanimous vote and confirmed in writing; otherwise, resolutions adopted through remote or virtual meetings may be null, inasmuch as article 179 of the LGSM provides that shareholders’ meetings shall take place in the corporate domicile of the company.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The authority to call a shareholders’ meeting corresponds to the board of directors or sole director, as applicable. In SAs, shareholders who represent at least 33 per cent of the shares representing the capital stock of the company, may request the board of directors, sole director or the statutory examiner to issue the relevant call and in case of refusal or failure to do so, such shareholders may request it through a judicial authority. In SAPIs, a request may be made by the shareholders representing at least 10 per cent of the capital stock of the company.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Under Mexican law, there are no specific provisions regarding special duties, such as fiduciary duty, owed by the controlling shareholders in favour of the company or the non-controlling shareholders. However, shareholders representing 25 per cent of the capital stock of an SA or 20 per cent of the capital stock of an SAPI may oppose the resolutions approved by the shareholders’ meeting through a judicial procedure, provided they have voting rights with respect to the matters approved through such disputed resolutions.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders or partners of an SA, SRL or SAPI are protected by a corporate veil, whereby shareholders or partners are only liable up to the amount of their contributions; in other words, their liability is limited to the loss of their participation in the company. However, in case a company is not duly registered with the Public Registry of Commerce (RPC), shareholders or partners may be held jointly liable for certain acts and omissions of the company in violation of tax and criminal laws (piercing of the corporate veil).

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Yes. There are no specific provisions that prohibit anti-takeover devices.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Pursuant to the LGSM, any issuance of new shares shall be approved by the shareholders’ meeting. Regarding the pre-emptive rights to acquire shares, article 132 of the LGSM sets forth that shareholders will have a pre-emptive right to subscribe the newly issued shares in the event of an increase in the capital stock, in proportion to the number of their shares.

Furthermore, the LGSM and the LMV expressly allow shareholders agreements limiting or setting forth additional requirements in connection with such pre-emptive rights.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Yes, legal entities are allowed to include in their by-laws restrictions for the sale or transfer or shares, such as requiring the prior approval of the shareholders’ meeting or the board. Additionally, by-laws may include further share transfer rules, such as tag-along, drag-along, put and call options and such other similar rights and obligations.

Furthermore, in the SRL, the transfer of equity quotas to a person alien to the company shall be approved in advance by the partners’ meeting.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Put and call options are valid; however, under Mexican law, compulsory repurchase agreements are not allowed, under article 2303 of the Federal Civil Code.

14 Dissenters’ rights

Do shareholders have appraisal rights?

As a general rule, article 91, section VII of the LGSM provides that the by-laws of a company shall include the scenarios for shareholders to exercise their retirement right and provisions regarding the mechanisms to be followed in case of a deadlock where the shareholders fail to reach an agreement with respect to certain specific matters, inter alia.

Also, article 206 and 228 bis of the LGSM establish that any opposing shareholder with respect to resolutions adopted by the shareholders’ meeting in connection with the change of the corporate purpose, the change of nationality, the transformation of the company, or spin-off, shall have the right to sell their stock and obtain the reimbursement of their shares, in proportion to the company’s assets.

In an SRL, partners have the right to retire from the company when a person alien to the company is appointed as a member of the board or sole manager, to the extent the retiring partner has voted against such appointment.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Mexican law, listed companies shall have a board of directors and at least two committees (Audit Committee and Corporate Practices Committee) that are entitled to carry out different activities regarding, among others, the supervision of corporate governance and the assistance provided to the board of directors in connection with corporate matters.

The aforementioned committees may be integrated by the independent members of the board of directors of the listed company.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board of directors is in charge of all matters concerning the management of the company. In accordance with article 157 of the LGSM, directors shall have the responsibilities inherent to their mandate and those arising from their obligations pursuant to law and the by-laws.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors represents the company and owes legal duties to it.

The directors are jointly and severally liable with the company with respect to:

• the trustfulness of the contributions made by the shareholders;

• the compliance with the legal and statutory requirements in case of the payment of dividends;

• the existence and maintenance of the accounting, control, registration or information required by law; and

• the fulfilment of the resolutions adopted by the shareholders’ meetings.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Yes. Article 161 of the LGSM provides that an enforcement action regarding the liability of the directors may only be claimed as agreed by the shareholders’ meeting, in which the shareholders may appoint the individual that shall be in charge of enforcing the corresponding actions and remedies. Subject to the fulfilment of certain conditions, (ie, not having voted against taking an action against directors and claiming the total amount of the liability in favour of the company, and not only the one related to their personal interest) minority shareholders representing at least 25 per cent of the capital stock of the company may directly enforce a civil liability action against directors, in accordance with article 163 of the LGSM; in SAPIs, such action may be enforced by shareholders representing at least 15 per cent of the capital stock.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Generally, members have a fiduciary duty towards the shareholders and partners and the company. They have the responsibilities and duties that are inherent to their position, towards the company, shareholders or partners and third parties (which includes, in a broader sense, care and prudence elements). In terms of applicable laws and the corresponding by-laws of the company, board members shall protect and look out for the company’s interests and refrain from participating in decisions in which they have a conflict of interest.

20 Board member duties

To what extent do the duties of individual members of the board differ?

There are certain positions within the board of directors that may have additional duties or responsibilities. For example, pursuant to article 143 of the LGSM, the chairman of the board of directors, unless otherwise provided in the by-laws, has a tie-breaking vote in resolutions adopted by the board of directors; and, in accordance with article 148 thereof, the chairman of the board of directors shall be in charge of the formalisation and execution of the resolutions adopted by the board of directors.

In addition to the foregoing, the by-laws of the company may set forth specific duties for various positions within the members of the board of directors (chairman, secretary, etc). However, there are no statutory rules in this regard.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Under article 147 of the LGSM, the director and member of the board positions are personal and shall not be performed through representatives. However, the board, as a collegiate body, may create committees or design specific members to perform certain acts and assume determined liabilities on its behalf; nevertheless, the foregoing does not limit the board’s legal and statutory liability. Furthermore, the board or sole director may confer powers of attorney to other persons to be exercised on behalf of the company for the performance of diverse responsibilities (within the scope of the board’s respective authority), which may be revoked at any time.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Under the LGSM there is no requirement to appoint non-executive or independent members of the board of directors.

Pursuant to the LMV, at least 25 per cent of the members of the board of directors of listed companies shall be independent.

An independent director is a person that has no considerable influence in the company (since he or she cannot be a shareholder of the listed company), nor any power of command, and is not part of the management team of the listed company. Therefore, the independent director is impartial towards the company, not having any conflict of interest or personal interest and is appointed as independent expert based on his or her expertise, capacity and professional reputation.

In addition, the LMV establishes that none of the following persons may be appointed as an independent director:

(i) relevant officers or employees of the company or companies that are part of the group of which the listed company is part, as well as the examiner of the aforementioned companies;

(ii) persons with considerable influence or control over the listed company or companies that are part of the group of which the listed company is part;

(iii) persons that are part of the group of people that maintain control over the listed company;

(iv) clients, service providers, debtors, creditors, partners, directors or employees of a company that is a relevant client, service provider, debtor or creditor; and

(v) persons with familiar or affinity relationships with any of the persons listed in sections (i) to (iv) above.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

In case of non-listed companies, management may be entrusted to a sole director or manager, or to a board. The board shall be composed of at least two members. In case the board has three or more members, the by-laws shall determine the rights that minority shareholders shall have for the appointment of members, but, in any case, the minority representing at least 25 per cent of the capital stock shall appoint at least one member. For listed companies, this percentage shall be 10 per cent; for SAPIs, shareholders that jointly or individually hold 10 per cent of the shares with voting rights (even if limited or restricted) may appoint or revoke a member of the board.

Only the shareholders’ meeting is entitled to make appointments to fill vacancies on the board, and pursuant to article 155 of the LGSM, exceptionally, in the event of vacancies resulting in the lack of a quorum for adopting resolutions, the statutory examiner of the company may appoint provisional members. There are no specific provisions or differences in connection with newly created directorships.

Pursuant to the LMV, the board of directors of listed companies shall be integrated by a maximum of 21 members. As per article 24 of the LMV, the board of directors may appoint provisional members in exceptional vacancy cases, whenever a member is not replaced by the shareholders within a 30-day period or in case such vacancy results in lack of quorum for adopting resolutions.

Other than the prohibition to appoint individuals banned from commercial activities as member of the board, Mexican law does not set forth any additional guidelines, criteria or requirements to appoint members to the board.

Notwithstanding the foregoing, the CMPC suggests appointing different persons as chairman of the board of directors and CEO. The CEO is the person in charge of carrying out and conducting the business of the listed company and the entities that the listed company controls, in accordance with the LMV and the strategies and policies issued by the board of directors thereof; the board’s chairman is the person in charge of the management of the listed company and not specifically of conducting its business.

In 2016, a bill to amend the LGSM and the LMV was submitted to the Senate, pursuant to which at least one-third of the members of the management bodies of companies shall be of a different gender than the rest. Also, in 2017, another bill was submitted to the Senate, proposing to amend the LMV so that listed companies may opt for gender equality policies within the integration of their boards of directors; in that event, at least 20 per cent of board members shall be of the least represented gender. As of this date, those bills have not been approved.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no law or regulation on this regard. However, separating the function of board chairman and CEO is generally recognised as best practice. The rationale behind this practice is that the CEO is supposed to be supervised by the board.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Pursuant to the LGSM, there are no mandatory board committees; however, companies may create board committees as permitted by their by-laws.

According to article 25 of the LMV, the board of directors of listed companies may be assisted by one or more committees created for that purpose. The committee or committees that carry out activities in connection with corporate practices and auditing shall be exclusively integrated by independent directors and by a minimum of three members appointed by the board of directors. In case of listed companies that are controlled by a person or group of persons that hold 50 per cent or more of the capital, the corporate practices committee shall be integrated, at least, by a majority of independent directors.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

No. However, in accordance with the LGSM and the LMV, the shareholders must hold at least one annual shareholders’ meeting, within the first four months of each year, approving, among other matters, the report submitted by the board or management body of the company, with respect to the company’s performance in a calendar year, as well as the policies adopted by directors and, as applicable, the main existing projects of the company. Thus, although there is no specific requirement for a formal board meeting, it is customary that the board gathers at least once a year, in order to discuss and prepare the foregoing report to be submitted for the shareholders’ approval.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

No. However, regarding listed companies, because they are obliged to disclose certain documents and resolutions that contain the appointment, structure, functions and duties of the board (ie, an annual report and shareholders’ resolutions), such information is thereby disclosed. Additionally, there are some specific resolutions that listed companies are required to disclose in certain events (eg, authorisation for launching a tender offer).

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Other than the obligation for the shareholders’ meeting to annually review or determine the remuneration for the members of the board of directors (pursuant to article 181 of the LGSM), there are no specific rules or provisions, nor listing requirements, regarding the determination of such remuneration.

Although there are no specific provisions or listing rules governing the directors’ service contracts, article 182 of the LGSM states that members of the board shall be appointed, removed or ratified on an annual basis. Additionally, article 154 of the LGSM provides that directors will continue in the performance of their duties even when the term for which they were appointed has expired, until their replacements have been appointed and have taken office.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

There is no law or regulation governing the remuneration of senior management of non-listed companies.

Pursuant to the LMV, the board of directors of listed companies shall approve, among others, the appointment and remuneration policies with respect to the high-level ranked managers, as well as the policies for granting loans, credits or guarantees in favour of such managers; however, there is no regulation or guidelines regarding how such policies shall be determined.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Directors’ and officers’ liability insurance is permitted but is not a common practice. There is no restriction for a company to pay the corresponding insurance premiums. However, as per public information (forbes.com.mx), hiring D&O liability protection insurance policies is becoming a more frequent practice for Mexican listed companies.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no restriction for indemnifying directors and officers in this regard; however, it is not a customary practice.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Companies or shareholders may limit the liability of directors and officers by offering certain immunity towards the company or the shareholders (ie, exempting them from claims for liability incurred in their professional capacity); this is common when the company or shareholders are willing to offer attractive incentives to certain individuals to accept being appointed as board members. Regarding liability toward third parties, this cannot be limited; however, the company and shareholders may reduce liability attributable to directors and officers through the implementation of robust corporate governance, ethics and compliance policies and programmes, including provisions stating that in case of breach of laws or company’s regulations, liability shall or may be attributed to other officers or members.

33 Employees

What role do employees play in corporate governance?

Under the LGSM or the LMV, there are no specific provisions regarding the role or obligations of employees in connection with corporate governance. However, on a case-by-case basis, companies may adopt policies or guidelines imposing specific obligations for its employees with respect to corporate governance activities.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Even though it is not an evaluation of the board per se, pursuant to article 172 of the LGSM, the board of directors or sole director, as applicable, shall present to the shareholders’ meeting an annual report informing the company’s performance, its financial, accounting and commercial affairs, as well as main policies followed by the management body of the company. In addition, the statutory examiner of the company shall review and certify the veracity, sufficiency and reasonableness of the information presented by the board of directors. The statutory examiner’s report shall include an opinion regarding:

• whether the accounting and information policies and criteria followed by the company were adequate and fit to the particular circumstances of the company;

• whether those policies and criteria were duly applied in the information presented by the board of directors; and

• if, as a consequence of the above, the information presented by the board of directors reflects in a truthful and sufficient way the financial situation and the results of the company.

In case of listed companies, on a yearly basis, the CEO, the corporate practices committee and the audit committee shall prepare and submit to the board of directors a report containing certain information regarding the financial situation of the listed company and an assessment of whether the policies (accounting, information, etc) and resolutions adopted by the board of directors and the shareholders of the company have been fulfilled during such year.

Once such reports have been reviewed by the board of directors, the latter shall submit each report, including an opinion regarding the information contained in the report prepared by the CEO, to the shareholders’ meeting, which shall review, discuss and, as applicable, approve the information contained therein.

In connection with the above, in terms of article 33 of the CUE, listed companies shall disclose: the reports prepared by the CEO and both committees; and the opinion issued by the board of directors in connection with the CEO’s report.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Yes. Once incorporated, companies shall be registered before the RPC corresponding to their corporate domicile. The articles of incorporation and by-laws are recorded in said RPC. In practice, such registry only discloses excerpts of the main clauses of the by-laws of the companies to the public, upon request.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Pursuant to the Code of Commerce, it is mandatory for companies to be registered with the RPC. Each company shall have a commercial folio disclosing the following information:

• corporate name;

• corporate purpose;

• duration;

• corporate domicile and branches, if any;

• public instruments evidencing its incorporation, transformation, mergers, spin-offs, dissolution and liquidation; and

• at the company’s option, appointments, resignations or removals of officers, as well as the powers of attorney granted by the company (though registration of certain powers, such as powers for granting and issuing negotiable and credit instruments, is mandatory).

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Although it is not common that shareholders have advisory or other vote regarding executive remuneration, the shareholders’ meeting is the supreme body of a commercial company; thus, it is entitled to vote on those matters. Normally, executive remuneration is part of the business plans prepared and approved by the board; those plans may be passed to the shareholders’ meeting for approval.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Shareholders may nominate directors, pursuant to the rules described in the answer to question 23. Under Mexican law, there are no specific proxy access provisions.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Yes. Mainly, engagement occurs in connection with shareholders’ meetings. Also, the relationship between the company and its shareholders is carried out through the board, the chairman of the board and the secretary of the board.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Under the LGSM or the LMV, there are no obligations in connection with the disclosure of corporate social responsibility matters. However, under specific requirements arising from environmental laws, entities are required to report, among other items, their carbon emissions. Additionally, the Mexican Stock Exchange has implemented sustainability evaluations whereby companies must produce and submit sustainability reports in order to be rated in sustainability indexes and reports.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There are no requirements in this regard.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There are no requirements in this regard.

Update and trends

Recently, there has been an increased interest in implementing corporate governance programmes and policies within companies, mainly because owners and directors of companies have recognised and learned about the long-term benefits that implementation would bring. In Mexico, a great many companies are family-owned; thus, company (and family) leaders have understood that the success of their companies and generational changes of leadership may only happen or may be strengthened through the accurate design of rules that look for the company’s best interests over the individual family members’ interests.

Also, as a consequence of global trade, corporate governance has played a role very similar to that of compliance and anti-corruption; as Mexican entities are willing to engage in formal business relationships with foreign companies, they had no option but to evolve to more sophisticated structures, including solid policies and rules for risk avoidance and governance.

As an example of a recent development and of the relevance that corporate governance has gained within the business and regulatory sector in Mexico, the Law for the Regulation of Financial Technology Institutions, better known as the ‘Fintech Law’, enacted in March 2018, includes provisions regarding corporate governance of financial technology institutions, establishing requirements for the board of directors, the general director and the audit committee, in connection with the features of each institution, such as number of clients, business models and capital.

The most significant trends would be:

• gender equality;

• gender pay gap;

• best practices to avoid sexual harassment and mobbing;

• social work on creation of consciousness against corrupt practices;

• handling of conflicts of interest; and

• creation and implementation of corporate governance policies, ethics codes and internal regulations.

Miguel Valle Salinas

mvalle@gcsc.com.mx

Fernando González González

fgonzalez@gcsc.com.mx

Laura Hernández Salas

lhernandez@gcsc.com.mx

Montes Urales 632, Floor 3

Lomas de Chapultepec

11000, Mexico City

Mexico

Tel: +52 55 5202 7622

www.gcsc.com.mx

Nigeria

Tamuno Atekebo, Otome Okolo and Omolayo Latunji

Streamsowers & Köhn

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main sources of law relating to corporate governance are as follows:

• the Companies and Allied Matters Act 1990 (CAMA);

• the Investment and Securities Act 2007 (ISA);

• the Financial Reporting Council of Nigeria Act 2011 (FRCA);

• the Banks and Other Financial Institutions Act 1991 (BOFIA);

• the Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses in Nigeria (the CBN Code);

• the Insurance Act 2003;

• the National Insurance Commission Act 1997 (the NAICOM Act);

• the NAICOM Code of Corporate Governance for the Insurance Industry in Nigeria (the NAICOM Code);

• the Code of Corporate Governance for Licensed Pension Operators (the PENCOM Code);

• the Rule Book of the Nigerian Stock Exchange;

• the Securities and Exchange Commission Code of Corporate Governance in Nigeria (the SEC Code);

• the Securities and Exchange Commission Rules and Regulations (the SEC Rules);

• the SEC Code of Conduct for Shareholders’ Associations (SCCSA); and

• the Nigerian Communications Commission Code of Corporate Governance for telecommunication companies (the NCC Code).

The Rule Book of the Nigerian Stock Exchange requires mandatory compliance with listing rules.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary government entities responsible for making such rules are:

• the Corporate Affairs Commission (CAC), created under CAMA, which oversees the registration of companies and compliance by corporate bodies with the provisions of CAMA;

• the Securities and Exchange Commission (SEC), created under the ISA, which regulates the capital market;

• the Central Bank of Nigeria (CBN), which regulates banks and other financial institutions in Nigeria;

• the National Insurance Commission (NAICOM), established under the NAICOM Act 1997, which ensures compliance by insurance companies with the provisions of the NAICOM Act and the Insurance Act;

• the National Pension Commission established under the Pension Reform Act, which regulates Pension Fund Administrators and Pension Fund Custodians;

• the Nigerian Communications Commission established under the Nigerian Communications Act, 2003 (NCA) which regulates the communications industry in Nigeria and ensures compliance with the NCA; and

• the Financial Reporting Council of Nigeria (FRCN), created under the FRCA, which is empowered to enforce and approve compliance with accounting, auditing, corporate governance and financial reporting standards in Nigeria. The FRCN is charged with ensuring good corporate governance practices in the public and private sector. The Directorate of Corporate Governance, created under the FRCA, has the responsibility to issue the code of corporate governance and guidelines and to develop a mechanism for periodic assessment of the code and guidelines.

There are several shareholder activist groups in Nigeria. These include: Progressive Shareholders’ Association of Nigeria, Lagos Zone Shareholders’ Association, Renaissance Shareholders’ Association, Association for the Advancement of the Rights of Nigerian Shareholders, the Independent Shareholders’ Association of Nigeria, Dynamic Shareholders’ Association of Nigeria, Nigerian Shareholders’ Solidarity Association, Proactive Shareholders Association of Nigeria and the Pacesetter Shareholders’ Association of Nigeria. The various groups are more active in participating in annual general meetings, influencing decision-making at such meetings and protecting shareholders’ rights.

It should be noted that the regulatory authorities such as the SEC and the FRCN adopt a consultative process in making regulations in order to obtain the views of various stakeholders, including shareholder groups. The SCCSA is one of the means through which the SEC seeks to ensure the highest standard of conduct among association members and the companies with which they interact as shareholders and to ensure that association members make positive contributions in the affairs of public companies. The SCCSA prescribes that shareholders’ associations be registered with the CAC in order for their views to be considered by the SEC during consultations on corporate governance issues.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders in a general meeting have the power to appoint or remove directors by a resolution passed by a simple majority of votes cast in person or by proxy. Though the board of directors of a company is empowered to appoint new directors to fill casual vacancies created by death, resignation, retirement or removal, such appointments are, however, subject to ratification by the shareholders in a general meeting. Generally, unless the articles of association provide otherwise, the directors, when acting within the powers conferred upon them by CAMA or the articles, are not bound to obey the directions or instructions of the shareholders in general meetings provided the directors act in good faith and with due diligence. This notwithstanding, the shareholders may make recommendations to the board regarding actions to be taken by the board and may ratify or confirm any action taken by the board. The SEC Code provides that the board is to ensure that all shareholders are given equal treatment and minority shareholders are adequately protected from the abusive actions of controlling shareholders. Also, there should be adequate shareholder representation on the board proportionate to the size of shareholding.

A shareholder can bring a court action to restrain the directors from entering into an illegal or ultra vires transaction, or perpetuating a fraud. Members holding 5 per cent of the total voting rights in the company could circulate a resolution to be voted upon at a general meeting, indicating a course of action that should be adopted by the directors of the company.

Under CAMA, a company may remove a director before the expiry of his or her tenure of office, notwithstanding anything in its articles or in any agreement between the company and the director. However, CAMA requires that a special notice be given to those entitled to attend and vote as well as the director sought to be removed in order to move and pass such resolution. The company shall also give its members notice of such resolution, a minimum of 21 days before the meeting where the removal of the director is to be considered.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The shareholders in a general meeting are empowered to appoint and remove directors of the company, determine directors’ remuneration, appoint auditors and approve their remuneration, alter the company’s share capital, alter the memorandum and articles of association of the company, approve the conversion of the company from a private to a public company and vice versa, and from a limited company to an unlimited company and vice versa, change the company’s name, declare a dividend on the recommendation of the board.

CAMA provides that, subject to the provisions of the articles of association of a company, there are certain powers of the board that cannot be restricted by the shareholders in a general meeting. These include powers over the day-to-day running of the company and the powers of the directors to institute actions on behalf of the company. Where the board fails to institute or defend an action on behalf of the company when it ought to do so because the board is itself in the wrong or there is a deadlock on the board, then the shareholders may apply to court to bring the action on behalf of the company.

Where the articles of association of a company expressly vest the board with certain powers, it is not bound to obey the instructions of the shareholders, especially when it acts in good faith and with diligence. In such situations, the shareholders may only amend the articles of association of the company such that those powers are now made exercisable by the shareholders in a general meeting and not by the board of directors.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

CAMA expressly prohibits disproportionate voting rights and the limitation of voting rights. The basic rule is ‘one share, one vote’ and no company may by its articles or otherwise authorise the issue of shares that carry more than one vote in respect of each share or that do not carry any rights to vote. There are, however, a few exceptions. Preference shareholders, if the articles of the company so provide, can have more than one vote per share upon consideration of any resolution:

• where a dividend on the preference share remains unpaid after the due date of the dividend;

• that seeks to vary the rights attached to the preference shares;

• to appoint or remove an auditor; and

• for winding up the company.

Also, any special resolution of a company increasing the number of any class may validly resolve that any existing class of preference shares carry the right to such votes, in addition to the one vote per share necessary to preserve the existing ratio that the votes exercisable by the holders of such preference shares bear to the total votes exercisable at the meeting. The right of members to vote upon their share may also be limited by the company’s articles until all calls or other sums payable to the company by them in respect of the shares have been paid.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

All shareholders are entitled to attend and vote at the company’s general meeting. It should be noted, however, that until the name of a person having shares in a company has been entered as a member in the register of members, which companies are statutorily required to maintain, such person will not be deemed a member of the company and may therefore not attend meetings of the company or be allowed to vote at such meetings.

The articles of a company may also provide that members who have not made payments on all calls on their shares shall not be entitled to attend meetings.

Shareholders of a private company can act by way of written resolution. CAMA provides that a resolution of the shareholders of a company would be effective only if it is passed at a general meeting. However, the shareholders of a private company may act by a written resolution signed by all the shareholders entitled to attend and vote at the general meeting of the company where the resolution would have been passed.

CAMA does not provide for virtual meetings. By the provisions of CAMA, all statutory and annual general meetings shall be held in Nigeria and the notice calling for such meetings should contain the place for the meetings. An extraordinary general meeting has no such restrictions and therefore can be a virtual meeting. In practice, a company may provide for the holding of virtual meetings in its articles of association.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The duty to call general meetings of shareholders is one held by the board of directors. However, a shareholder or shareholders representing at least one-tenth of the shareholding (or voting rights in a company not having share capital) of the company may requisition a general meeting at any time. Where the board refuses to convene the requisitioned meeting within 21 days, the requisitionists are authorised to convene the meeting (within three months of the requisition) after issuing the required notices and any reasonable expenses incurred in relation to the meeting shall be repaid by the company.

The nomination of a person to the board of directors can be put to a vote at a general meeting, provided that prior notice (not less than three or more than 21 days prior to the meeting) outlining his or her intention to propose such person for election has been given, signed by a shareholder qualified to attend and vote at the meeting and accompanied by a notice in writing signed by the nominated person of his or her willingness to act.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

There are no statutory provisions that expressly provide that controlling shareholders owe legal duties to the company or minority shareholders. However, the CBN Code, the SEC Code and the NAICOM Code each provide that it is the responsibility of the board to ensure that minority shareholders are protected from the overbearing influence of controlling shareholders of a company and to ensure the fair treatment of all shareholders. Further, if a controlling shareholder infringes on the rights of a minority shareholder, or commits a fraud on either the company or the minority shareholder, which the directors fail to redress (owing to the wrongdoer being in control of the company or otherwise), the non-controlling shareholder may apply to court for injunctive relief.

A shareholder may also bring an application to the court for relief on the grounds that the actions of the company are being conducted in an unfairly prejudicial and oppressive or discriminatory manner.

Further, a shareholder may bring a derivative action on behalf of the company where the wrongdoers are in effective control of the company, the directors refuse to act, the application is brought in good faith, and it is in the best interest of the company. Evidence that the majority shareholders have approved any such wrongdoing will not in itself prevent a shareholder from seeking relief from the courts.

A shareholder who possesses, either directly or through a nominee, shares in a public company that entitles the shareholder to exercise 10 per cent of the unrestricted voting rights at any general meeting must notify the company of his or her interest. The duty also arises where the shareholding falls below 10 per cent.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are generally not liable for the acts or omissions or debts of the company as the liability of shareholders is limited to the amounts paid or yet to be paid on their shares. In the case of an unlimited company, the liability of members for the debts of the company is unlimited. The company is a separate legal personality from its members. However, the courts may ‘lift the corporate veil’ where a company is a mere sham or is being used as a tool to perpetrate illegality. A shareholder may also be liable where, to his or her knowledge the company operates with less than two directors.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

There are generally no rules prohibiting anti-takeover devices. The directors have a duty to act in the best interests of the company in all situations. Major shareholders of a company may enter into a lock-in arrangement.

The ISA mandates directors of a target company to send circulars to members of the target company expressing their opinion one way or the other on a takeover bid. A dissenting director can also circulate his or her opinion to the shareholders.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Subject to any limitations in the articles of a company, the power to issue shares is vested in the company. The power is exercised by the general meeting unless the articles specify otherwise, and the general meeting may grant the authority to issue new shares to the board.

The articles of a company should determine whether shareholders have pre-emptive rights to acquire newly issued shares. Where the articles do not provide for such rights, none can be said to exist. The articles of private companies usually provide for pre-emptive rights.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The transfer of shares of a private company is subject to restrictions as specified in its articles of association. Restrictions commonly employed include provisions on pre-emptive rights. The right of pre-emption gives the other shareholders the first option to buy any shares a shareholder wishes to sell or transfer. Another restriction employed are clauses in a company’s articles giving the board of directors and, in some cases, the shareholders a discretion to refuse to approve or register transfer of shares to persons or entities of whom they do not approve.

Public companies are expressly precluded from restricting the transfer of fully paid shares.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

There are certain situations in which a company may repurchase its shares. These are where the company does so in order to settle a debt or claim against the company, to eliminate fractional shares, where the company has entered into an agreement to purchase shares from an officer or employee of the company or in order to satisfy the claims of a dissenting shareholder, or in compliance with a court order in the course of an arrangement or compromise. CAMA provides that an agreement with a company providing for the acquisition by a company of its shares is specifically enforceable against the company, to the extent that the company can perform the agreement without breaching the provision of CAMA on repurchase of shares. Any public company seeking to repurchase its own shares is also required to obtain the approval of the SEC and comply with the SEC Rules.

Where the shares are to be repurchased by the company, the shares may only be repurchased out of profits that would have been otherwise distributed as dividends or out of the proceeds from a fresh issue of shares made specifically for the purpose of the purchase of such shares.

Further, redeemable shares shall not be purchased at a price greater than the lowest price at which they are redeemable.

14 Dissenters’ rights

Do shareholders have appraisal rights?

The ISA provides that where the approval of nine-tenths of the shareholders has been obtained, the shares of the dissenting shareholders (those who have not approved a scheme of merger, takeover or acquisition) may be acquired, with notice, at the value agreed by the consenting shareholders except where the dissenting shareholders apply to court to have those terms varied. Aggrieved shareholders may petition the court to make an order compelling the company to buy them out at a price to be determined by the court.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The board structure for listed companies can best be described as one or single-tier, comprising both executive and non-executive directors.

The SEC Code provides that the board should be of a size relative to the size and complexity of the operations of the company. It further recommends that the board of a public company should be made up of at least five directors but sets no upper limit for the number of directors on a board. The SEC Code further recommends that the majority of the board members should be non-executive directors and at least one should be an independent director.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board’s legal responsibilities include directing and managing the affairs of the company, securing its assets, performing its duties in the interest of the company and furthering the purposes for which the company was formed.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board represents the company and owes its duties primarily to the company. The board is to perform its duties in the interest of the company and all its shareholders as a whole, and not in the interest of a specific shareholder or a section of the shareholders. The board is also to take into consideration the interests of the employees in general, in performing its duties. However, the interests of the company must always come first, regardless of whether the actions of the board may adversely affect a shareholder.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The directors owe their duty to the company. The company can bring an action against a director to enforce any duty imposed by law or contract. A shareholder may bring an action to prevent or redress a breach of duty by the directors.

A shareholder may also, with the leave of court, bring a derivative action on behalf of the company where the wrongdoers are directors who are in control and thus will not redress the wrong done to the company. A shareholder may also apply for relief from the court on the grounds that the affairs of the company are being conducted in an unfairly prejudicial and oppressive manner.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The directors of a company owe a duty of care and skill to the company and are to exercise such degree of care and skill that a reasonably prudent director would exercise in comparable circumstances. A director is required to exercise the powers and duties of his or her office honestly, in good faith and in the best interests of the company.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The same standard of care in relation to the duties of a director is expected of all members of the board including executive and non-executive directors. The relationship is a fiduciary one and directors are trustees of the company’s assets, and are bound to exercise their powers in the interest of the company.

However, there may be additional contractual liabilities and benefits for executive directors under the principles of ‘master and servant’ where there is a contract to that effect.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board is empowered, subject to any specific provisions in the articles to the contrary, to delegate any or all of its powers to a managing director or to committees made up of members of the board. The managing director or committee shall, in the exercise of such responsibilities so delegated, conform to any directions or regulations of the board. However, such delegation should not be done in such a way that it amounts to an abdication of duty.

The SEC Code provides that it is the responsibility of the board to facilitate the effective discharge of its duties and responsibilities through committees. While membership of these committees is exclusively reserved for board members, senior managers are allowed to be in attendance during their meetings to provide all necessary information needed by the committee to make informed decisions on behalf of the board. Even after delegating its powers, the overall responsibility of directing and managing the affairs of the company still ultimately lies with the board.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The SEC Code recommends that there be at least five members of the board with a mix of both executive and non-executive directors. The CBN Code and the SEC Code provide that the number of non-executive directors on the board should exceed the number of executive directors. The CBN Code provides that for banks, at least two of the non-executive directors should be independent directors, and for discount houses at least one of the non-executive directors should be an independent director. The SEC Code provides for a minimum of one independent director.

The SEC Code describes an independent director as a non-executive director who:

• is not a substantial shareholder of the company, that is, one whose shareholding, directly or indirectly, does not exceed 0.1 per cent of the company’s paid-up capital;

• is not a representative of a shareholder that has the ability to control or significantly influence management;

• has not been employed by the company or the group of which it currently forms part, or has not served in any executive capacity in the company or the group for the preceding three financial years;

• is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the group in an executive capacity;

• is not a professional adviser to the company or group, other than in the capacity of a director;

• is not a significant supplier to or customer of the company or group;

• has no significant contractual relationship with the company or group and is free from any business or other relationship that could materially interfere with his or her capacity to act in an independent manner; and

• is not a partner or an executive of the company’s audit firm, internal audit firm, legal or other consulting firm that have material association with the company and has not been a partner or an executive of any such firm for three financial years preceding his or her appointment.

The PENCOM Code describes an independent director as one who has no relationship with the company, its related companies or officers that could interfere, or be reasonably perceived to interfere, with the exercise of his or her independent business judgement. The NAICOM Code provides that the board of insurance companies should have a minimum of seven and a maximum of 15 members and that the maximum number of executive directors should not exceed 40 per cent of the members of the board. The PENCOM Code provides that the number of non-executive members (excluding the chairman) of the board shall equate to the number of executive directors. The NAICOM Code and PENCOM Code each provide for a minimum of one independent director.

Non-executive directors are those whose roles are strictly supervisory and who do not participate in the day-to-day running of affairs of the company but are nevertheless important members of any board in the sense that they play a key role in the transparency, integrity and credibility of the board. An independent director on the other hand serves the function of bringing an objective, unbiased perspective to the board in carrying out its functions.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Generally, persons of unsound mind, persons under the age of 18, persons previously convicted of fraud or breach of duty in connection with the promotion, formation or management of a company and insolvent persons are statutorily disqualified from being directors. There are criteria that must be met to be a director in a company and any person who is or proposes to be a director of a company must meet these criteria. A company may by its articles require directors to hold a specified number of shares. Failure of a director of such a company to obtain the share qualification within two months of his or her appointment will result in the person vacating his or her office until he or she obtains the shareholding qualification. The PENCOM Code provides that a director of a pension fund administrator (PFA) must not be a director, an employee, a principal officer or shareholder in a pension fund custodian (PFC) with which the PFA conducts business.

Managing directors and key management operating in certain industries may be required by the regulations and guidelines governing those industries to have specific qualifications. The SEC Code permits public companies to have a governance or remuneration committee whose function is to establish the criteria for board and board committee membership and to periodically evaluate the skills, knowledge and experience required on the board. The CBN Code prescribes that members of the board shall be qualified persons of proven integrity and be knowledgeable in business and financial matters in accordance with the extant CBN Assessment Criteria for Approved Persons’ Regime for Financial Institutions. The NAICOM Code emphasises competence and integrity.

There is no restriction on the nationality of directors. Non-Nigerian citizens are permitted to be directors. Aside from the NCC Code, there are no gender requirements in the composition of boards.

A person over 70 years of age or more who is or is to be appointed as a director in a public company is required to disclose his or her age to the members of the company in a general meeting and failure to do so amounts to an offence under CAMA. Special notice of the resolution approving or appointing such a director must be given by the company to its members, disclosing the age of the director. An appointee to the board of a public company is also expected to disclose his or her membership of boards of other companies to enable the shareholders to give full consideration to his or her other obligations and commitments in determining his or her suitability as a board member.

CAMA requires every company to have a minimum of two directors at all times but does not provide for the maximum number of directors a company may have. CAMA provides, however, that the number of directors shall be determined in writing by the subscribers of the memorandum of association or a majority of them with the power of the shareholders at a general meeting to increase or reduce the board. The laws and regulations governing particular industries may also set the minimum and maximum number of board seats. The CBN Code prescribes a minimum and maximum board size of five and 20 directors respectively. The SEC Code prescribes a minimum of five directors while directing that the board of a company be of a sufficient size relative to the scale and complexity of the operations of the company. The NAICOM Code prescribes a minimum of seven and a maximum of 15 board members for insurance companies. The PENCOM Code prescribes that the board of a company shall not exceed a size that will allow it to employ simple and effective methods of work to enable each director to feel a personal responsibility and commitment to the company and the board is to take into cognisance the scope and nature of the operations of the company.

The NCC Code requires the composition of a board to include a mix of skills, diversity, experience and gender. The number of directors should reflect the scale, size, complexity and reach of the business of the company and the skills and resource requirements of the company have to be taken into consideration. A majority of the board should be non-executive directors with at least one independent director holding not more than 0.1 per cent of the shareholding directly or indirectly in the company. One-third of the non-executive directors is also required to retire yearly by rotation subject to reappointment and for larger companies, non-executive directors should not remain on the board for a continuous period in excess of 15 years.

Vacancies on the board may be filled by the shareholders of a company in a general meeting. The board of directors of a company is also empowered to appoint new directors to fill casual vacancies created by death, resignation, retirement or removal of a director. Such appointments are, however, subject to ratification by the shareholders at the next general meeting.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The SEC Code recommends that the board of a company should not be dominated by any one person and the positions of chairman and CEO should be separate and be held by different individuals. Also, the chairman of the board should be a non-executive director in order to ensure the effective operation of the board. While the role of the CEO is to see to the day-to-day running and management of the company, the chairman’s role is to provide overall leadership, direction and supervision of the board. The separation of the roles of board chairman and CEO is considered best practice.

The CBN Code and the NAICOM Code make it mandatory that no one person shall hold or combine the office of chairman of the board and that of CEO or managing director. The CBN Code further provides that no executive vice chairman shall be recognised in the board structure. The PENCOM Code and the NCC Code also require the position of the chairman of the board and the CEO to be occupied by two separate individuals.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Every public company is required to set up an audit committee consisting of an equal number of directors and shareholders’ representatives up to a maximum of six members. Members of an audit committee are not entitled to remuneration and are subject to re-election annually. The functions of the audit committee include:

• ascertaining whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;

• reviewing the scope and planning of audit requirements;

• reviewing the findings on management matters in conjunction with the external auditor and departmental responses thereon;

• keeping under review the effectiveness of the company’s system of accounting and control;

• making recommendations to the board with regard to the appointment, removal and remuneration of the external auditors of the company; and

• authorising the internal auditor to carry out investigations into any activities of the company that may be of interest or concern to the committee.

The various corporate governance codes require that members of the audit committee should be able to read and understand basic financial statements, and be in a position to make valuable contributions to the committee. The SEC and CBN Codes provide that at least one member of the committee should be financially literate. The SEC Code further provides that, when necessary, external professional advice may be sought by the committee.

The board of a public company is permitted by the SEC Code to establish a risk management committee and a governance or remuneration committee in addition to its audit committee. The risk management committee is to serve the function of assisting in the overseeing of the risk profile and the risk management framework to be determined by the board, while the governance or remuneration committee serves the function of periodically evaluating the skills and experience required by the individual members of the board and the board as a whole and making recommendations on the compensation structure for the executive directors of the company.

Banks and discount houses in Nigeria are directed by the CBN Code to establish a committee responsible for the overseeing of risk management and audit functions and a board governance and nominations committee. The CBN Code further provides that the risk management and audit functions may be carried out by one committee, particularly in small institutions. The CBN Code proscribes the chairman of the board from being a member or chairman of any committee and provides that board committees must be headed by non-executive directors. The board remuneration committee must have at least two non-executive directors, while the board audit committee must have at least three members consisting only of non-executive directors and be headed by an independent director.

The PENCOM Code requires PFAs and PFCs to constitute a nominating committee (NC) whose duty is to make recommendations to the board on all board appointments. The NC shall consist of three directors including the chairman of the board and an independent director.

It is common practice among quoted companies to have various board committees assist the boards in administering the affairs of such companies and strengthen corporate governance. These committees, which may be known by different names in different companies, include nomination, general purpose, remuneration or compensation, risk assessment, strategy, corporate governance, finance, etc.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There are no statutory minimum requirements on the number of board meetings per year. However, directors are required to meet no later than six months after the incorporation of the company. The directors may otherwise regulate their meetings.

The PENCOM, CBN, SEC and NCC Codes recommend that board meetings be held at least quarterly in each financial year. The NAICOM Code provides that the board shall meet not less than four times in a year.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

CAMA provides that, where a director presents him or herself for re-election, a record of his or her attendance at meetings of the board during the preceding year shall be made available to members at the general meeting where he or she is to be re-elected. Where a person to be appointed or re-elected as a director is 70 years old or older, notice of his or her election or re-election shall disclose the age of the person to the shareholders.

The CBN Code requires the board to disclose the total number of board meetings held in the financial year and attendance by each director in its annual report. The CBN Code also provides that members of the board be appraised by an independent consultant annually on all aspects of the board’s structure, composition, responsibilities, processes and relationships and the report of the independent consultant must be presented to the shareholders in the general meeting and to the CBN.

In addition, the SEC Code provides that the board of a public company is to include a corporate governance report in its annual reports, to be circulated to members and the regulatory authorities. The corporate governance report may contain information on the composition and responsibilities of board committees, and records of attendance at board and shareholders’ meetings by directors during the period covered by the annual report. The SEC Code goes further to provide that the company’s annual report ought to make sufficient disclosures on its accounting and risk management issues, indicating the board’s responsibility for the process of risk management as well as its opinion on the effectiveness of the process.

Public companies are also to disclose the details of any director’s interests in contracts with the company, its subsidiaries or holding companies and should also disclose any service contracts and any other significant contracts with controlling shareholders. Directors are required by the SEC Code to disclose any other directorship positions in other companies so that the members of the company can take into consideration a director’s other responsibilities in assessing his or her suitability as a director in the company.

The directors are required to disclose their shareholdings in the company. Directors are also required to disclose loans made by the company to directors, their interest in contracts involving the company and any conflicts of interest in relation to the company.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

CAMA provides that the remuneration of directors should be determined by the company in a general meeting, while the SEC Code provides that the remuneration of executive directors should be set by a remuneration committee consisting wholly of non-executive directors. The SEC Code also provides that the remuneration for non-executive directors should be fixed by the board and approved by the members in a general meeting and that, where share options are granted as part of remuneration for directors, the board should ensure that they are not priced at a discount except with the approval of the SEC. The CBN Code also requires the remuneration of directors to be fixed by a committee composed of non-executive directors and the remuneration for non-executive directors should be strictly limited to directors’ fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses. Executive directors do not receive sitting allowances and directors’ fees. The CBN Code further provides that stock options offered as part of executive remuneration shall be tied to performance subject to the approval of shareholders in general meeting, may only be exercisable after one year of the expiry of the director’s tenure and may only be priced at a discount on the authorisation of relevant regulatory agencies.

The remuneration of each director should be proportionate to his or her skill and experience and should be sufficient to attract, motivate and retain skilled and qualified persons. The remuneration of directors is to be disclosed in the yearly financial statements of the company.

The CBN Guidelines for the appointment of independent directors restricts the term of office of independent directors to a single term of four years and a maximum of eight years of two consecutive terms. In relation to other non-executive directors, their tenure is limited to a maximum of three terms of four years each. With respect to the tenure of the chief executive officer of a bank, the CBN Code allows for a tenure of 10 years, which may be broken down into periods not exceeding five years at a time.

CAMA discourages directors’ service contracts beyond a five-year term and provides that, before a service contract for a term beyond five years is executed, it must be approved by a resolution of the company. The SEC Code, while subjecting the tenure for directors to the provisions of CAMA, recommends that all directors should be submitted for re-election at regular intervals of at least once every three years. The SEC Code also provides that non-executive directors of public companies should serve for reasonable periods on the board but emphasises the necessity to continually reinforce the board by injecting new energy, fresh ideas and perspective and that the board should ensure the periodic appointment of new directors to replace existing non-executive directors.

Companies are prohibited from making loans to directors and are also not allowed to guarantee such loans. There are, however, two exceptions provided in CAMA: the company can grant a loan to a director where such loan will enhance the performance of his or her duties in the company; and the company can also grant a loan to a director where money lending is one of its ordinary businesses and the lending is done in the ordinary course of business.

In addition, substantial property transactions between a company and its directors are prohibited unless approval is granted by the company by way of an ordinary resolution at a general meeting. If a director is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company, he or she is required to declare the nature of his or her interest at a meeting of the board. Banks are also required to disclose details of insider-related credits in their financial statements. Such insider-related credits include transactions involving directors, shareholders, employees and their related interests.

CAMA makes it unlawful for a company to make payment to a director as compensation for loss of office or as consideration for or in connection with his or her retirement from office unless particulars of the proposed payment and amount have been disclosed to the members of the company and approved. Under CAMA, members’ approval is also required for compensatory payments to be made where, in connection with the transfer of the whole or part of the undertaking or property of a company, it is proposed to make any payment to a director as compensation for loss of office or as consideration for or in connection with his or her retirement from office.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The remuneration of the managing director is determined by the board. In addition to the response stated in the penultimate paragraph of question 28, banks are required by the CBN to disclose details of insider-related credits including the aggregate amount of insider-related loans, advances and leases outstanding with non-performing components further analysed by security, maturity, performance, provision, interest-in-suspense and name of borrowers in their financial statements.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Directors’ and officers’ liability insurance is permitted. It is not common practice for companies to take out such insurance, though some companies, in keeping with international best practices, take out liability insurance for their directors and officers.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Companies are permitted to indemnify their directors and officers for liabilities incurred in their capacities as directors and officers of the company except in cases of negligence, fraud or breach of trust in relation to the company.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

A company may ratify the act of an officer or director even where such an act or conduct is irregular. The company may also, by its articles (or by the director’s contracts of service), limit the liability of a director except in cases of negligence, fraud or breach of trust of which a director or officer may be guilty in relation to the company.

Further, a company may also provide that the liability of a director be unlimited, regardless of the fact that the company itself is a limited liability company, provided that the director is given notice before he or she takes up the appointment that his or her liability shall be unlimited. The company may also, by special resolution, amend its memorandum so as to render the liability of its directors or managers unlimited.

33 Employees

What role do employees play in corporate governance?

The CBN and SEC Codes require every public company to establish whistle-blowing procedures that encourage staff to report unethical activity or breaches of corporate governance to, in the case of the CBN Code, the bank and CBN and under the SEC Code, the company. The ISA also makes provision for employees of publicly quoted companies to report suspected criminal activities or non-compliance with any legal obligation within the company. The law provides that any such whistle-blower shall be protected from detriment as a result of his or her actions. Where he or she suffers any detriment, the SEC may, on his or her complaint, order that the employee be reinstated or compensated, or both. The CBN Guidelines for Whistle Blowing in the Nigerian Banking Industry, 2014 provide similar protection for employees of financial institutions.

In addition, the managing director and executive directors, as employees of the company, are responsible for the implementation of corporate governance policies.

The PENCOM Whistle Blowing Guidelines for Pensions (WBGP) provides that the directors, management, employees and any other persons that have dealings with a PFA or PFC shall have the responsibility to report breaches to PENCOM and requires that all PFAs and PFCs undertake not to victimise employees that comply with the WBGP. Where victimisation nonetheless occurs, the WBGP provides that PENCOM shall employ appropriate regulatory tools to offer redress to the employee concerned.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Under the NCC Code, the board is required to establish a system for periodic evaluation of its own performance, that of its committees, chairman, chairmen of its committees and individual directors. This should be done at least annually, and a statement of evaluation is required in the company’s annual returns to state whether evaluation had been conducted during the period under the review. The evaluation is to be an objective and independent process. The CEO appraisal is to be done by the board or such committee of the board made up of non-executive directors.

The SEC Code also requires a board to establish a system to undertake an annual and rigorous evaluation of its own performance, its committees, chairman and individual directors. The chairman is to oversee the evaluation of the performance of the CEO while the CEO is to do the same for the executive directors. The result of the evaluation is to be communicated and discussed by the board as a whole while that of the independent directors is to be communicated and discussed by the chairman with them. The board may engage the services of external consultants to facilitate the evaluation. The cumulative result of the performance evaluation of the board and independent directors is to be used as a guide for re-election. The SEC Code further recommends training for any director whose performance is unsatisfactory or where not feasible, removal from office.

The PENCOM Code has similar provisions to the SEC Code and NCC Code and requires that the outcome of the evaluation shall be prepared in two copies, one of which must be submitted to the Pension Commission along with the company’s annual report on corporate governance.

The CBN Code requires an annual formal assessment of the effectiveness of the board as a whole and the contribution by each individual director (including the chairman) to the effectiveness of the board. The Nomination Committee is to recommend the evaluation procedure and propose objective performance criteria, which should be approved by the board. The issues to be evaluated should include attendance at meetings, contributions to discussions at board meetings and board committee meetings, business referrals or support of the institution, public standing of the director and the beneficial effect of this on the business of the institution. The performance indicators should include the compliance status of the institution, the overall performance of the institution, regularity of board meetings and the overall contribution of the board to the performance of the institution.

Under the PENCOM Code, the evaluation should answer questions such as:

• how well the board performed against any performance objectives that have been set;

• what the board’s contribution to the testing and development of strategy has been;

• whether the composition of the board and its committees is appropriate with the right mix of knowledge and skills to maximise performance in the light of future strategy;

• if the board responded to any problems or crises that have emerged and whether these could have been foreseen;

• how well the board communicates with the management team, company employees and others;

• how effectively the board uses mechanisms such as the annual general meeting;

• whether the board as a whole is up to date with the latest developments in the regulatory environment and the market;

• whether sufficient board and committee meetings of appropriate length are held to enable proper consideration of issues; and

• whether board procedures are conducive to effective performance and flexible enough to deal with all eventualities, etc.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The memorandum and articles of association and other statutory filings of companies are available to the public at the Corporate Affairs Commission. Copies can be obtained upon application and subject to the payment of prescribed fees.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The annual reports and accounts consisting of the directors’ report, auditor’s report and financial statements are to be filed with the Corporate Affairs Commission after every annual general meeting of a company. These documents can be accessed by the general public upon payment of the requisite fee. Other information filed with the Corporate Affairs Commission, which is available to the public, includes any changes in the composition of the board of directors, return of allotment of shares, change of registered address, charges on the company’s assets, appointment of receivers, appointment of liquidators, etc. Outside the statutory requirements, companies are encouraged to also include corporate governance reports laying out the company’s governance structure, policies and practices in their annual reports.

Quoted companies are required to make certain disclosures to the Nigerian Stock Exchange and the SEC from time to time. Such disclosures include:

• information on acquisitions of other companies or businesses;

• preliminary results for any year, half-year, quarter and comparative figures in respect of the profits before and after taxation, even if this calls for qualification that such figures are provisional or subject to audit;

• information on any proposed changes in the capital structure of the company or redemption of securities;

• financial statements; and

• interim reports such as first-quarter, half-year and nine-month accounts.

In addition, the annual reports shall disclose, among other things, the directors’ direct and indirect holdings in the issued shares, substantial shareholdings representing 5 per cent or more of issued shares and a five-year financial summary. The CBN and SEC Codes also require the board to disclose its risk management policy in its annual report.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Shareholders have a direct say in directors’ remuneration. CAMA provides that directors’ remuneration be determined by the shareholders in a general meeting. Such votes take place at the annual general meeting of a company. However, the board fixes the remuneration of executive directors. The SEC and CBN Codes stipulate that only the non-executive directors should be involved in decisions regarding the remuneration of executive directors.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Shareholders can nominate a director to be appointed to the board at the general meeting. The law states that a motion for nomination will be treated as a motion for his or her appointment.

A member may leave at the registered address of a company a signed notice in writing of his or her intention to propose a person for election to the office of a director in place of a retiring director at a general meeting. The notice must be given not less than three days or more than 21 days before the date appointed for the meeting and must be accompanied by a notice in writing signed by that person of his or her willingness to be elected.

One or more members representing not less than one-twentieth of the total voting rights of members entitled to vote at a general meeting or 100 or more members holding shares on which there has been paid up an average sum per member of at least 500 naira, may requisition the company to circulate notice of a resolution they intend to be moved at a general meeting. The proposed resolution can propose the appointment of a new director. The company has a duty to give notice of the resolution to members entitled to receive notice of the next annual general meeting where the resolution is intended to be moved. The notice of the resolution shall be given in the same manner and so far as practicable, at the same time as notice of the meeting and where not practicable, soon thereafter. The company is, however, not bound to give notice of any requisition unless a duly signed copy is deposited at the registered address of the company and a sum deposited or tendered, which is reasonably sufficient to meet the company’s expenses in giving effect to it. The company may also decide to bear the expenses of circulating notice of the proposed resolution.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The process of engaging with the shareholders is typically led by the directors and senior management of the company. Generally, companies engage with their shareholders through the holding of general meetings. It is usual for directors, senior management, external counsel, auditors and other specialists or consultants engaged in relation to matters to be discussed or decided during a general meeting of the company to be involved in such engagements. Some quoted companies also organise pre-AGM forums or dinners for directors, management, investors, major customers, etc to interact.

The SEC Code provides that the general meetings of the company should be the primary avenue for meeting and interaction between the shareholders, management and board of a company. It further requires that general meetings should be conducted in an open manner allowing for free discussions on all issues on the agenda such that sufficient time is allocated to shareholders to participate fully and contribute effectively at the meetings.

The NAICOM Code provides that directors should always communicate information that is understandable and accessible to shareholders in a timely manner and on a regular basis and encourage shareholders to participate in annual general meetings. Under the CBN Code, banks are encouraged to communicate with their shareholders via their website. Information to be provided through this means shall include major developments in the bank, risk management practices, executive compensation, local and offshore branch expansion, establishment of investment in subsidiaries and associates, board and top management appointments and sustainability initiatives and practices.

The NCC Code provides that there should be a dialogue and engagement between the board and the shareholders to align appreciation and attain the mutual understanding of corporate objectives of telecoms companies.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

While some of the codes encourage corporate social responsibility, they do not all have specific disclosure requirements. The SEC Code requires companies to pay attention to the interests of its employees, host community, consumers and the general public. It further requires that companies demonstrate sensitivity to local social and cultural diversity issues. The SEC Code mandates that the board report annually on the nature and extent of its social, ethical, safety, health and environmental policies and practices including application of options with the most benefit or least damage to the environment, opportunities created for physically challenged persons or disadvantaged individuals, the nature and extent of the company’s social investment policy and the company’s policies on corruption and related issues. The CBN Code requires that banks demonstrate a good sense of corporate social responsibility to their customers, employees, host communities and the general public and encourages banks to make robust disclosures beyond the statutory requirements of CAMA and BOFIA.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no direct requirement to disclose pay ratio between CEOs and other employees of companies. However, various codes of corporate governance require that companies disclose their remuneration policies.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The various corporate governance codes or regulations have no requirement for disclosure of information on gender pay gap. The SEC Code requires that companies report annually on the nature and extent of employment equity and gender policies and practices, especially as they relate to executive level opportunities.

Update and trends

The National Assembly is considering the Chartered Institute of Nigeria (Establishment) Bill, which seeks to, among other things, promote corporate governance values by directors serving in both public and private companies. The bill seeks to establish a Chartered Institute of Directors of Nigeria (the Institute) which shall serve as a regulatory body for persons serving as directors in the public and private sectors. The Institute is to have several functions and powers including building capacity of directors in respect of corporate governance issues and determining the standard of knowledge and skill to be attained by persons seeking to be members of the Institute.

The FRCN has recently inaugurated a Technical Committee to review the National Codes of Corporate Governance, released earlier and suspended by the FRCN. The Technical Committee has engaged various stakeholders, including other regulatory bodies, shareholders’ associations and professional bodies, with a view to aligning the National Codes of Corporate Governance with the existing codes of corporate governance. The high level of stakeholder engagement with respect to the ongoing revision of the National Codes of Corporate Governance is expected to resolve the issues relating to said Codes and create minimal or no friction in the application of the revised National Codes of Corporate Governance by companies currently being regulated by any one of the existing codes of corporate governance.

Tamuno Atekebo

tamuno@sskohn.com

Otome Okolo

otome@sskohn.com

Omolayo Latunji

omolayo@sskohn.com

16D Akin Olugbade Street

Victoria Island

Lagos

Nigeria

Tel: +234 1 271 2276 / 3846

Fax: +234 1 271 2277

www.sskohn.com

Norway

Anne Kaurin, Janne Kaada Erichsen and Marius L Andresen

Kvale Advokatfirma DA

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main Norwegian company laws are the Private Limited Liability Companies Act (Companies Act), the Public Limited Liability Companies Act (Public Companies Act) and the Partnership Act.

The following laws and regulations also apply to listed companies:

• The Securities Trading Act (Securities Act);

• Oslo Stock Exchange listing rules (Listing Rules);

• Continuing obligations of stock exchange listed companies (Continuing Obligations); and

• The Norwegian Corporate Governance Board Code of Practice (Code of Practice).

The Companies Act, the Public Companies Act, the Securities Act, the Partnership Act, Listing Rules and Continuing Obligations are mandatory provisions. The Code of Practice applies on a ‘comply or explain’ basis.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The Norwegian Parliament is responsible for implementing all Norwegian laws.

The Listing Rules and Continuing Obligations are prepared by the Oslo Stock Exchange. The Code of Practice is made by the Norwegian Corporate Governance Board.

The Norwegian courts enforce rules of law in general. The Oslo Stock Exchange enforces the Listing Rules. The Norwegian Financial Supervisory Authority supervises and controls compliance with laws and regulations applicable to listed companies.

Proposals of new legislation are published and it is common that well-known law firms and other relevant private or public bodies submit their views in respect of the proposals. Such submissions are considered by the Norwegian Parliament.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

The shareholders appoint and can remove members of the board of directors of a company. Such resolution shall be passed by the general meeting with an affirmative vote of more than 50 per cent of the shareholders represented at the meeting.

The shareholders cannot require the board to pursue a particular course of action as such. Shareholders representing at least 10 per cent of the share capital of a company can require the board of directors to convene a general meeting in order to resolve a particular matter.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

A number of important decisions are reserved to the shareholders pursuant to the Companies Act and the Public Companies Act. The main decisions that must be adopted by the general meeting are:

• approval of the annual accounts;

• other matters that, pursuant to the articles of association, shall be resolved by the general meeting;

• election of board members;

• amendments of the articles of association;

• election of auditor;

• distribution of dividends;

• approval of agreements between a company and related parties;

• amendments of the share capital;

• mergers and de-mergers; and

• liquidation.

There are no regulations regarding non-binding shareholders’ vote pursuant to the Companies Act or the Public Companies Act.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

The main rule is that all shares have the same rights. The general meeting can resolve that the company shall have different share classes. If such resolution is passed this shall be reflected in the articles of association, together with information about the rights pertaining to each share class. Different share classes may have different rights, such as voting rights or the right to receive dividend payment.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Private limited companies

All shareholders can participate in general meetings and vote for their shares. Shareholders can act by written consent without a meeting or by a virtual meeting if no shareholders object to such procedure.

Public limited companies

All shareholders can participate in general meetings and vote for their shares. The right to vote at the general meeting can, by written regulation in the articles of association, be limited to persons or companies registered as shareholders on the day falling five days prior to the date of the general meeting. The articles of association can include regulations stating that shareholders wishing to participate in a general meeting must notify the board within a set deadline not less than five days prior to the meeting. Shareholders that do not comply with this deadline may be excluded from the meeting.

The main procedure for public limited companies is that the general meeting is held as a physical meeting. The shareholders can participate through electronic measures unless otherwise specified in the articles of association. If specified in the articles of association, the shareholders may cast their vote in writing prior to the general meeting.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Shareholders representing at least 10 per cent of the share capital of a company may require the board of directors to convene a general meeting in order to resolve a particular matter, including director nominations. If the board does not convene the general meeting, the local court shall convene the meeting if requested by a board member, member of the corporate assembly, the CEO, a shareholder or the auditor.

A shareholder may require that a specific matter is put to a shareholder vote at the general meeting. In this case, the matter in question, accompanied with a proposed resolution and a description of the reasons for putting the matter to a shareholder vote, must be submitted to the board in writing at least seven days before the summons to the general meeting is to be distributed. If the summons has already been distributed, a new summons, including the requested matter, shall be distributed, unless the deadline for summoning the general meeting has passed.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

The shareholders do not owe duties directly to the company or to non-controlling shareholders. However, there are regulations to protect the minority shareholders from misuse of authority. A minority shareholder may require its shares to be redeemed. A shareholder can also be liable for damages caused to another shareholder or to the company.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

A shareholder cannot be held responsible for acts or omissions of the company. A shareholder can be liable for any loss incurred by the company or a third party based on acts or omissions that the shareholder has caused in his or her capacity as a shareholder, if he or she acted negligently or with wilful misconduct.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

The Norwegian takeover rules correspond to a large extent to the rules within the European Union as the Directive 2004/25/EC on takeover bids (the Takeover Directive) is implemented in Norwegian law. The rules apply to public takeover bids (listed companies).

The Code of Practice states that in a bid situation, the company’s board of directors and management has an independent responsibility to help ensure that shareholders are treated equally, and that the company’s business activities are not disrupted unnecessarily. The board has a particular responsibility to ensure that shareholders are given sufficient information and time to form a view of the offer. The board should not hinder or obstruct takeover bids for the company’s activities or shares. The equal treatment principle is also a fundamental principle of the Public Companies Act and a requirement in respect of mandatory and voluntary offers pursuant to the Securities Act.

The Securities Act, which implements the Takeover Directive, also sets out various restrictions of the offeree company’s freedom of action. Article 11 of the Takeover Directive prevents a company from using certain measures, including restrictions on the transfer of shares and restrictions on voting rights, to defend itself from a takeover bid (breakthrough). The general meeting of a company may, by way of the articles of association, stipulate that article 11 shall apply.

Further, the Code of Practice states as a general principle that in the event of a takeover bid for the company’s shares, the company’s board should not exercise mandates or pass any resolution with the intention of obstructing the takeover bid unless this is approved by the general meeting following announcement of the bid. This corresponds to article 9 of the Takeover Directive. The Securities Act, which applies to mandatory and voluntary offers, states that article 9 will apply if adopted in the articles of association.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Issuance of new shares requires the general meeting’s approval. The general meeting can, however, grant the board a proxy to issue new shares. Such proxy cannot exceed 50 per cent of the registered share capital.

Existing shareholders have preferential rights to subscribe for shares. However, the general meeting (or the board, pursuant to proxy) can resolve that issued shares can be subscribed by others than existing shareholders and that the existing shareholders’ preferential rights shall be deviated from. If the general meeting, with the applicable vote, resolves that persons other than existing shareholders shall subscribe for shares, then the existing shareholders do not have pre-emptive rights to subscribe or acquire the shares.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Transfer of shares in private limited companies requires consent by the board of directors unless otherwise specified in the articles of association. Existing shareholders of private limited companies have pre-emptive rights unless otherwise specified in the articles of association. For public companies, restrictions may be specified in the articles of association. Such restrictions are mainly consent requirements, pre-emptive rights and ownership restrictions or shareholders’ qualifications.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Compulsory share repurchase is not common in Norway.

14 Dissenters’ rights

Do shareholders have appraisal rights?

There are no such rules in Norwegian legislation. Shareholders of private limited companies may request that their shares are redeemed in the event of violation of minority rights or if there are continuing and unresolvable conflicts of interest or opinions between the shareholders.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The board stucture in Norway is one-tier.

If a private or public company has more than 200 employees, the company shall have a corporate assembly. The corporate assembly is, among other duties, responsible for supervision of the board and the CEO. The main purpose of the corporate assembly is to elect the board members and supervise the board and the CEO’s management of the company.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

Management responsibility

The board is responsible for the management of the company and shall ensure that the business is properly organised. The board shall adopt plans and budgets for the activities of the company. The directors must keep themselves informed about the company’s financial situation and ensure that its activities, accounts and management of assets are subject to adequate control.

Supervisory responsibility

The board has a supervisory responsibility of the day-to-day management performed by the CEO. The board may also lay down instructions and issue guidelines for the company’s business. This is not a compulsory obligation, but will often be necessary for supervising the CEO.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board represents and owes it legal duties to the company. The board shall act in the best interests of the shareholders, to the extent that this is not in conflict with the company’s interests.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The general meeting resolves whether or not the company shall take enforcement action against a board member, the CEO, a shareholder, member of the corporate assembly or an investigator, for loss incurred on the company caused by such persons.

If the general meeting decides to reject enforcement actions, the shareholders representing at least 10 per cent of the share capital may resolve to enforce such actions on behalf of and in the name of the company. If the company has 100 shareholders or more, the shareholders representing at least 10 per cent of the total number of shareholders may enforce such actions. These regulations do not apply if the initial resolution by the general meeting not to enforce enforcement actions was passed with a majority vote of at least two-thirds of the cast votes and the share capital represented at the general meeting.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The board is obliged to perform the management and supervisory responsibility in compliance with the general duty of care. This means that the board shall act with due diligence and with the care of a good merchant towards the company.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The board members must exercise reasonable care, skill and diligence commensurate with the individual directors’ knowledge and skills. There is also a minimum standard of care and skills that would be expected to be met by all the individual board members. It is also expected that the board members have basic knowledge of their duties as stated in the company legislation and other applicable laws.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate its responsibilities on a case-by-case basis. It is not possible to delegate the management of the company or the supervisory responsibility in general.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

There are no applicable requirements regarding a minimum number of non-executive or independent directors for non-listed companies.

For listed companies it is required that at least two of the shareholder elected members of the board are independent. A director is independent if he or she is independent of the company’s executive management, material business contacts and the company’s larger shareholders. The Code of Practice states that the majority of the shareholder elected members should be independent of the company’s executive management and material business contacts.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The size of the board is determined by the general meeting. For private limited companies, the minimum requirement is one board member. For public limited companies, the minimum limit is three members. If a company has a corporate assembly, then the board shall consist of five members. There is no maximum number of seats on the board.

The general meeting is authorised to appoint board members. Employee representatives are elected by and from among the employees. If a company has a corporate assembly, then all board members are elected by the corporate assembly.

A minimum of half of the board members must be resident in Norway, or both a citizen of and resident in an EEA country. It is also expected that the board members have basic knowledge of their duties as stated in applicable laws.

For public companies and state-owned private companies (eg, companies where all shares are owned by the Norwegian state) there are regulations in respect of gender representation. The exact representation varies depending on the number of seats on the board.

The current board composition shall always be registered in the Norwegian Register of Business Enterprises. For listed companies, amendments to the board composition shall be notified to the Oslo Stock Exchange.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There are no requirements related to separation (or joining) of the functions of board chairman and CEO of a private company. In public companies, the CEO cannot be a member of the board. The Listing Rules state that executive employees cannot be a member of the board.

The Code of Practice states that executive employees should not be members of the board. This is also considered as best practice and common practice for both private and public companies.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

No board committees are mandatory for private companies. Listed companies shall have an audit committee that is elected by and from amoung the board members.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There are no general requirements related to a minimum number of board meetings. However, the board shall comply with its duties related to management and supervision of the company. The board must hold as many meetings as necessary to fulfil these duties and obligations.

A physical board meeting is mandatory for public companies when approving the annual accounts and determination of salary and other remuneration for the general manager and other members of management.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The Listing Rules state that the company shall provide an annual statement related to the company’s management.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The board proposes the remuneration, which is determined by the general meeting. The Code of Practice recommends that the remuneration is not linked to the results of the company. There is no other practice that affects the remuneration.

Agreements between a director and the company shall be based on market terms. Agreements that have a value above 10 per cent of the share capital of the company shall be approved by the general meeting.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Salary and other remuneration to the CEO and other members of management is determined by the board.

The Code of Practice states that the board shall adopt a statement related to all remuneration to the management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Directors’ and officers’ liability insurance is permitted and the company can pay the premiums.

This insurance would cover the liability of a director on certain terms. It is quite common in Norway that a company provides such insurance, but it depends on the size of the company and the risk of the business.

Some of the typical terms of directors’ insurance would be as follows:

• the loss has to be a recoverable damage under applicable Norwegian law;

• the loss has to occur in the capacity of being a director of the relevant company;

• the loss has to be established in the term of the insurance;

• claims made policies (only claims filed within the term of the insurance); and

• often exceptions from coverage when the director in his or her capacity as director caused the loss intentionally or by gross negligence.

The coverage would also be limited in accordance with the maximum insurance amount that appears from the specific agreement.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

The company may indemnify a director from liability by entering into an agreement with the director regulating or limiting his or her liability for loss. Such an agreement has to be approved by the general meeting and will not limit the director for loss caused by intent or gross negligence. The agreement will, however, not reduce the liability towards third parties.

The general meeting may also adopt a resolution on discharge of liability in specific matters. The company may, nonetheless, bring a claim based on a matter for which the general meeting did not receive correct and complete information on important points when the resolution was adopted.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The company or a shareholder may preclude or limit the liability of directors by entering into an agreement with the directors regulating or limiting his or her liability for loss (see question 31).

33 Employees

What role do employees play in corporate governance?

When the average number of employees exceeds 30, employees are entitled to claim employee representation on the board. Employee board representatives are elected by and from among the employees, but are equally as authorised and empowered as the board members elected by the shareholders. The number of board representatives to be elected by the employees depends on the number of employees and the total number of seats on the board.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Code of Practice states that the board shall annually evaluate its performance and expertise. The recommendation is that the report includes an evaluation of the composition of the board and the manner in which its members function, both individually and as a group, in relation to the objectives set out for its work. The board should consider whether to use external resources to facilitate the evaluation of its own work.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The articles of association are publicly available at the Norwegian Register of Business Enterprises (brreg.no) upon payment of an applicable fee.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The following information shall be disclosed to the Norwegian Register of Business Enterprises:

• articles of association;

• incorporation date;

• municipality and business address;

• board members;

• CEO;

• signatory powers;

• auditor (if applicable); and

• annual accounts.

Amendments to the above must also be disclosed without undue delay. An example is amendment to the share capital, which requires amendments to the articles of association.

There are also extensive regulations related to disclosure of information of listed companies. In general, the company shall immediately disclose inside information that directly involves the company to the Oslo Stock Exchange.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

The general meeting of public companies shall vote on the guidelines regarding remuneration to management adopted by the board. This shall be done annually.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

A shareholder can nominate a director without the recommendation of the board by requiring the board to put board election on the agenda at the company’s general meeting. The agenda is included in the summons to the general meeting, which is distributed at the company’s expense.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Companies engage with shareholders both in connection with general meetings and by general communication at other times. Such communication can include provision of general information, obtaining views from shareholders and to engage in discussions with investors on a case-by-case basis.

Pursuant to the Code of Practice, the board should establish guidelines for the company’s contact with shareholders other than communication related to general meetings.

The extent of engagement between a company and its shareholders depends on various circumstances, such as the number of shareholders, the structure of the company, and the size and type of the business.

Listed companies are subject to regulations and limitations in respect of providing information to shareholders (and others).

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

The board shall prepare an annual report in connection with the annual accounts. The report shall include information regarding the impact of the company’s business on the environment and the measures that are implemented or planned to be implemented in order to reduce any negative environmental impact. Further, gender equality shall be described, including measures implemented or planned to be implemented in order to promote equality. If a company has more than 50 employees, then implemented or planned measures related to diversity of ethnicity, religion, disability, sexual orientation and gender identity shall be described.

The board of those private companies that have annual income below 70 million kroner, a balance sheet below 35 million kroner and fewer than 50 employees does not have to prepare this annual report.

The Code of Practice states that a board should describe the company’s key values and set forth guidelines for ethics and corporate social responsibility.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Companies are not required to disclose ‘pay ratio’ information. However, the annual compensation to the CEO shall be published in notes to the annual accounts.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are not required to disclose ‘gender pay gap’ information.

Update and trends

The Companies Act has been amended on several occasions during the last four to five years. Focus has been on simplifying incorporation and management of companies, as well as making the legislation technology neutral. Changes include:

• reduction of minimum share capital from 100,000 to 30,000 kroner;

• reduction of minimum number of board members and deputy board members;

• simplifying procedures for board meetings and general meetings;

• allowing smaller companies to operate without auditing their accounts; and

• reducing the number of auditor statements and investigations required to implement certain changes.

Anne Kaurin

aka@kvale.no

Janne Kaada Erichsen

jka@kvale.no

Marius L Andresen

mla@kvale.no

Haakon VIIs Gate 10

0161 Oslo

Norway

Tel: +47 22 47 97 00

Fax: +47 21 05 85 85

www.kvale.n

Romania

Teodora Cazan and Diana Dobra

Popovici Nițu Stoica & Asociații

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The law (referring here to the broad sense of the word and thus including laws, decrees, regulations, government decisions, etc) is the sole available option for regulating a specific matter in Romania. As opposed to common law jurisdictions, the Romanian legal system does not recognise precedents as a source of law. As such, the main legal framework covering corporate governance is provided by Companies Law No. 31/1990 (the Companies Law) and Trade Registry Law No. 26/1990.

In addition, there are special regulations applicable to listed companies and to state-owned enterprises.

Listed companies are subject to special corporate governance rules provided by Capital Markets Law No. 297/2004 and Law No. 24/2017 regarding the issuers of financial instruments and to the regulations issued by the specific regulatory authority in this field, namely the Financial Supervisory Authority (FSA). Among such specific regulations, FSA Regulation No. 1/2006 regarding issuers and securities operations (FSA Regulation No. 1/2006) and FSA Regulation No. 6/2009 regarding the exercise of certain shareholders’ rights in connection to companies’ general shareholders’ meetings are the most important.

Moreover, the Bucharest Stock Exchange has issued a Corporate Governance Code, which establishes principles of corporate governance and provides recommendations. Even though the Code is not mandatory, listed companies are under the obligation to disclose, in their annual reports, whether the company complies with the provisions of the Code and, if not, the reasons for such non-compliance (the Corporate Governance Compliance Statement – the ‘comply-or-explain’ statement).

State-owned enterprises are subject to Corporate Governance Emergency Ordinance No. 109/2011 (GEO No. 109/2011).

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Under the Romanian Constitution, the Parliament, following parliamentary or government initiative, is the primary authority in charge of the enactment of binding laws and regulations, including those regarding corporate governance. Also, the Romanian government may issue legislative acts such as decisions and emergency ordinances.

In addition, other authorities (the National Bank of Romania (NBR) and the FSA) are empowered to issue secondary norms and regulations enforceable in their supervisory field.

Regarding the proxy advisory firms, the tumultuous discussions on the EU context will not lead, at least in the short term, to significant changes in Romania, taking into consideration that, in our market, there are no proxy advisory firms.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

As a matter of principle, shareholders enjoy exclusive competence to appoint and remove directors in all types of companies, by means of a secret ballot. There are two ways to appoint directors: through the statutory documents (particularly as regards the composition of the first board of directors) and by the shareholders’ meetings.

The above is particularly true with regard to joint-stock companies. Directors under the one-tier system (board of directors) are appointed by the resolution of an ordinary shareholders’ meeting, voting by simple majority, except for the first directors, who are appointed through the statutory documents of the company. Shareholders are entitled, by resolution of the shareholders’ meeting, to remove the directors at any time, by means of resolution of an ordinary shareholders’ meeting, voting by simple majority. Directors are not permitted to challenge the removal decision, but they may seek damages if the removal is made without proper cause.

As an exception to the general rule, in the two-tier system (directorate and supervisory board), the members of the directorate (who oversee the management of the company in a way that is similar to the executive officers in the one-tier system) are appointed and removed by the supervisory board (with the latter being appointed and revoked by the shareholders), the shareholders only being in charge of the appointment and removal of the members of the supervisory board. The constitutive act of one company can provide that the members of the directorate be revoked also by the ordinary shareholders’ meeting.

Deriving from its subordination to the shareholders’ meeting, the board must take all required action to implement the decisions of the shareholders’ meeting.

In listed companies and in state-owned enterprises, shareholders may appoint the members of the board of directors (under the one-tier system) and members of the supervisory board (under the two-tier system) based on the cumulative voting rights system. According to this method, a shareholder is entitled to assign its cumulative votes (ie, votes resulting from multiplying the votes held by it in the company’s share capital with the number of directors composing the company’s board) to one or more persons nominated for a board position. The existing members of the board of directors or the members of the supervisory board are automatically recorded as candidates for election in the new board of directors and, if they are not re-elected, they are considered revoked.

Upon the request of a significant shareholder (holding at least 10 per cent of the share capital or of the voting rights), appointment by this method is mandatory.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The shareholders’ meeting decides on all major issues concerning the company, such as:

• discussion, approval or amendment of the annual financial statements, including dividend distribution;

• appointment and revocation of directors, members of the supervisory board and auditors and establishment of their remuneration;

• the company budget and the business plan for the following financial year;

• change of the company’s legal form;

• change of the headquarters of the company;

• change of the company’s main business scope of activity;

• increase or decrease of the registered capital;

• setting up or dissolution of potential secondary offices;

• extension of the duration of the company’s existence;

• approval of the voluntary dissolution of the company;

• merger or spin-off of the company;

• conversion of shares from one category to another (eg, nominative to bearer shares);

• conversion of bonds from one category to another or to shares; and

• issuance of bonds.

By means of statutory documents or decision of the extraordinary general meeting of the shareholders, certain powers may be delegated to the board of directors or directorate such as: change of the headquarters of the company; change of the business activities (except for the main business activity); and an increase of the share capital. According to the Companies Law, there are no matters subject to a non-binding (consultative) vote of the shareholders.

Any shareholder who did not participate in the shareholders’ meeting or voted against is entitled to challenge the decisions that are contrary to the law or to the constitutive act of the company by filing a contestation action within 15 days of the publication of the decisions in the Official Gazette of Romania. When the challenge is based on grounds of absolute nullity, the right to challenge the decision is imprescriptible and it can be exercised by any interested person.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

The main rule is ‘one share, one vote’. However, joint-stock companies may issue preferred shares without voting rights, entitling the shareholders to a preferential distribution of dividends. Such shares are subject to specific limitations, for instance, they cannot exceed a quarter of the company’s share capital and shall have the same nominal value as the ordinary shares. Also, members of the board, executive officers, members of the directorate or of the supervisory board cannot hold such preferred shares. Although the holders of preferred shares may participate in the shareholders’ meetings, they do not have voting rights. If the company delays the paying of dividends, within specific conditions, preferred shares acquire voting rights. The extraordinary meeting of shareholders might decide on the conversion of preferred shares into ordinary shares or vice versa.

Other exceptions are allowed through the statutory documents in respect of shareholders holding more than one share. There are no specific rules on the limits of such exceptions, to the extent where they do not amount to a disproportionate distribution of dividends. Typically, such exceptions take the form of extraordinary veto rights on specific matters and other specific mechanisms such as quorum conditions, supermajorities and limitation of the voting rights for shareholders exceeding a specific share stake.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders may only vote within their general meetings; the shareholders registered as such at the reference date mentioned in the convening notice are entitled to attend the meeting and vote. Shareholders’ meetings are convened by the board of directors or by the directorate, whenever necessary, the meeting being held no sooner than 30 days of publication of the convening notice in the Official Gazette and in a widely circulated newspaper.

Shareholders may participate in general meetings either personally or via a representative holding a power of attorney in this respect. There are limitations concerning the possibility of representing the shareholders, more precisely, the directors, members of the directorate or of the supervisory board or the employees of the company cannot represent the shareholders, the sanction being the nullity of the decision of the general meeting of the shareholders if, without their votes, it would not have been possible to achieve the required majority.

Shareholders holding 100 per cent of the share capital of a company can decide to waive any and all formalities or procedural conditions with respect to the summoning, convening and holding of the general meeting of shareholders.

In the case of joint-stock companies, the powers of attorney must be submitted with the company at least 48 hours before the shareholders’ meeting (or in another such term provided by the company’s by-laws), under the sanction of losing the voting rights for that respective meeting. Shareholders holding preferred shares are not allowed to vote in general meetings; however, they are allowed to vote in the special meetings of such holders. Holders of bearer shares are allowed to vote only if they deposit such shares at the places provided by the statutory documents or by the convening notice at least five days before the general meeting. Voting rights in respect of unpaid shares are suspended until the full payment of such shares.

When a conflict of interest between the company and one of the shareholders arises, the latter is required to refrain from voting, otherwise such shareholder will be responsible for the damages caused to the company if a majority was not able to meet without him or her. The Companies Law also prohibits the shareholders who are directors, members of the directorate or of the supervisory board from voting with respect to their annual management discharge or, generally speaking, related to any other issue regarding their management.

The shareholders cannot generally act by written consent without a meeting; however, acting by written consent is usually practised in cases of non-listed companies, if the constitutive act provides this possibility and the written consent is signed by all shareholders.

Virtual meetings are expressly allowed for listed companies; they are possible for non-listed companies if the constitutive act expressly provides for it and with shareholders’ consent.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

In this respect there is a rather official procedure, which joint-stock companies (at least) must observe. As such, the main rule is that convening notices must be published both in the Official Gazette and in a widely circulated newspaper in the city where the company has its main seat at least 30 days prior to the meeting. In addition, listed companies and state-owned enterprises should also publish the convening notice on their web pages.

Although meetings are generally convened by the board, in the case of joint-stock companies, shareholders owning a certain number of shares (at least 5 per cent of the share capital, but possibly less if so stipulated in the company’s statutory documents) may require the board of directors, respectively the directorate, to convene the shareholders’ meeting or to amend its agenda. This meeting must be convened within a maximum of 30 days and held within a maximum of 60 days of the shareholders’ request. However, the convening procedures cannot be carried out directly by the shareholders.

Should the board of directors or directorate fail to comply with such a request, the shareholders are entitled to request authorisation to convene a general meeting in court. Through the same court judgment, the court will set the agenda, the reference date, the day when the general meeting shall take place and the shareholder who will chair the meeting.

Also, shareholders owning at least 5 per cent of the share capital may request the board to include new items on the agenda within a maximum of 15 days of the publication of the convening notice. The supplemented agenda completed with the requested items shall be published at least 10 days prior to the day of the shareholders’ meeting.

In limited liability companies, the board must convene the shareholders’ meeting at the request of the shareholders representing at least a quarter of the share capital of the company.

Dissenting shareholders can request that their opinion be included in the minutes of the shareholders’ meeting – to which any of the shareholders may have access upon request.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders do not owe specific duties to the company or to the non-controlling shareholders, apart from the general obligation to exercise their rights in good faith and by avoiding majority abuses, respecting the rights and the legitimate interests of the company and of the other shareholders. Controlling shareholders, like any other shareholders, are also obliged to avoid voting in situations where there is conflict of interest. If, despite this rule, they use their vote to force a decision in the shareholders’ meeting, they may be held liable for the damages caused to the company as a result of such decision, as the case may be.

With regard to majority abuses, Romanian case law has frequently been confronted with situations in which majority shareholders exercised their voting right in discretionary ways, aiming to satisfy their individual interests, in a way that harmed the company’s interest or that of the minority shareholders. Generally, majority abuses, especially if the majority shareholder is acting in bad faith, trigger the annulment of the general meetings’ decisions.

In theory, a non-controlling shareholder may also check the validity of an apparently legal decision taken by the controlling shareholder on grounds of majority abuse. Such legal actions must usually be filed within 15 days of publication of the shareholders’ resolution in the Official Gazette.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders in joint-stock and in limited liability companies (which are by far the most common forms of companies used in practice) may be held liable for the company’s obligations only to the extent of their contribution to the registered capital, unless the shareholders expressly agreed otherwise.

Nevertheless, there are specific situations where shareholders’ liability might be extended. As such, the founding shareholders are jointly and severally liable for the complete subscription and payment of the share capital or for providing true and complete data during the incorporation process.

Second, in the event of the company’s insolvency, shareholders’ liability may be extended if it is proven that the insolvency was caused by the shareholders, by way of activities such as using the assets or credit of the company in their own or a third-party’s interest, performing commercial operations for their personal interest under the protection of the company or continuing an activity that obviously led to the cessation of payments.

In the case of dissolution or liquidation of the company, shareholders that have fraudulently abused the limited nature of their liability might be held liable for the unpaid debts of the company.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

There are no specific anti-takeover devices under the Companies Law, despite the fact that anti-takeover defences are not prohibited in Romanian law. Yet, Romanian companies seem to still be reluctant to implement such clauses in their statutory documents.

However, Romania strengthened board neutrality through measures such as, for example, prohibiting the board of the company subject to takeover (after the receipt of the preliminary notice) from concluding any act or taking any measures that may affect its assets or the objectives of the takeover, except for current administrative acts (from the perspective of the Capital Markets Law, operations that are considered to affect the company’s assets include, without limitation, share capital increases or securities issues granting the right to subscribe or convert into shares and encumbrance or transfer of certain assets representing at least one-third of the net asset according to the company’s latest annual balance sheet). As an exception to this rule, only operations deriving from obligations assumed prior to the publication of the takeover notice and those operations expressly approved by the extraordinary general meeting called for that purpose after the preliminary notice may be performed.

In listed companies, the intention of an investor to take control over a company by acquiring more than 33 per cent of its voting rights is specifically conditioned. The investor has to submit a preliminary takeover announcement to the FSA, whose approval is required. Subsequent to FSA approval, the announcement has to be submitted to the company, to the regulated market on which such securities shall be traded and shall be published in at least one central and one local newspaper within the administrative and territorial area of the issuer. The board of directors then has five days to inform the FSA and the offeror about its opinion with respect to the takeover. The board may then convene a shareholders’ meeting in order to inform the shareholders about the board’s opinion with respect to the takeover. The convening of the shareholders’ meeting is mandatory for the board if it is requested by shareholders holding at least 10 per cent of the share capital, the convening notice being published within five days of the request and the shareholders’ meeting being held within five days of the publication of the convening notice in a national newspaper. From the date of the receipt of the preliminary notice and until the closing of the offer, the board of directors shall inform the FSA and the regulated market of all operations performed by the members of the board of administration and of the executive management regarding such securities. The specific regulations are in line with the EU Directive on Takeover Bids, the sell-out and squeeze-out procedures being regulated even before the transposition of the Directive.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Authorising the board of directors or the directorate to increase the share capital is an exception from the rule according to which the decision to increase the share capital belongs to the extraordinary general meeting of shareholders. The board of directors or the directorate may be entitled by the statutory documents or by a resolution of the shareholders to increase the share capital up to a determined nominal value (authorised capital) by issuance of new shares. Such authorisation is limited to a certain period of time (which cannot exceed five years from the date of the company’s registration or from the shareholders’ resolution) and to a value that cannot exceed half of the subscribed share capital.

In the case of listed companies, the board of directors may be entitled to increase the share capital within three years; this period of time can be renewed for subsequent periods of three years each time. Such decisions of the board of directors can be challenged by any shareholder under the same conditions as those for the decisions of the general meetings of shareholders.

As a rule, newly issued shares have to be offered first to the existing shareholders, proportionally to the number of shares held in the share capital of the company, or to the number of pre-emptive rights held, in the case of listed companies in which the share capital increase is preceded by transfer of such rights. The term for exercising the pre-emptive right is at least one month from publication in the Official Gazette of the shareholders’ meeting resolution approving the share capital increase. For justified reasons, which the board of directors has to explain to the shareholders through a written report, the pre-emptive right may be limited or denied through a resolution of the extraordinary general meeting of shareholders, taken with the majority of the votes of the present shareholders (the Companies Law demands that the shareholders representing three-quarters of the subscribed share capital to be present for the validity of such resolutions).

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

In non-listed joint-stock companies, restrictions on the transfer of fully paid shares are permitted through the company’s statutory documents, meaning that the only available restrictions for Romanian companies are conventional restrictions and not legal mechanisms. Most commonly used restrictions are provided in the statutory documents and include drag-along and tag-along rights, as well as the right of first refusal. These may be combined with specific lock-up periods (usually up to three to five years).

In limited liability companies, share transfers to third parties require the approval of the shareholders representing at least three-quarters of the share capital. The statutory documents may require higher majorities.

In listed joint-stock companies, no such restrictions are possible.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Under the Companies Law, compulsory repurchase is stipulated with respect to dissenting shareholders who decide to withdraw from the company because they do not agree with the decisions of the shareholders’ meetings changing the main business scope or the legal form of the company, relocating the registered offices abroad, or deciding on the merger or spin-off. In this case, the dissenting shareholders must exert their withdrawal right within 30 days of publication of the corporate decision with the Official Gazette in all cases, except for that of a merger or spin-off, when the term elapses from the moment when the merger or spin-off operation is approved. The price that shall be paid by the company to the shareholder exercising his or her right to withdraw from the company in these conditions is computed by an independent authorised expert, the evaluation costs also being paid by the company.

In listed companies, the shareholder who, pursuant to carrying out a public offering addressed to all shareholders and for all their holdings holds shares representing at least 95 per cent of the total number of shares in the share capital granting the right to vote and at least 95 per cent of the voting rights that can actually be exercised; or has acquired, during the public offering, shares representing at least 90 per cent of the total number of shares in the share capital granting the right to vote and at least 90 per cent of the voting rights envisaged during the offering, is entitled, no later than three months after the public offer, to request shareholders who have not subscribed to the offering, to sell those shares at a fair price. Once this procedure is finalised, the company is delisted. The Capital Market Law also provides for a ‘sell-out’ mechanism for the minority shareholders, allowing them the right to request the majority shareholder that finds itself in any of the above-mentioned situations to acquire their shares.

Also, in listed companies, the shareholders who did not agree with the resolutions of the general meeting in connection to mergers or divisions (which implies the distribution of shares that are not admitted to trading on a regulated market) are entitled to withdraw from the company and to obtain payment from the latter for their shares.

There is an additional repurchase allowed, applicable only to limited liability companies: the shareholder who does not obtain the unanimous agreement of the rest of the shareholders is entitled to ask the court to issue a withdrawal judgment, provided that there are legitimate reasons justifying such request.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Dissenting shareholders (see question 13) have the right to sell their shares at a price computed by an independent authorised expert.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The majority of the companies prefer the one-tier system, the management powers being usually delegated by the board to a general director.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

In the case of joint-stock companies, the board has the following main responsibilities that cannot be delegated to directors:

• to decide on the company’s long-term or periodic business plan;

• to establish the accounting and financial control systems and to approve the annual financial planning;

• to appoint and remove the executive officers and establish their remuneration;

• to ensure the control of the executive officer’s activity;

• to draft the annual financial statements, convene the shareholders’ meeting and implement its resolutions; and

• to submit the request for opening the insolvency procedure.

The board of directors cannot delegate to the directors those responsibilities that have been delegated from the extraordinary shareholders’ general meeting to the board of directors.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board represents the company and not the shareholders, and owes legal duties to the company itself and not to the shareholders.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Enforcement actions can be brought against directors, members of the directorate and of the supervisory board who are in breach of their duties towards the company for the damages caused to the company.

The prerogative to decide on the initiation of legal action belongs to the ordinary shareholders’ meeting. When taking such a decision, the shareholders’ meeting shall also appoint the person representing the company in court against the director. When deciding on the annual financial statement, the ordinary shareholders’ meeting may decide on the directors’ responsibility even though this matter is not on the agenda. In the one-tier system, the mandate of the board members, and in the two-tier system, the mandate of the directorate, ceases automatically when the shareholders’ meeting takes such a decision. As a result, the ordinary shareholders’ meeting, respectively the supervisory board, will proceed with their replacement. If the action is held against the directors, their mandate is suspended until the judgment becomes irrevocable.

The ordinary shareholders’ meeting can also decide to exercise the legal action against the supervisory board, their mandate ceasing automatically, furthermore the shareholders deciding on their replacement.

If the shareholders’ meeting fails to make a decision, the shareholders representing, jointly or individually, at least 5 per cent of the company’s share capital are entitled to bring legal action against the directors in breach, in their own name, but on behalf of the company.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The members of the board have to fulfil their duties with the prudence and diligence of a good manager. They also owe to the company a duty of loyalty, and their actions must be in the company’s interest. The board will not be in breach of its duties if in taking the relevant decision and based on the available information, it could have reasonably believed that it was acting in the interests of the company (the business judgement rule).

20 Board member duties

To what extent do the duties of individual members of the board differ?

There are no specific regulations in this respect, and all board members have the same duties towards the company and act as a coactive body. It will be the board’s internal decision to give specific duties to individual members by considering their experience and skills, but the decisions of the board will still be taken as a collective body and the responsibility will belong as such to the board members, regardless of the nature of the matter decided on.

Where the board elects to delegate its management responsibilities to executive officers, the latter may be entrusted with different operational attributions according to their experience or skills.

If the board sets up various board committees with consultative roles (as described in question 25), such as remuneration or audit committee, its members shall have the duties indicated by the board of directors.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Under the one-tier system, the board may delegate the management of the company to one or several executive officers from inside or outside the board. However, if such management powers are delegated, then the majority of the board must be composed of non-executive officers. As an exception, certain powers cannot be delegated to executives, such as those listed in question 16, along with those delegated to the board by the extraordinary general meeting of shareholders (eg, change of the company’s headquarters, increase of the registered capital). Such delegation is mandatory for a joint-stock company whose financial statements are subject to compulsory financial audit obligations.

In the two-tier system, the management is entrusted to the directorate, while the supervisory board strictly controls the way the directorate manages the company.

For specific operations, the board may also narrowly delegate some of its attributions to other persons, on a case-by-case basis.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Where the management of the company is delegated by the board to executive officers (because it is required by the shareholders or by law) members of the board may also be appointed as executives. However, in such case, the majority of the board must be represented by non-executive directors. As regards their responsibilities, the executives may hold representation powers, while the non-executives hold only supervisory powers. By ‘non-executive’ directors, the Companies Law simply understands this to be those members of the board of directors who do not have day-to-day management and representation responsibilities.

Moreover, based on the statutory documents or on the resolution of the shareholders’ meeting, one or more members of the board of directors may be independent directors. In assessing directors’ independence, the shareholders’ meeting may consider, inter alia, the following criteria:

• he or she should neither be nor have been a director of the company or of one of its subsidiaries during the past five years;

• he or she should not have maintained an employment relationship with the company or its subsidiaries during the past five years;

• he or she must not be a significant shareholder of the company;

• he or she should neither be nor have been an auditor of the company or of a subsidiary during the past three years;

• there should be no potential conflict of interest;

• he or she is not to receive or have received from the company or from a controlled company an additional remuneration or other advantages, apart from those received in its capacity as non-executive director;

• he or she is not to have or have had within the last year a business relationship with the company or with a controlled company, either personal or as shareholder, director or employee of a company having such a relationship, if, through its substantial character it is likely to affect its objectivity;

• he or she cannot be the director in another company in which an executive director of the company is non-executive director; and

• he or she is not to have been a non-executive director for more than three terms.

The independent directors have the same legal duties towards the company as the rest of the members of the board, but they play a significant role in aspects such as developing the company’s strategy from an external perspective, monitoring the management and solving the conflicts of interest.

Under the Corporate Governance Code (applicable only to those listed companies that voluntarily adopted it), there is a recommendation that an adequate number of non-executive directors be independent, in the sense that they do not maintain, nor have they recently maintained, directly or indirectly, any business relationship with the listed company or persons linked to the listed company of such a significance as to influence their autonomous judgement. Renunciation to a term, by an independent director, shall be accompanied by an extensive, detailed statement regarding the reasons for such action.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Generally speaking, there are no criteria related to age, gender, nationality, diversity, expertise, insolvency or similar criteria, except for the cases mentioned below.

A person cannot be appointed as director if previously sentenced for any of the following criminal offences: fraudulent management, breach of trust, embezzlement, forgery, perjury, bribery, tax evasion, crimes relating to money laundering and terrorist acts. However, in the case of specialised entities, such as credit institutions, insurance companies and investment firms, the directors must have adequate experience in their corresponding field of activity (eg, banking, insurance, investments). In the case of insurance companies, at least one of the board members must speak Romanian.

There are no disclosure requirements relating to board composition, except for certain identification data of the directors that need to be included in the statutory documents and, as such, are subject to public disclosure by registration with the Trade Registry (eg, full name, citizenship, date and place of birth).

In the case of the one-tier system in joint-stock companies, the board is composed of an odd number of directors, determined by the shareholders’ meeting. In the two-tier system, the directorate board is composed of an odd number of directors and the number of the members of the supervisory board is established by the constitutive act, and cannot be lower than three and higher than 11. If the financial statements of the company are audited, the board of directors (the directorate) will have at least three members. In the case of limited liability companies, there are no limits, the company being managed by one or more directors, as determined by the shareholders’ meeting.

State-owned enterprises are managed by a board of directors composed of three to seven members or five to nine members (depending on the rate of turnover and the number of the employees) who have to meet the following requirements:

• relevant experience within the management of a profitable state-owned enterprise engaged within the business scope of the company in question; and

• at least two of the board of directors should have undertaken economic or law studies and have five years’ experience within the economic, law, accountancy or audit fields.

Under the Corporate Governance Code (applicable only to those listed companies that voluntarily adopted it) the board of directors or the supervisory board should be composed of at least five members.

In the case of a vacancy of one or more director positions, unless otherwise provided by the company’s by-laws, the board shall appoint temporary directors until the ordinary shareholders’ meeting is held. If the vacancy causes a decrease in the number of directors below the minimum legal number, the remaining directors shall promptly convene the ordinary shareholders’ meeting. Should the board of directors fail to comply with such request, the shareholders are entitled to request the court to appoint the person entitled to convene an ordinary shareholders’ meeting that will elect the members of the board of directors.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Companies Law expressly allows the board chairman to function as CEO, but ultimately it is up to the shareholders or the board to decide how to deal with this issue. The common practice is to join the two functions, so that the chairman also acts as CEO. This is generally seen as best practice in one-tier structures, particularly where the chairman’s role is not merely decorative.

When the same person is both board chairman and CEO, the Corporate Governance Code provides for the listed companies that there should be a clear separation between the responsibilities of the two positions.

In the case of state-owned enterprises, the board chairman cannot also be appointed as CEO.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The general framework provided by the Companies Law does not impose the obligation to establish specific committees. However, the board can set up consultative committees of at least two members of the board. The responsibilities of such committees include investigations and recommendation for the board with respect to different key areas of interest, such as financial audit, remuneration of directors, executive officers and employees or candidacy for different management positions. At least one of the members of such committees must be a non-executive independent director.

Furthermore, the audit and remuneration committees must only be composed of non-executive directors. The committees are compelled to regularly submit reports to the board concerning their activities. Similarly to the board of directors, in the two-tier system, the supervisory board may also establish consultative committees in order to carry out investigations and make recommendations to the directorate with respect to its activities.

In the case of specific entities, there is, however, the obligation to establish certain committees. For example, credit institutions have the obligation to establish an audit or remuneration committee, or both, as per NBR Regulation No. 18/2009; non-banking financial institutions and insurance companies have the obligation to establish an audit committee according with Law No. 162/2017 regarding the annual and consolidated financial statements; and state-owned enterprises should establish a remuneration and nomination committee and an audit committee, as per GEO No. 109/2011.

The Corporate Governance Code (applicable only to those listed companies that voluntarily adopted it) makes the recommendation for the listed companies to create a nominalisation committee, a remuneration committee and an audit committee.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

In the one-tier system, the board of directors is required to organise board meetings at least once every three months. The board meetings are convened by the chairman, but can also be convened upon the justified request of at least two members of the board or the CEO. The convening notice shall be sent in due time; however, a specific term to be observed can be set by the board. In the two-tier system, the supervisory board is required to organise meetings at least once every three months; the directorate has a duty to present written reports regarding the company’s management to the supervisory board every three months.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Disclosure of board practices is not expressly required. Nevertheless, information regarding the members of the board of directors and the executives holding representation powers has to be made available at the Trade Registry for any interested person.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

As a general comment, the board members and the executive officers of joint-stock companies cannot perform their duties based on employment contracts, but only based on service or mandate contracts. In the case that such persons are appointed from among the company’s employees, then their respective employment contracts shall be suspended for the duration of the mandate.

The basic (as well as any additional) remuneration of the board of directors and of the supervisory board is established by the statutory documents or by the shareholders’ meeting. The remuneration of the executive officers and of the members of the directorate is established by the board of directors and the supervisory board, respectively. The remuneration package should normally be justified by the specific functions of the members and by the status of the company, but otherwise there are no specific legal limitations as to the value of the remuneration.

Compensatory arrangements are not widely used in Romania. While they are not illegal per se, it should be thoroughly investigated if such payment would not ultimately determine the directors to breach their obligations of independence and loyalty towards the company, and not towards specific shareholders.

In joint-stock companies, the length of a director’s mandate is stipulated in the statutory documents and it cannot exceed four years, with the possibility of being renewed. However, the duration of the mandate of the first members of the board is limited to two years. In limited liability companies the mandate of the director can be established for any duration, even for an indefinite period of time.

The company is not allowed:

• to grant loans to its directors;

• to grant financial advantages to the directors following the execution of agreements between the company and the directors for the sale or purchase of goods or for the execution of works or services;

• to guarantee, fully or partially, any loans granted to its directors;

• to guarantee, fully or partially, the execution by its directors of any obligations undertaken by the directors towards a third party; or

• to acquire a receivable, having as its subject matter a loan granted to its directors by a third party.

The prohibitions listed are also applicable to operations involving the spouses or relatives of the directors up to the fourth degree, as well as to those operations involving companies where the directors or the persons indicated above have at least 20 per cent of the share capital. Nevertheless, these limitations shall not be applicable if the value of the operation does not exceed €5,000, or the operation is part of the company’s regular business activities and is concluded on an arm’s-length basis.

The Corporate Governance Code (applicable only to those listed companies that voluntarily adopted it) states that the company should publish a remuneration policy on its website and include in its annual report a remuneration statement on the implementation of this policy during the annual period under review. It should describe the remuneration governance and decision-making process, detail the components of executive remuneration and describe each component’s purpose. In addition, the remuneration policy should disclose the duration of the executive’s contract and their notice period and eventual compensation for revocation without cause.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

There is no specific law or regulation with respect to senior management remuneration. The rules presented in question 28 are applicable to the senior management as well.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

In joint-stock companies, taking out professional liability insurance for the directors, the members of the directorate and the supervisory board is mandatory. The premiums are usually paid by the companies.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

The matter of whether directors and officers may be indemnified by the company in this respect is not covered specifically in the Companies Law. Generally, since the board members are liable only towards the company, and not to third parties, any indemnity from the company is practically excluded. There is also the possibility that the members of the board are liable towards third parties, but this would be an exceptional situation as it is not common for companies to indemnify such directors.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

There are no specific regulations as regards the possibility of companies or shareholders precluding or limiting the liability of directors and officers. As a matter of principle, there can be decisions of the shareholders or even provisions in the charter containing such limitations in various degrees and forms. Such exonerations are, however, debatable in the event of fraudulent or wilful conduct of directors.

33 Employees

What role do employees play in corporate governance?

Employees do not play a formal role in corporate governance, but they may enjoy various degrees of leverage through trade unions or employees’ representatives with regard to their position and involvement in the decision-making process of the company; however, this is not a regulated legal matter.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

There is no legal provision regulating the evaluation of the board of directors in privately owned companies

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Corporate charters and by-laws are registered with the Trade Registry Office and are publicly available. In addition, most listed companies publish these documents on their website, along with other corporate documents.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

As a general rule, companies are compelled to submit to the Trade Registry all amendments brought to their corporate charter and by-laws. However, in the case of joint-stock companies, there are certain exceptions where such registrations are not mandatory, for example, when changes are made in the shareholding structure. Also, the submission of updated by-laws is not required when board members are replaced (in opposition to limited liability companies where the submission of the updated by-laws in this case is mandatory).

Listed companies have much broader disclosure obligations towards investors, FSA and stock exchange markets. According to FSA Regulation No. 1/2006, the following report categories have to be drafted and submitted by the companies:

• quarterly, biannual and annual reports, including, among others, accounting documents, certain economic and financial indicators, auditors’ and board’s reports;

• disclosure of privileged information – a listed company must disclose any privileged information concerning the company’s activity that can influence the price of shares. Such disclosure must be made in a term of maximum 24 hours, and may refer to aspects such as:

• board of directors’ resolutions regarding the convening of shareholders’ meetings or board meetings (in this case when the subject matter of the meeting refers to any of the powers delegated by the extraordinary meeting of shareholders to the board);

• shareholders’ resolutions or board resolutions (in this case when the subject matter of the meeting refers to any of the powers delegated by the extraordinary meeting of shareholders to the board);

• changes in the direct or indirect control over the company;

• changes in the management of the company;

• change of the company’s auditor, along with the reasons triggering this change;

• termination or decrease of the company’s contractual relations that generated at least 10 per cent of the company’s turnover of the previous financial year;

• publication of the merger or spin-off project with the Official Gazette;

• changes of the characteristics or rights of the shares;

• litigations involving the company;

• suspension and resuming of activity;

• initiation and closing of dissolution, judicial reorganisation or bankruptcy procedures; and

• reports regarding the payment of dividends, regarding dividend value and payment term and arrangements.

State-owned enterprises are required to post the following information on their website:

• resolutions of the general meeting of shareholders;

• annual financial statements;

• quarterly accounting reports;

• an annual audit report;

• membership of the company’s management bodies, directors’ and executive officers’ CVs or, as the case may be, CVs of members of the directorate and supervisory board and the level of their remuneration;

• reports of the board of directors or of the supervisory board; and

• annual report on the remuneration and other advantages award to the members of the board, directors, members of the supervisory board or directorate during the financial year.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

In a one-tier board structure, the shareholders’ meeting establishes the remuneration of the board members. If the management is delegated to executive officers, their remuneration is established by the board. For the two-tier board structure, the remuneration of the members of the directorate is established by the supervisory board. Nevertheless, the shareholders’ general meeting is entitled to set the general limits of all remuneration or financial advantages, including those regarding the company’s executives. As regards the frequency under which the shareholders decide upon the remuneration of the board members, the law does not impose any specific frequency.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Any shareholder has the ability to nominate directors within 15 days of publication of the convening notice in the Official Gazette and, further, to have their nominations included in the updated shareholder meeting materials. The final decision regarding the appointment belongs to the general meeting of shareholders.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Romanian companies do not usually engage with shareholders outside the annual meeting season.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

State-owned enterprises, companies that are supervised by the FSA and credit institutions that exceed an average of 500 employees during the financial year include in the Administrator’s Report a statement with non-financial information referring to the development, performance and the position of the entity and the impact of its activity, information on at least environmental, social and personnel aspects, the human rights, the fight against corruption, and bribery.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no obligation to disclose the CEO pay ratio.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no obligation to disclose gender pay gap information.

Teodora Cazan

teodora.cazan@pnsa.ro

Diana Dobra

diana.dobra@pnsa.ro

239 Calea Dorobanti St, 6th Floor

Bucharest, 1st District, 010567

Romania

Tel: +40 21 317 7919

Fax: +40 21 317 8500 / 7505

www.pnsa.ro

Singapore

Leon Yee and Krishna Ramachandra

Duane Morris & Selvam LLP

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The corporate governance regime in Singapore focuses primarily on companies listed on the Singapore Exchange Securities Trading Limited (SGX-ST) and consists of laws, rules and recommended practices.

Company law

The Companies Act (chapter 50) of Singapore (CA) is the principal statute governing corporate governance matters in Singapore. The CA expressly provides that the board shall be responsible for the overall management of the company and may exercise all the powers of the company except any power that is required to be exercised by the company in general meetings under its constitution or the CA. The CA imposes specific duties on the board (see question 16).

The CA also codifies certain fiduciary duties of directors that exist at common law, for example, by providing that a director shall act honestly and use reasonable diligence in the discharge of his or her office and shall not make improper use of any information acquired by virtue of his or her position. These directors’ duties are not exhaustive, but exist in addition to any other rule of law relating to the duty of directors or officers (including directors’ duties under the common law, as set out below).

Under the CA, a director has the duty to disclose:

• his or her interests in transactions or proposed transactions with the company or any potential conflict arising from his or her holding other offices or possessing any property;

• particulars necessary for the company to maintain its register of directors’ shareholdings and register of directors; and

• if he or she is a director of a public company, the date when he or she has or will have attained the age of 70 years.

Under the common law, a director owes the company the following fiduciary duties (which overlap with the statutory duties imposed by the CA):

• to act bona fide in the interests of the company;

• to exercise skill, care and diligence;

• not to place himself or herself in a position of conflict with the company;

• not to make a secret profit from the company;

• to act within the powers conferred by the company’s constitution and to exercise such powers for proper purposes; and

• not to fetter his or her discretion.

Listing regime

The Securities and Futures Act (chapter 289) of Singapore (SFA) and the Listing Manual of the SGX-ST (the Rules) play an important part in regulating the governance of Singapore-listed companies.

The SFA, which is the primary legislation regulating the securities and futures industry in Singapore, governs the offer of securities and regulates market conduct by providing for offences such as insider trading, false trading and market manipulation, dissemination of false information and the employment of manipulative and deceptive devices. Officers (including directors and senior management) of a listed company are required not to deal in its securities while in possession of material price-sensitive information and during the blackout period (ie, the period surrounding the announcement of the company’s financial results), as such dealings could give rise to civil and criminal liability for insider trading under the SFA.

The Rules, which seek to secure and maintain confidence in the market, set out the requirements that a company must meet to qualify for admission to the Official List of the SGX-ST and the listing of its equity securities, as well as the continuing requirements that a listed company is required to observe. It should be noted that despite the non-statutory nature of the Rules, a company is obliged to comply with them once it lists on the SGX-ST. The SGX-ST has discretion in respect to the interpretation and application of the rules and may apply to the court to enforce them pursuant to sections 25, 203 and 325 of the SFA. Additionally (or in the alternative), the SGX-ST may punish non-compliance in other ways (eg, by reprimanding a company, halting or suspending its trading, or even delisting it).

Under the Rules, listed companies are also required to disclose their corporate governance practices with specific reference to the principles of the Code of Corporate Governance 2012 (the Code) and disclose and explain any deviation from any guideline of the Code in their annual reports. The Code recommends that listed companies make a positive confirmation at the start of the corporate governance section of their annual report that they have adhered to the principles and guidelines of the Code, or specify the areas of non-compliance, if any. The SGX-ST, on 29 January 2015, provided further guidance on compliance with the Code by way of an additional disclosure guide whereby listed companies are encouraged to answer and enclose such answers in their annual reports.

As stated below, the Corporate Governance Council have made recommendations for certain guidelines to be amended and shifted from the Code to the Rules for enhanced compliance. If a requirement is included in the Rules, it would become mandatory instead of being on a ‘comply or explain’ basis. The key proposed changes are as follows:

• independent directors are to make up at least one-third of the company’s board;

• the term of an independent director is to be limited to nine years, or the alternative proposed amendment is that, independent directors can serve more than nine years if their continued appointment is approved by the majority of all shareholders and non-controlling shareholders in separate resolutions;

• a director will not be considered independent if they or their immediate family member controls five per cent or more of the company’s shares, instead of the previous 10 per cent;

• where weaknesses in the effectiveness of internal controls are identified by the company’s board or its audit committee, such weaknesses and the steps taken to address them are to be disclosed in the company’s annual report, in addition to commenting on the adequacy and effectiveness of internal controls; and

• first-time directors will be required to undergo training in the roles and responsibilities of a director.

Code of Corporate Governance 2012

The Code was first issued by the Corporate Governance Committee on 21 March 2001, with the objective of encouraging Singapore-listed companies to enhance shareholder value through good corporate governance, and was effective from and applied to annual general meetings held from 1 January 2003 onwards. Following a review of the Code by the Council on Corporate Disclosure and Governance, a revised Code was issued on 14 July 2005, and has been effective from and applies to annual general meetings held on or after 1 January 2007.

Further amendments to the Code were made on 2 May 2012, when the Monetary Authority of Singapore (MAS) issued a revised Code. The key changes to the Code are focused on the areas of director independence, board composition, director training, multiple directorships, alternate directors, remuneration practices and disclosures, risk management, as well as shareholder rights and roles. The revisions apply to annual reports relating to financial years commencing from 1 November 2012. Notwithstanding the above, as MAS recognises that sufficient time should be given for companies to make board composition changes, a longer transition period will be provided for necessary board composition changes to comply with the requirement for independent directors to make up at least half of the boards in specified circumstances (Guideline 2.2). These changes should be made at the annual general meetings following the end of financial years commencing on or after 1 May 2016.

On 27 February 2017, MAS announced that it had formed a Corporate Governance Council (the CG Council) to review the Code, and on 16 January 2018, the CG Council released a consultation paper on its recommendations to revise the Code. The key recommendations were as follows:

• shift certain guidelines of the Code to the Listing Manual of the SGX-ST (as discussed above);

• where the chairman is not independent, independent directors (ie, one who has no relationship with the company, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company) should make up majority of the board, instead of at least half of the board;

• independent directors are required to be ‘independent in conduct, character and judgement’;

• votes of non-controlling shareholders in the appointment of independent directors, who served on the board for less than nine years, are to be separately disclosed;

• directors with conflict of interest are to abstain from attending meetings and making decisions involving issues of conflict;

• an expansion of the scope of duties of the company’s audit committee to include reviewing the assurance from the chief executive officer and chief financial officer on the financial records and financial statements;

• an increased cooling off period from 12 months to two years for a former director of the company’s existing auditing firm to serve in the Audit Committee;

• requirement for diversity to include ages of directors, also it is recommended that the company’s board diversity policies and progress in relation to such policies to be disclosed;

• the company is to disclose the names and remuneration of employees in bands no wider than S$100,000, who are substantial shareholders or who are immediate family members of substantial shareholders and whose remuneration exceeds S$100,000; and

• requirement for engagement with stakeholders, specifically:

• the company should put in place processes to identify its important groups of stakeholders and to manage relationships with such stakeholders;

• the primary areas of focus with regard to the management of stakeholder relationships are to be disclosed by the company during the reporting period; and

• the company should have an updated corporate website that enables stakeholders to keep abreast of important updates in a timely manner.

The Singapore Code on Takeovers and Mergers

In Singapore, takeover offers are regulated under the SFA. The Singapore Code on Takeovers and Mergers (the Takeover Code), which was issued by MAS under the SFA, governs the takeover or merger of a company or business trust with a primary listing on the SGX-ST, or an unlisted public company or unlisted registered business trust with more than 50 shareholders or unit holders (as the case may be) and net tangible assets of S$5 million or more (target company).

In a takeover situation, the board of a target company is required to observe both the spirit and provisions of the Takeover Code.

MAS, on the advice of the Securities Industry Council (SIC) issued a revised Takeover Code on 23 March 2012. The revised Takeover Code incorporated the feedback received from the public consultation conducted by the SIC on or around October 2011 and is consistent with international best practices. The amendments to the Takeover Code took effect on 9 April 2012.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The Accounting and Corporate Regulatory Authority (ACRA) is responsible for the administration of the CA. A steering committee, chaired by the attorney general and supported by a joint secretariat comprising the Ministry of Finance, the Attorney-General’s Chambers and ACRA, had been appointed by the Minister of Finance to review the CA and had issued its proposals for public consultation in the first half of 2010. Some of the key amendments proposed include allowing nominee companies or custodian banks to appoint more than two proxies to attend general meetings of a company, enhancing investor rights for Central Provident Fund (CPF) members who buy company shares through the CPF Investment Schemes, increasing minority shareholder protection and alternative modes of executing documents.

MAS oversees the securities and futures market in Singapore and has powers under the SFA to issue directions to the SGX-ST, make regulations for the due administration of the SFA, carry out civil enforcement actions in relation to market misconduct and conduct investigations in relation to matters under the SFA.

The Rules are made by the SGX-ST, subject to any requirements that may be prescribed by MAS under the SFA. If a listed company fails to comply with the Rules, MAS or the SGX-ST may apply to court to enforce the Rules, or the SGX-ST may reprimand the company, suspend the trading of the company’s securities or delist the company.

The Takeover Code was issued by MAS under the SFA and it is administered by SIC, which comprises representatives from the private sector and the public sector appointed by the Minister of Finance. SIC has powers under the SFA to investigate any dealing in securities that is connected with a takeover offer. If SIC finds a breach of the Takeover Code, it may have recourse to private reprimand or public censure or further action designed to deprive the offender of the facilities of the securities market. If SIC finds evidence that a criminal offence has taken place, it will refer the matter to the appropriate authority.

In addition, certain organisations have been established to provide guidance and promote best practices in relation to corporate governance matters, such as the Singapore Institute of Directors, which was set up to promote the professional development of directors and uphold corporate governance standards and the Audit Committee Guidance Committee, which was set up to develop practical guidance for the audit committees of listed companies.

On 16 January 2018, the CG Council also recommended the establishment of an industry-led Corporate Governance Advisory Committee, which will not have any formal regulatory powers but will act as an advisory body. Their functions include issuing Practice Guidance to clarify the Code and monitor the quality of listed companies’ corporate governance disclosures.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

The CA states that unless provided for otherwise by the constitution of a company, a company may appoint a director by way of ordinary resolution (simple majority of over 50 per cent of the votes cast at a general meeting). The constitution of a company will typically provide that directors are to be elected or removed by shareholders passing an ordinary resolution.

In the case of public companies, the CA does not permit the appointment of two or more persons as directors by a single resolution, unless it is unanimously agreed to by the meeting that such a resolution may be moved. This is to allow members the opportunity to accept or reject each nominated director. The constitution of private companies may provide that certain shareholders have the power to appoint directors; however, such an article will not be enforceable by a person who is not a member of the company unless there is a separate contract outside the constitution embodying that right.

Shareholders of a public company may, by way of an ordinary resolution passed at a general meeting, remove a director before the expiry of his or her term of office, notwithstanding anything contained in the constitution of the public company or in any agreement between the public company and the director. However, where the director was appointed to represent the interests of any particular class of shareholders or debenture holders, the resolution to remove him or her shall not take effect until a successor has been appointed. By contrast, a director of a private company may only be removed from office in accordance with its constitution. If the constitution does not provide for the removal of directors, directors cannot be removed before the expiry of their term of office unless the constitution is suitably amended. The constitution of a private company may be drafted to contain provisions to entrench certain directors.

Shareholders may use their power to call for or requisition an extraordinary general meeting and require resolutions to be put for the purpose of appointing or removing directors, or amending the constitution to compel the board to pursue a particular course of action (see question 7).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following matters require shareholders’ approval under the CA:

• amendments to the constitution of the company;

• alteration of share capital;

• issuance of shares;

• reduction of share capital;

• disposal of the whole or substantially the whole of the company’s undertaking or property;

• provision or improvement of emoluments to directors in respect of their office; and

• appointment of auditors.

In addition, the Rules require listed companies to obtain shareholders’ approval for, inter alia: transactions with interested persons (as defined in the Rules), and acquisitions and disposals that exceed certain financial thresholds.

Furthermore, pursuant to shareholder agreements or amendments to the constitution, additional matters may require shareholders’ approval. The CA does not require any matter to be subject to a non-binding shareholder vote. However, shareholders may call for or requisition an extraordinary general meeting and require resolutions to be passed (see questions 3 and 6).

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

The CA allows for the creation of different classes of shares, so that the respective shareholders are given varying rights to the company. The rights attached to the classes of shares would generally be contained in the constitution of the company. There may be shares that carry non-voting rights, additional voting rights, or restricted voting rights (ie, a share whereby there is only a right to vote in certain circumstances). For instance, the constitution may provide that a member shall not be entitled to vote unless all calls or other sums personally payable by him or her in respect of the company have been paid.

With effect from 2016, the Companies Act was amended to remove the one-share-one-vote restriction in public companies. The SGX-ST has also indicated that it would allow companies with dual-class share structures to list, although this may only be restricted to the mainboard.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The general rule is that every member who holds ordinary shares (excluding treasury shares) shall have a right to attend any general meeting of the company and to speak and vote on any resolution before the meeting. However, the constitution may provide that a member shall not be entitled to vote unless all calls or other sums personally payable by him or her in respect of the company have been paid. A shareholder may appoint a proxy (who need not be a shareholder) to vote on his or her behalf.

Only shareholders of private companies and unlisted public companies may pass resolutions by written means; however, these must strictly comply with the requirements under sections 184B and 184F of the CA. Furthermore, passing of written resolutions is not applicable to resolutions involving the removal of directors or dispensation of the requirement to hold an Annual General Meeting. Whether a company is able to hold a virtual meeting of shareholders depends on its constitution, which may provide that the meetings can be by video or teleconference.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Generally, shareholders holding not less than 10 per cent of the company’s paid-up share capital may serve a requisition on the directors requiring them to call an extraordinary general meeting. Two or more shareholders holding not less than 10 per cent of the company’s issued share capital (excluding treasury shares) may themselves call a meeting of the company.

Shareholders of the company, who hold at least five per cent of the total voting rights or at least 100 shareholders holding shares on which there has been an average sum, per shareholder, of not less than S$500, can then requisition the company to circulate notice of the proposed resolution (which may include director nominations) and a statement containing further details in respect of the proposed resolution. This must be done at the expense of the requisitionists (unless the company otherwise resolves). The copy of the requisition sent must contain signatures of all the requisitionists, must be deposited at the registered office of the company and must be followed by a sum of money reasonably sufficient to meet the company’s expenses in giving effect to the resolution.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders do not generally owe duties to the company or to non-controlling shareholders. However, a shareholder may apply to court for relief where the affairs of a company are being conducted in a manner that is oppressive towards him or her, disregards his or her interests, discriminates unfairly against him or her or is otherwise prejudicial to him or her under section 216 of the CA. A successful application under section 216 of the CA gives the court the discretion to make a wide variety of orders, including but not limited to, directing or prohibiting acts and varying transactions.

Where the controlling shareholders also sit on the board of the company, they will then owe directors duties to the company. Other shareholders may then step into the shoes of a company, and bring enforcement action through either a common law derivative action or statutory derivative action (not available for listed companies).

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are not generally held responsible for the acts or omissions of the company, except in exceptional circumstances. Shareholders of a company limited by shares are generally not liable for its debts except to the extent that they are liable as contributories on the winding-up of the company, such liability being limited to any unpaid amount on shares held.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Where the board of a target company believes a bona fide takeover offer is imminent, the Takeover Code requires that the board must not take any action, without the approval of shareholders at a general meeting, that could effectively result in the takeover offer being frustrated or the shareholders being denied an opportunity to decide on its merits. Such prohibited actions include issuance of shares to third parties, disposal of material amount of assets etc. The board, in advising the shareholders, should have regard to the interests of the shareholders as a whole.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The constitution usually vests the power to issue shares in directors. However, the directors must not exercise any power to issue shares without the prior approval of the majority of the shareholders in the general meeting.

There is no statutory pre-emption right for existing shareholders under Singapore law. Shareholders may have pre-emptive rights to acquire newly issued shares if the constitution so provides.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Shares are transferable in the manner provided for in the constitution. The transfer of shares in a private company must be restricted in some way, usually by giving directors discretion to refuse to register the transfer or existing shareholders’ pre-emptive rights. Public companies may, but are not required to, impose restrictions on the transfer of their shares. Listed companies are not permitted to restrict the transfer of their shares, except in the case of certain regulated industries where these companies are permitted to restrict the transfer of their shares to foreigners (eg, banks and some privatised government companies).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

If a company (offerer) acquires or has contracted to acquire at least 90 per cent of the shares in another company (the target company), it may compulsorily acquire the shares of the target company that are held by dissenting shareholders. Once the offerer gives a dissenting shareholder notice of its intention to acquire the shares held by the dissenting shareholder, unless the court thinks fit to order otherwise on the application of the dissenting shareholder, the offeror will be bound to acquire the shares on the same terms as those applicable to the original offer for the acquisition of 90 per cent of the shares.

14 Dissenters’ rights

Do shareholders have appraisal rights?

In Singapore, shareholders do not have appraisal rights under the CA. Shareholders of private companies may have appraisal rights if these are expressly provided for in the constitution or a shareholders’ agreement.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Listed companies have a one-tier board structure.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

Under the CA, the board has a general duty to manage the company’s business and is also obliged:

• to ensure that the company keeps such accounting and other records as are necessary to explain the transactions and financial position of the company;

• to present the audited accounts of the company at the annual general meeting;

• not to knowingly incur debts when there is no reasonable ground for expecting that the company will be able to pay the debts;

• not to allow payment of dividends by the company unless there are profits available for that purpose; and

• to ensure that the company complies with its statutory obligations under the CA (such as the obligations to maintain statutory books, make statutory filings with ACRA and convene general meetings annually) and other relevant laws and regulations.

The boards of listed companies have additional responsibilities under the Rules and the Takeover Code.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board represents and owes fiduciary duties to the company. However, in discharging its duties, the board is entitled to consider the company’s commercial interests, the collective interests of shareholders and the interests of employees. Where the company is close to insolvency, the board must take into account the interests of the company’s creditors as a whole.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Directors owe fiduciary duties to the company and the company may bring an action against its directors for the breach of these duties. Where the company has not brought an action against the defaulting director, a shareholder may seek the court’s leave to bring a derivative action (ie, an action brought on behalf of the company and in respect of a cause of action vested in the company) against such director.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Under the CA, directors are required to act honestly at all times and to use reasonable diligence in the discharge of their duties, and shall act in the best interests of the company. Directors’ fiduciary duties under the common law include the duty to exercise care, skill and diligence. The standard of care and diligence expected of a director is objective; a director is expected to exercise the same degree of care and diligence as a reasonable director in his or her position. However, this standard is not fixed but a continuum depending on various factors such as the individual’s role in the company (eg, the standard is different between non-executive and executive directors), the type of decision being made, the size and the business of the company. This standard will not be lowered to accommodate any inadequacies in the individual’s knowledge or experience. The standard will, however, be raised if he or she held him or herself out to possess, or if he or she in fact possesses, some special knowledge or experience.

20 Board member duties

To what extent do the duties of individual members of the board differ?

All directors are subject to the same responsibilities under the general law, although the expectations of the necessary actions to fulfil directors’ duties may differ (see question 19).

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

In practice, the board of a listed company will delegate responsibility for the day-to-day operations of the company to management, and responsibilities for certain board matters to its audit, remuneration and nomination committees (see question 25). However, directors have a non-delegable duty of supervision.

The CA also entitles directors to rely on information (eg, reports, statements and financial data) prepared by the company’s employees, professional advisers or experts, or any other company director, based on professional or expert advice given. Directors must ensure that they have acted in good faith, made proper inquiries where the need was indicated by the circumstances, and had no knowledge that such reliance on the information prepared was unwarranted.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Listed companies are required under the Rules to have at least two non-executive directors who are independent and free of any material business or financial connection with the listed company. Further, the Code recommends that at least one-third of the board should comprise independent directors. In addition, pursuant to Guideline 2.2 of the Code, independent directors should make up at least half of the board in any of the following four scenarios:

• the chairman of the board and the chief executive officer (CEO) (or equivalent) are the same person;

• the chairman and the CEO are immediate family members;

• the chairman is part of the management team; or

• the chairman is not an independent director.

Principle 2 of the Code states that there should be a strong and independent element on the board of companies that is able to exercise objective judgement on corporate affairs independent from management and shareholders with at least 10 per cent of the total voting shares. The Code defines an ‘independent’ director as one who has no relationship with the company, its related companies, any shareholders with at least 10 per cent of the total voting shares or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company. Guideline 2.4 of the latest Code also states that the independence of any director who has served on the board beyond nine years from the date of his or her first appointment should be subject to particularly rigorous review. The board should also explain why any such director should be considered independent.

The CA defines a ‘non-executive director’ as a director who is not an employee of, and does not hold any other office of profit in, the company or its related corporation in conjunction with his or her office of director and his or her membership of any audit committee. While there is no distinction drawn between the duties of independent directors and non-independent directors under the CA and the Rules and independent directors, by definition, are also non-executive directors, non-executive directors are not necessarily independent directors pursuant to Guideline 2.2 of the Code. The Code states that the role of non-executive directors is to constructively challenge and help develop proposals on strategy, to review the performance of management in meeting agreed goals and objectives, and to monitor the reporting of performance. To facilitate a more effective check on management, the Code also encourages non-executive directors to meet regularly without the presence of management.

All directors are subject to the same responsibilities under the general law, although the expectations of the necessary actions to fulfil directors’ duties may differ (see question 19). Although independent directors, as non-executive directors, are not expected to give the same continuous attention to the affairs of the company as executive directors, they will be liable, just like executive directors, if it is found that they failed to properly discharge their duties at law. This is illustrated in a recent case involving the release of a misleading statement by a listed company, Airocean, where the court had imposed a fine on the other directors involved in the offence but imposed a four-month custodial sentence on the independent director as he was found to have played a major part and was the most culpable among the directors in relation to the release of the misleading statement that downplayed a bribery probe involving Airocean’s former chief executive officer. However, in the independent director’s appeal to the High Court, the then Chief Justice Chan Sek Keong acquitted him stating that Airocean had not acted recklessly as the company had relied on legal advice from its lawyer and acted in accordance with the legal advice that has been provided.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

In general, there is no legal requirement as to board size, apart from the minimum requirement under section 145 of the CA that each company is required to have at least one director who is ordinarily resident in Singapore (ie, resident in Singapore with some degree of continuity and apart from accidental or temporary absences, and is independent from citizenship). Any person may be a director as long as he or she is a natural person, of full age (ie, at least 18 years old) and capacity. Although there is no requirement that a director must have any particular educational qualification or business experience, the CA imposes restrictions on the following categories of persons from assuming the post of a director:

• undischarged bankrupts;

• unfit directors of insolvent companies (ie, the court being satisfied that the conduct of a director of a company that went into insolvent liquidation makes him or her unfit to take part in the management of a company);

• persons who had been convicted of offences involving fraud and dishonesty, and management offences;

• persons who had been thrice convicted of failing to file returns, accounts and documents with ACRA as required under the CA; and

• directors of companies that had been wound up on grounds of national security.

With reference to the above, it should be noted that the constitution of the individual company may increase the minimum number of directors or require specific qualifications in respect of the directors. Additionally, in the case of listed companies, the Code recommends that independent directors should make up at least one-third of the board in ordinary circumstances, and one-half the board where there are relationships or circumstances that are likely to affect, or could appear to affect the director’s judgement.

If the company only possesses one director and he or she vacates office, this absence will be deemed invalid as this would contravene the requirement of the company having at least one director. All subsequent and additional appointments of directors and casual vacancies are dictated by the constitution of the company. In the case of listed companies, the nominating committee of a listed company is responsible for recommending candidates to be appointed to the board of directors.

The board composition of listed companies is typically disclosed in the annual report as the Code recommends that listed companies disclose in their annual report several matters relating to a board’s practices (see question 27). The nominating committee of a listed company is responsible for recommending candidates to be appointed to the board of directors. Companies are also generally required to provide information on the composition of their board and their directors to ACRA.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Code recommends that there be a clear division of responsibilities at the helm of the company. Therefore, the chairman of the board (chairman) and the CEO should be separate persons, to ensure an appropriate balance of power (between the board and management), increased accountability (of management to the board) and greater capacity of the board for independent decision-making. However, it is not unusual for the chairman and CEO of listed companies to be the same person.

In addition, companies should disclose the relationship between the chairman and CEO where they are immediately related. Companies should appoint an independent non-executive director to be the lead independent director where the chairman and the CEO:

• are the same person;

• are related by close family ties;

• the chairman is part of the executive management team; or

• the chairman is not independent.

The independent directors of a Singapore-listed company should make up at least half of its board under any of the four specific scenarios listed in question 22.

The lead independent director (if appointed) should be available to shareholders where they have concerns and for which contact through the normal channels of the chairman, CEO or chief financial officer (or equivalent) has failed to resolve or is inappropriate.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The CA requires every listed company to establish an audit committee comprising three or more members of the board, the majority of whom must be independent directors. The chairman of the audit committee must not be an executive director or employee of the company or its related corporation.

Additionally, the Code recommends that the audit committee should comprise at least three directors, all non-executive, the majority of whom, including the audit committee chairman, should be independent. At least two members of the audit committee, including the audit committee chairman, should have accounting or related financial management expertise or experience. The CA, the Rules and the Code set out the role of the audit committee in reviewing audit matters, financial reporting matters, the internal control systems of the company and interested party transactions.

The Code recommends that every listed company establishes a nominating committee to make recommendations to the board on all board appointments (including the re-nomination of directors). The nominating committee is also responsible for determining if a director is independent, bearing in mind the circumstances set forth in Guidelines 2.3 and 2.4. The nominating committee should comprise at least three directors, a majority of whom, including the chairman, should be independent. The lead independent director, if any, should be a member of the nominating committee.

The Code also recommends that every listed company establishes a remuneration committee to make recommendations to the board on the remuneration of directors and the CEO (or executive of equivalent rank) and review the remuneration of senior management. The remuneration committee should comprise at least three directors, all non-executive, the majority of whom, including the remuneration committee chairman, are independent.

Guideline 11 of the Code states that the board should be responsible for the governance of risk in the company, and recommends the establishment of a separate risk committee or otherwise assess appropriate means to assist it in carrying out the responsibility of overseeing the company’s risk management framework and policies.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Neither the CA nor the Rules prescribe a minimum number of board meetings to be held each year. The Code recommends that the board meets regularly and as warranted by particular circumstances, as deemed appropriate by the board members.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The Code recommends that listed companies disclose in their annual report, inter alia, the following matters relating to a board’s practices:

• any delegation of authority by the board, to any board committee, to make decisions on certain board matters;

• the number of board and board committee meetings held in the year, and the attendance of every board member at these meetings;

• the type of material transactions that require board approval under internal guidelines;

• where the company considers a director to be independent in spite of the existence of a relationship as stated in the Code that would otherwise deem him or her as non-independent, the nature of the director’s relationship and the reason for considering him or her as independent;

• where the board considers an independent director, who has served on the board for more than nine years from the date of his or her first appointment, to be independent, the reasons for considering him or her independent;

• the relationship between the chairman and CEO where they are related to each other;

• the composition of the nomination, remuneration and audit committees;

• the process for the selection and appointment of new directors to the board;

• the process for assessing the effectiveness of the board as a whole and the contribution of each individual director; and

• the maximum number of listed company board representations that its directors may hold.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

A company cannot provide or improve emoluments for a director in respect of his or her office unless the provision is approved by a shareholders’ resolution that is not related to other matters.

The Code recommends that the remuneration committee makes recommendations on remuneration policies and packages of directors and senior management to be submitted to the board for endorsement (see question 25). For listed companies, the fees payable to non-executive directors must be a fixed sum, and not by a commission on or a percentage of profits or turnover and likewise, salaries payable to executive directors may not include a commission on or a percentage of turnover. The Code recommends that executive directors’ remuneration should be structured to link rewards to corporate and individual performance, and long-term incentive schemes are encouraged. Executive directors’ remuneration should be linked to their level of contribution and responsibilities, and the remuneration committee should consider implementing schemes to encourage non-executive directors to hold shares in the company to align their interests with shareholders. The constitution may require the remuneration of directors to be put forward for shareholders’ approval at the annual general meeting (see question 37). The Code also recommends that the remuneration policy, level and mix of remuneration, and the procedure for setting remuneration be disclosed in the annual report of the company, and the remuneration of each individual director and the CEO on a named basis should also be disclosed.

Listed companies typically provide in their constitutions that directors are to resign and present themselves for re-election at least every three years, as recommended by the Code. Constitutions of listed companies must also provide that, where a managing director or a person holding an equivalent position in a listed company is appointed for a fixed term, the term must not exceed five years.

Companies (other than private companies in which no corporation holds a beneficial interest and that have no more than 20 members) are prohibited from granting loans, providing security or entering into any such credit transactions with their directors or directors of their related companies, subject to limited exceptions under the CA. Prior to listing, all debts owing to the company or the group to be listed by its directors, substantial shareholders and companies controlled by such directors and substantial shareholders should be settled.

Directors are not prohibited from dealing with the company but they must disclose to the board any interest (whether direct or indirect) that they have in any transaction with the company, unless such interest may properly be regarded as being immaterial. Under the Rules, the constitutions of listed companies must provide that a director must not vote during board deliberations in relation to any contract or proposed contract or arrangement in which he or she has, directly or indirectly, a personal material interest.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Executive remuneration is a matter for the board to determine. The Code recommends that the remuneration committee should recommend to the board a framework of remuneration and the specific remuneration package for the CEO or executive of equivalent rank, and review the remuneration of senior management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Companies are allowed but not obliged to purchase and maintain directors’ and officers’ liability insurance to insure directors and officers against monetary liability arising from any claims made against them in respect of their performance of duties. However, such insurance generally does not cover fraudulent, criminal, dishonest acts or wilful breaches of duty. At present, it is not a widespread practice for unlisted companies to purchase directors’ and officers’ liability insurance for their directors and officers, but it is increasingly common for public-listed companies to do so.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Under the CA, any provision (whether in the constitution or in any contract or otherwise) exempting an officer (including a director) from or indemnifying him or her against liability for negligence, default, breach of duty or breach of trust is void. Although limited exemptions exist in relation to defending any proceedings in which he or she is acquitted or judgment is given in his or her favour. The court may also relieve directors from the consequences of their default if the director shows that he or she has acted reasonably and honestly and in such circumstances it is fair to excuse him or her.

However, a company may purchase and maintain insurance against such liability for its officers or indemnify an officer against any liability incurred by him or her.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Shareholders may agree to release a director from his or her fiduciary duties and excuse him or her for liability for breaches of duty to the company provided the director has made a full and frank disclosure of all material facts. Shareholders cannot, however, ratify an illegal act. Additionally, under the CA, the court has the power to relieve directors from the consequences of their negligence, default, breach of duty or breach of trust, but the court will only exercise such power to excuse directors who have not received the company’s property in breach of trust. See also question 31.

33 Employees

What role do employees play in corporate governance?

At present, employees do not play a formal role in the corporate governance process, except to the extent that they are also shareholders, directors or officers of the corporation. However, through whistle-blowing, employees may help to uncover acts of misfeasance by the company’s management.

Although there is no general legislation protecting employees who are whistle-blowers. The Code recommends that the audit committees ensure that appropriate measures are put in place for employees to raise any concerns in strict confidence with regard to any act of misfeasance by the management, together with an appropriate follow-up independent investigation of the concerns raised.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

In respect of listed companies, the Code recommends a formal assessment of the effectiveness of the board as a whole and the contribution made by each director. The evaluation process should be carried out by the nominating committee, and the results of the assessment should be disclosed in the company’s annual report.

The Code further recommends that the nominating committee put together objective performance criteria to measure the board against. This should allow comparison with its industry peers and address how the board has enhanced long-term shareholder’s value (eg, the company’s return on investment, return on equity, return on assets over a long-term period). Individual evaluation should aim to assess whether each director continues to contribute effectively and demonstrates commitment to the role.

There are no similar laws or regulations requiring private companies to do the same.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The constitution of a company incorporated in Singapore is publicly available from ACRA, for a fee. However, such constitution may not include any amendments to it made pursuant to resolutions. While resolutions made by the company may be separately obtained from ACRA for a fee, prior to the purchase of such resolutions an interested party will not be able to identify the contents of resolutions filed by the company.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Listed companies must observe the continuing disclosure requirements in the Rules and make timely and non-misleading disclosure of the information set out below (which is non-exhaustive):

• material information (including information necessary to avoid the establishment of a false market in its securities, information that might be price sensitive and information concerning the listed company’s assets, business, financial condition and prospects, information concerning a significant change of ownership of the listed company’s securities owned by insiders, a change in effective or voting control of the issuer and any developments that materially affect the present or potential rights or interests of the shareholders);

• transactions between the listed company, its subsidiaries and associated companies, and interested persons (and obtain shareholder approval if necessary);

• acquisitions and disposals that exceed certain financial thresholds (and obtain shareholder approval if necessary); and

• the financial statements of the company for each full financial year and for each of the first three-quarters of its financial year.

The Code sets out additional matters that listed companies are encouraged to disclose in their annual reports, such as the remuneration of directors and key executives, the policy on remuneration, details of employee share schemes and the adequacy of internal control systems.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Payments to directors in his or her capacity as a director or otherwise in connection with the affairs of the company must be approved by an ordinary resolution of the shareholders at the annual general meeting. However, payment of a director’s fees for services rendered need only be approved by the board. Executive directors’ remuneration falls within the purview of the remuneration committee. However, where the executive directors’ remuneration includes employee share options or incentive shares, separate shareholders’ approval may be required prior to the granting of such share options or share awards.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Subject to the constitution of the company, the shareholders can nominate directors without the recommendation of the board (see questions 3 and 7).

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The Rules require listed companies to make continual disclosures relating to select matters, including but not limited to any information likely to materially affect the price of a listed company’s securities (see question 36). Such disclosures are to be made on the SGX-ST’s website, SGXNET. The Code also recommends that listed companies actively engage their shareholders and put in place an investor relations policy to promote regular, effective and fair communication with shareholders. Some of the recommended ways in which companies can engage their shareholders that are set out in the Code include disclosing information through a company website and establishing regular dialogue by way of analyst briefings or investor roadshows. The foregoing is in addition to annual meetings, which are required by all companies under the Act.

Typically, for engagement efforts outside annual meetings, representatives from listed companies are limited to management. At annual meetings, engagement efforts are usually led by the directors and senior management. However, for annual meetings and extraordinary general meetings where the listed company is seeking approval from shareholders for specific transactions or corporate actions, it is common for the relevant outside counsel to be present to answer shareholder queries.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

The Rules require listed companies to prepare an annual sustainability report. The sustainability report must describe the sustainability practices with reference to the following components:

• environmental, social and governance (ESG) factors material to the company and its business;

• policies, practices and performance in relation to the material ESG factors identified and previously disclosed targets;

• targets for the forthcoming year in relation to each material ESG factor identified;

• sustainability reporting framework to guide its reporting and disclosure; and

• board statement on the board having considered sustainability issues as part of its strategic formulation, determined such ESG factors and overseen the management and monitoring of the material ESG factors.

If the company excludes any primary component, it must disclose such exclusion and describe what it does instead, with the relevant reasons.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no such requirement. Although the Code provides that the company should report to shareholders annually on the remuneration of directors, the CEO and at least the top five key management personnel.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no such requirement. Although the Code provides for certain disclosure requirements in relation to remuneration.

Listed companies can highlight gender, skills and experience as an ESG factor material to business sustainability in their sustainability report (see question 40). If diversity is not assessed to be a material ESG factor by the company, where stakeholders express sufficient interest in the information the issuer is advised to state its policy and actions on its website.

Update and trends

Dual-class shares

SGX-ST has, after extensive public consultation, decided to allow companies with dual-class shares to list on the SGX.

Dual-class share structure would allow companies to issue classes of shares that are entitled to different voting rights or other rights. This would allow founders or other managing shareholders to retain more control of the company, despite holding a small proportion of shares.

From a corporate governance perspective, dual-class shares allow certain shareholders to concentrate voting power and this increases the risk of such shareholders entrenching control. It may also serve to insulate management from challenge and thus, decrease accountability.

The SGX-ST had proposed certain rules and safeguards to mitigate such risks, including and not limited to the dual-class shares structure being an exception that requires justification, all shares to carry one vote during certain circumstances such as appointment and removal of independent directors, and multi-vote shares to carry a maximum of 10 votes.

Nonetheless, allowing for dual-class shares is unlikely to address SGX-ST’s loss of competitiveness, which is the result of other more fundamental problems, most notably small market size and low valuations, and allowing for dual-class share structures is not necessary a solution.

Shareholder activism

In the context of a takeover

A Singapore-listed parent company had been thwarted in its attempt to privatise a London-listed company owing to the latter’s investors being dissatisfied with the terms of the takeover proposal.

The investors had criticised the independent directors of the company for supporting the bid as they believe that the offer is undervalued, and did not reflect the true value of the assets held by the company. The company’s directors had been accused of failing in their duty to create maximum value for all the shareholders, and investors alleged that independent directors should have consulted other shareholders regarding the offer.

Such privatisation exercises also allow the controlling shareholder to unlock value in the target for its shareholders, especially where the cash or asset rich target is trading at low valuations.

Action against management

Singapore has seen a rise in shareholder activism in recent years. A case study is that of an under-performing Real Estate Investment Trust (REIT) listed on the SGX-ST, with investors who are dissatisfied with the REIT manager owing to reasons such as poor occupancy rates, a dilutive rights issue and high remuneration of the management despite poor performance.

The investors coalesced and took steps for collective action against the REIT managers, which include proposing to vote against the general mandate for the rights issue, and arranging a meeting to remove the REIT manager, which requires at least 50 unit holders or those representing no less than 10 per cent of total units to request for such a meeting.

As a result of such discontent from the investors, the REIT had undertaken a strategic review that resulted in a cut in directors’ fees and a new chief executive officer for its manager. The REIT had also appointed a third independent, non-executive director to join the audit committee.

The fact that significant minority investors had taken initiative to drum up support for the campaign and that investors have gathered on social media to demand action from the REIT managers is demonstrative that shareholder activism in publicly-listed companies is taking off all over the world, including Singapore.

Leon Yee

lyee@duanemorrisselvam.com

Krishna Ramachandra

kramachandra@duanemorrisselvam.com

16 Collyer Quay, No. 17-00

Singapore 049318

Tel: +65 6311 0030

Fax: +65 6311 0058

www.duanemorrisselvam.com

Spain

Rafael Mateu de Ros and Cristina Vidal

Ramón y Cajal Abogados

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The Spanish corporate governance rules are structured around a double system based on hard and soft law rules. The Spanish regulator has been very active in this matter and both hard and soft law rules have enjoyed constant development during recent years, owing to new EU regulations and the entrance of international private funds with high influence and demands.

Listed companies, as joint stock companies, are primarily governed by the Royal Legislative Decree 1/2010, of 2 July, approving the consolidated text of the Corporate Companies Act (the Corporate Companies Act), which includes the general corporate framework for listed companies. In addition to this act, specific additional regulations govern different corporate issues (eg, accounting audit, annual reports, corporate reorganisations, transparency and disclosure, related-party transactions).

In addition, special regulations containing several rules on corporate governance apply: the Spanish Securities Market Act (recast by Legislative Royal Decree 4/2015 of 23 October) defining the powers of the Spanish National Securities Market Commission (CNMV) in this matter and for listed financial institutions the Law 10/2014, of 26 June, for the monitoring, supervision and solvency of credit institutions.

Besides these regulations, companies in Spain are subject to several corporate governance soft law rules. The most important regulation in this regard is the Good Governance Code of Listed Companies (GGC) approved in February 2015 by the CNMV. The GGC sets out recommendations under the principle of ‘comply or explain’. Therefore, although it is not mandatory for listed companies to comply with the recommendations (ie, whether or not to follow the GGC’s recommendations) companies must give a reasoned explanation in their Annual Report on Corporate Governance (ARCG) for any deviations from those recommendations. Some other important soft law rules in this regard are the technical guides of the CNMV on good practices for the application of the ‘comply or explain’ principle and on audit committees at public-interest entities.

In the near future, further corporate governance rules applicable to investment firms will be included in the Spanish Securities Market Act as a result of MiFID II regulations.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary government public bodies responsible for making such rules are the Spanish regulator, the CNMV and the Spanish Central Bank (the latter regarding financial institutions and other supervised financial entities). The CNMV is the Spanish regulator endowed with the power to enforce the corporate governance rules. The Spanish Central Bank is also endowed with some enforcement powers regarding some own supervisory matters.

Among other associations, the Spanish Bank Association and the Spanish Association of Minority Shareholders of Listed Companies are well-known Spanish shareholder groups. Also, INVERCO, as an association of collective investment schemes and pension funds, often pushes for governance reforms.

Proxy advisory firms have gained a high level of importance in Spain during recent years, largely owing to the entrance of overseas private funds. ISS and Glass Lewis & Co can be considered the most relevant proxy advisory firms.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders have the right to remove any director at any moment even if it is not included on the agenda of the shareholders’ meeting. Directors with opposite interests to the company shall also be dismissed at the behest of any shareholder.

For the appointment of any director, the same right concurs but with the particularity that it must be included on the agenda in advance of the annual general meeting (AGM) at the time of the call or at a later moment if some legal requirements are met.

Appointments or removals of directors shall be voted on separately and adopted by simple majority of the votes of the shareholders present or represented by proxy in the general meeting. Accordingly, an agreement is understood to be adopted once more votes are obtained in favour of the present or represented share capital than against.

Any other request to the board to pursue a particular course of action in this regard, but not included as an item of the AGM’s agenda, may be included through a supplementary call by shareholders fulfilling the same above-mentioned requirements.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

It is under the jurisdiction of the general meeting to deliberate and decide on the following matters:

• approval of annual financial statements, distribution of earnings and the approval of corporate governance;

• appointment and dismissal of directors, liquidators and, when necessary, account auditors and the institution of liability action against any of these persons;

• amendments to by-laws;

• capital increase and reduction;

• removal or limitation of pre-emptive or preferential subscription rights;

• acquisition, disposal or transfer to another company, of any essential assets;

• conversion, merger, spin-off or global assignment of assets and liabilities and transfer of registered office abroad;

• dissolving the company;

• approval of the final liquidation balance sheet;

• any other matters stipulated by the law or the by-laws;

• transfer to subsidiaries, of essential activities that until that moment have been performed by the company itself, although said company shall maintain full control over them;

• operations whose effect be equivalent to that of liquidating the company; and

• the directors’ remuneration policy under the terms established in accordance with the Corporate Companies Act.

For the purposes outlined above, assets and activities shall be considered of an essential nature when the volume of the transaction exceeds 25 per cent of the total assets or the share value shown in the latest approved balance sheet. This has been a very controversial matter and a remarkable doctrinal debate around the valuation criteria has been generated, particularly regarding corporate groups.

The annual directors’ remuneration report and amendments to the regulations of the board shall be submitted to a non-binding shareholder vote, as a separate agenda item, at the shareholders’ AGM. On the contrary, the directors’ remuneration policy is subject to a binding vote from the shareholders.

In addition, unless otherwise provided in the by-laws, the general meeting may issue instructions to the board or submit for their authorisation the adoption by the aforementioned body of decisions and agreements about certain management issues, without prejudice to some legal stipulations.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Although it is recommended that no disproportionate voting rights are allowed in listed companies, there is no legal prohibition.

For all or some items, by-laws may require a higher percentage of ‘aye’ votes than established by regulations, but never a unanimity. In addition to the proportion of votes established by law or by-laws, the latter may demand that aye votes be cast by a certain number of shareholders.

In order to attend general meetings, by-laws may not require the possession of more than 1,000 shares but may include clauses that establish a general ceiling on the number of votes that may be cast by the same shareholder, companies belonging to the same group or anyone acting in conjunction therewith. Nevertheless, those clauses shall be null and void when, after a takeover bid, the bidder holds 70 per cent or more of the voting share capital, unless such bidder is not bound by an equivalent breakthrough rule or fails to invoke it.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

By-laws may subject eligibility to attend the general meeting to the ownership of a minimum number of shares, irrespective of class or series, but under no circumstances may the number required be greater than one-thousandth of the share capital (see question 5). By-laws may also subject the shareholders’ right to attend the general meeting to advance proof of their eligibility, but no restriction in this regard shall be made for holders of registered shares or shares represented by book entries that comply with some legal requirements.

Shareholders are entitled to vote in person or by proxy (by any person, even non-shareholders) within the limitations that may be set forth in the by-laws. Proxy appointments shall be in writing or provided by remote means of communication, that guarantee the shareholder’s identity and must be issued specifically for each general meeting.

Shareholders may also exercise their attendance and voting rights remotely if by-laws allow it and if those rights are exercised by electronic methods that guarantee the shareholder’s identity. Directors may require shareholders attending the meeting by electronic means to send the opinions and proposals they plan to raise to the company prior to the meeting date. Votes on motions under items included on the agenda of any type of general meeting may be cast by the shareholder by post, electronic correspondence or any other means of distance communication, provided that the identity of the persons exercising their right to vote is properly substantiated.

However, shareholders cannot act by written consent without a meeting as decisions shall be adopted by shareholders assembled in a general meeting.

Although it is not expressly provided by regulations, virtual meetings are permitted if by-laws allow shareholders to exercise their attendance right remotely.

Listed companies should disclose and permanently display in their website the requirements and processes accepted for admitting share ownership, the right to attend general meetings and the exercise or delegation of voting rights. It is also recommended that companies broadcast their general meetings live on their corporate website.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

The board is obliged to convene a general meeting when so requested by one or several shareholders representing at least 3 per cent of the capital, who must specify the matters to be addressed in the request. If directors fail to attend in time to the minority application to convene a general meeting, the meeting may be convened by the clerk of the commercial court or the registrar of companies, prior to the hearing of directors. In the event of the death or dismissal of the majority of the members of the board, any shareholder may issue a request as indicated above for the appointment of new directors.

If the AGM or general meetings provided for in the by-laws are not convened within the period stipulated in the laws or by-laws, they may be convened at the application of any shareholder through the same procedure mentioned above.

Items not included in the AGM’s agenda by the board may be included through a supplementary notice of meeting within five days of the date of publication of the initial notice by shareholders representing at least 3 per cent of the share capital, if proposed items are accompanied by a justification and, when relevant, justified proposed agreements. This right shall be exercised by means of reliable notification.

Shareholders representing a minimum of 3 per cent of the corporate capital may present proposals for agreement on matters already included or that should be included in the agenda items for the general meeting, within the same deadline detailed above. Proposals for agreement submitted by shareholders must be published on the company’s website, uninterrupted, until the general meeting is held.

See question 38 for more information.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

All shareholders of the same status shall at all times be guaranteed equal treatment in respect of information, participation and exercise of voting rights at the general meeting.

Shareholders shall not exercise their voting rights when the issue at hand regards an agreement that triggers a conflict of interest as set forth in the regulations (eg, related-party company or shareholders transactions). Neither shall shareholders exercise their voting rights when an indirect conflict of interest arises regarding related-party transactions involving shareholder-nominated directors.

Also, shareholders shall disclose significant shareholdings percentages through the appropriate means as set forth in the regulations.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders, in their capacity as such, are not responsible for the acts or omissions of the company, unless they are directors. Yet shareholders are responsible before the CNMV regarding some disclosure obligations (eg, significant shareholdings or inside information).

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Under Spanish regulations, companies are allowed to adopt anti-takeover devices before and after a takeover bid, in compliance with the rules laid down in the regulations.

Pre-adopted anti-takeover devices (preventive devices) by listed companies in order to strengthen the position of the company in the event of a takeover bid are permitted through by-law clauses (restricting the right to vote, limiting access to the status of members of its management or administrative bodies or of its executive or delegated committees, or, in general, hindering the exercise of the voting rights of the securities in proportion to their respective holdings) or through non-by-law clauses (extraordinary dividends, early maturity clauses in financing agreements, new and complementary share delivery plans or acquisition of controlling interests in listed third parties).

During the takeover bid, according to the legal limits (duty of passivity that must be by the board except in certain cases appraised) the competence to agree on transactions that may affect the success of the takeover bid is transferred to the general meeting (except for the search for competing offers). These devices may be capital increases, extraordinary dividends, convertible bond issue, sale of significant assets, etc. The CNMV has direct monitoring powers towards any conduct of the offeree company.

No clear and consistent approach concerning this matter by the Spanish regulator has yet been established.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The issuance of new shares shall be adopted by the general meeting complying with the requirements established by the regulations for the amendment of by-laws as a result of a capital increase. The board may only adopt execution decisions that the general meeting could delegate in this regard (the power to indicate the date on which the agreement already adopted shall be executed and to set the terms and conditions not determined by the general meeting or the power to agree on one or more times to increase the share capital up to the sum specified, when and for the amounts deemed appropriate, without consulting the general meeting), all delegations shall be made in compliance with the specifications established by the regulations.

Shareholders do have pre-emptive rights to subscribe newly issued shares within the time limit set by the board. This right may, however, be removed or limited by a general meeting agreement in cases where the interests of the company so require and if some conditions are met.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Pursuant to Spanish regulations, restrictions or conditions on the transfer of shares shall only be valid when they fall on registered shares, so no restrictions or conditions on the transfer of shares are permitted in listed companies because shares are represented by book entries.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

If, as a result of a takeover bid for all securities, the offeror meets some legal premises (ownership of a number of securities representing at least 90 per cent of the share capital conferring voting rights and acceptance of the bid by holders of securities representing at least 90 per cent of the rights other than those already held by the offeror), the offeror may require the other holders of the securities to sell him or her such securities at an equitable price. In addition, the holders of the offeree company’s securities may require the offeror to purchase its values at an equitable price.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Apart from the legal causes for exit (eg, change in corporate purpose, company term extension or reactivation, change in ancillary commitments, company conversions and relocations of the registered office abroad) shareholders may have the allowed causes for exit that may be set forth by the by-laws. Under these assumptions, shareholders shall have appraisal rights and may sell their stock to the company at the average listed price for the last quarter.

Aside from the aforementioned causes, under Spanish regulations shareholders who would not have voted in favour of a merger or other stock transaction agreement may only have an exit right in case of an EU-wide cross-border merger. However, a minority part of the doctrine understands that there could also be an exit right in a national merger because this operation implies a substantial substitution or modification of the corporate purpose and therefore a legal exit cause.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Spanish regulations require joint-stock companies two basic organs for their existence: the general meeting (property body) and the directing body (responsible for supervisory, managing the company’s business and its resources).

Board structure for corporate companies is categorised under Spanish regulations in a one-tier corporate governance system so the company must be governed by a unified board performing both management and supervisory functions (except for European companies with registered offices in Spain that may opt for one- or two-tier governance, as defined in their by-laws).

The foregoing is without prejudice to the fact that, if by-laws do not state otherwise, the board may delegate some of its functions (except for those functions whose delegation is not permitted by regulations) to one or several CEO or executive committees and may also grant proxies.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The primary legal responsibility of the board is to conduct the business and affairs of the company. In particular, directors have the duty to convene and attend all necessary general meetings according to the regulations or by-laws and avoid conflict of interest situations in their performance.

In general, members of the board are subject to the duty of diligence and the duty of loyalty that translate into the duty to act as orderly businessmen, for example, be properly dedicated to having to attend general meetings (duty of diligence) and to put the interests of the company before their own (duty of loyalty). Failure to comply with these duties allows the company to hold directors accountable (see question 19).

Regulations provide a number of non-delegable powers for which the board must remain responsible (see question 21).

The board also has the duty to ensure that the procedures for selecting its directors favour diversity of gender, experience and knowledge and do not suffer from implicit biases that may imply any discrimination and, in particular, facilitate the selection of female directors.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

Broadly speaking, the board represent the company’s object. In addition to being a body for the deliberation of the company’s interests and the execution of resolutions in accordance with those interests, the board is the representative body of the company and members respond coactively to the company on trial or off trial. That is, although directors are elected by shareholders gathered in a general meeting, they cannot represent any particular set of shareholding constituents. Furthermore, directors who are appointed by a group or category of shareholders have the same duties towards the company and the rest of the shareholders as the remaining directors, not being able to infringe their duties under the pretext of defending the interest of those who have appointed them.

The board is required to report back to the general meeting, which will evaluate and approve them. Also, the board must complete an annual performance evaluation on itself and its committees and, based on the results, propose a plan of actions to correct any issues detected.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Directors are liable for damages caused by acts or omissions contrary to the regulations or to the by-laws or for those carried out in breach of the duties inherent in holding office with the company, shareholders and creditors.

Upon breach of loyalty duty, the director shall be bound to compensate any damage caused to the company’s assets, as well as to return to the company any unjust gains obtained. Shareholders individually or jointly representing a share that permits them to request a general meeting (see question 7) may exercise the action for liability directly, without the need to submit the decision to the general meeting.

The liability can be enforced through a corporate action (to reimburse the damage caused by the director to the company’s assets) or an individual action for damages or debts (to reimburse the third party, eg, shareholders, creditors, etc, for the damages caused by the director to his or her assets). Any person who considers that the actions or omissions of the director have caused him or her damage or injury is entitled to bring an individual action.

A corporate action may be carried out by:

• the general meeting, even if the adoption of the resolution is not on the agenda of the meeting;

• shareholders holding 3 per cent of the share capital when the directors do not call a general meeting, when the company does not bring the action within one month or when the company unreasonably decides not to bring the action; or

• the creditors of the company, when it has not been exercised by the company or its shareholders and provided that the company’s assets are insufficient to satisfy its claims.

Finally, it is possible to claim from the company’s directors any corporate debts that may arise after the company has been dissolved if they do not call a general meeting to dissolve the company.

In addition to the above, there are also other actions envisaged in the CNMV and, where appropriate, the Spanish Central Bank sanctioning regime, which has been tightened and in which the supervisor has been given more independence from the Ministry of the Economy.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Yes, directors are subject to the duty of diligence and the duty of loyalty.

The duty of diligence obliges directors to exercise their duties with the diligence of an orderly businessman by adopting the necessary measures for the good management and control of the company and by devoting adequate or sufficient time to this purpose.

The duty of loyalty obliges directors to not put their personal interests before the company’s interests, to operate in good faith and to act in the best interests of the company. For example, the duty of loyalty binds directors to not exercise their powers for any end purpose other than that for which they were granted, to maintain the confidentiality of any information, data or records to which they may have access in the course of fulfilling their role, or to refrain from participating in discussions and votes on agreements and decisions in which the director or a related person may have a direct or indirect conflict of interest.

The system with regard to loyalty and responsibility for breaching the same is imperative, so no limitations by by-laws shall be valid. Notwithstanding the above, the company may exempt prohibitions regarding the duty of loyalty in exceptional circumstances, by authorising a director or related person to complete a particular transaction with the company, use certain company assets, take advantage of a specific business opportunity or obtain an advantage or remuneration from a third party.

In addition, under Spanish regulations, directors must avoid any conflict of competence in their performance (understood as the performance of activities on their own or others’ behalf that entails a current or potential effective competition with the company, that would otherwise place them in permanent conflict of interest with the company’s interests). In such cases, the board may, in the interests of more legal certainty, adopt an agreement to waive the conflict on a one-off basis, at the request of the director concerned or by its own decision.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Directors have the individual duty to attend general meetings (although they may request representation at such meetings for themselves or for another person, provided that the request is made publicly and in accordance with the terms set out in the regulations).

With regard to strategic and business decisions subject to business judgement rule, the diligence duty is understood to have been fulfilled when the director acts in good faith, without personal interest in the matter being decided, with sufficient information and organisation to be able to proceed to an appropriate decision.

Bearing in mind that the functions of the board are exercised jointly through meetings, an act carried out by one of them individually or independently does not bind the company, except if powers are conferred or if the board has delegated powers to a specific director (CEO). In these two situations, the acts performed by the proxy or CEO will bind the company. In consequence, all the members of the board are jointly and severally liable for the damages caused to the shareholders or the company by their negligent and fraudulent actions unless they prove that, having not intervened in its adoption and execution, they were unaware of its existence or, knowing of it, did everything necessary to avoid the damage or, at least, expressly oppose it. However, to the extent that it is understood that the director has acted as a de facto director, it may be understood that the company can hold this director accountable for such events.

The foregoing is without prejudice to directors performing executive functions (who shall comply with the duties proper to that function) and members of any board committee set up by the board (eg, the appointments and remuneration committee (ARC) or the audit committee (AC)), which requires relevant expertise and knowledge as well as experience in specific matters that shall be delivered (eg, finance, auditing, risk management, etc).

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate the functions attributed by regulations, by-laws or resolution of the general meeting, except for those non-delegable powers, to one or more of its members (CEO) or to commissions (executive commissions), without prejudice to any powers of attorney they may grant to persons outside the company to act on their behalf. Nevertheless, delegations are subject to a high qualified majority of votes.

The board under any circumstances shall not delegate the powers set out by regulations as non-delegable powers.

The board may then delegate not only the execution and adoption of the delegable matters that are proper to this body by regulations, by-laws or resolution of the general meeting, but also the execution (non-adoption) of those matters that are considered non-delegable.

In addition, boards of listed companies must have an AC and an ARC (the latter should be separated into two different committees in large companies), which shall have the corresponding functions.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

As provided for in the GGC, it is recommended that boards should have a balanced composition in which the majority of the directors are non-executive directors and independent directors should represent at least half of the non-executive members. However, when companies do not have a large market capitalisation, or when a large company has shareholders individually or concertedly controlling over 30 per cent, independent directors should occupy, at least, one-third of board places.

In relation to the composition of the AC, regulations require that all of its members are non-executive directors, with the majority (at least two) being independent.

The ARC must be composed of non-executive directors with the majority (at least two) being independent. The chairman of this committee must be appointed from among the independent members of this committee.

Executive directors are those directors who perform management duties in the company or its group, whatever their legal connection to the same. In addition, when a director performs their management duties and, at the same time, is or represents a significant shareholder or is represented on the board, they are considered an executive director.

Notwithstanding the foregoing, directors who are senior management or directors of companies belonging to the group of the dominant entity of the company shall also be considered proprietary directors.

Non-executive directors are all directors who are not executive directors and may be proprietary, independent or other external directors.

Independent directors are those who, appointed in recognition of their personal and professional status, may perform their duties without appearing biased owing to relationships with the company or its group, its significant shareholders or its management team unless in the cases set out in the regulations.

No responsibilities for non-executive directors differ from those of executive directors, apart from the fact that directors must carry out their role and fulfil their tasks in accordance with the regulations and by-laws, with the due diligence, taking into account the nature of the role and the duties inherent in each one.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

By-laws must establish the exact or a minimum and maximum number of members for the board. The general meeting is responsible for determining the specific number of members.

The Corporate Companies Act stipulates that boards must have at least three members without specifying the maximum number of members for this purpose. Following the recommendation of the GGC, the composition of the board of directors should be between 3 and 15 directors.

In the event of an early vacancy, the board shall appoint a director to fill the vacancy (on the proposal of the ARC in the case of an independent director), in accordance with the procedure established in the regulations. This appointment is temporary until the first general meeting is held, which must ratify the appointment of the board or appoint another director.

Each year the company must submit a corporate governance report to the CNMV, which will be published on its website. This report (ARCG) contains, among other matters, information on the composition, rules of organisation and functioning of the board and its committees. In addition, the GGC recommends that companies publish some specific information of their directors on their website and keep it updated (eg, professional and biographical profile, other boards of directors to which they belong, whether or not they are listed companies, as well as other paid activities of any kind, their category of director, shares in the company and options on shares held by them).

For individual or joint criteria of directors, see question 22 above.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

In general, it is permitted that the position of chairman of the board may be held by an executive director. In cases in which the chairman is an executive director, the board, with the abstention of the executive directors, must necessarily appoint a coordinating director from among the independent directors. This coordinating director shall be empowered to request the calling of a meeting of the board or the inclusion of new items on the agenda of a board that has already been convened, to coordinate and meet non-executive directors and to direct, where appropriate, the periodic evaluation of the chairman of the board.

Although it is permitted to bring together in one person the position of chairman and CEO, a distinction is recommended between these positions.

Notwithstanding the foregoing, regulations establish that, for listed financial institutions, the position of chairman and CEO cannot be exercised simultaneously by the same person unless the company justifies so and obtains the prior authorisation of the CNMV .

In any case, the usual practice is that the chairman is not also the CEO.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

The board may set up specific committees, drawn from its members, determining their composition, appointing members and establishing the day-to-day duties of each.

Notwithstanding the previous point, the board must set up at least one AC and one or two separate committees for appointments and remuneration, with the minimum composition, duties and exceptions stipulated by regulations.

The AC shall be composed exclusively of non-executive directors, appointed by the board, of whom at least the majority must be independent directors and one of whom shall be nominated by virtue of their knowledge and experience in matters of finance, auditing or both. As a whole, members of this committee shall have technical knowledge of the industry to which the audited company belongs. Without prejudice to the foregoing, it is recommended that all members of the AC, and in particular its chairman, be appointed on the basis of their knowledge and experience in accounting, auditing or risk management matters.

The ARC shall be entirely composed of non-executive directors, appointed by the board, at least two of whom must be independent directors. The committee chairman shall be nominated from among the independent directors that form said committee. The GGC recommends that members of this committee should be appointed because of their knowledge, skills and experience appropriate to the functions they are called upon to perform.

In both cases, the company by-laws or the board’s regulations, in accordance with the provisions therein, shall establish the number of members in these committees and regulate their performance. Members shall remain independent in the performance of their duties.

With regard to the functions of the aforementioned committees, regulations list their minimum functions (without prejudice to those attributed by the by-laws or by the board regulations) and the GGC recommends additional and complementary functions.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

While the regulations require the board to meet at least once a quarter, the GGC recommends that the board should meet with the necessary frequency to properly perform its functions eight times a year at least (every month and a half) in accordance with a calendar and agenda set at the start of the year, to which each director may propose the addition of initially unscheduled items.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Companies must publish and communicate to the CNMV an ARCG. This report, which will be published on the website of the CNMV and on the company’s website, must provide a detailed explanation of the structure of the company’s system of governance and its functioning, particularly among other information, that relating to the composition, rules of organisation and functioning of the board and its committees.

In this report, they must also indicate whether or not they comply with the recommendations set out in the GGC and, if they do not, they must explain the reason for not doing so (‘comply or explain’ principle).

Companies must also publish on their website, together with other information (eg, company by-laws, board regulations, resolutions adopted at general meetings, financial and economic information of the company), information about the members of the board’s committees (the AC and the ARC in particular), their status and, where applicable, their rules of procedure.

This duty is without prejudice to the internal rules agreed by the company (for example through internal codes or regulations) on the information to be published on its website.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The appointment term for directors is legally capped at six years (renewable), but the shareholders may retain a shorter term of duties.

Unless by-laws establish otherwise, the position of director is remunerated. In this regard, regulations distinguish between the remuneration they receive for their position as such and, as the case may be, the one received for the performance of their executive duties.

The remuneration received by directors for the performance of their duties shall be the one established in the remuneration policy. This policy must be in accordance with the system of remuneration provided for in the by-laws and must include the maximum amount of the annual remuneration to be paid to all directors. For this determination, regulations oblige the board to consider the functions and responsibilities attributed to each director, membership of board committees and the other circumstances that are objectively relevant for these purposes.

All remuneration items must be included in the above-indicated remuneration system and the remuneration policy must be approved by the general meeting (which is also responsible for any changes to it) at least every three years, on the proposal of the board. The proposed remuneration policy must be reasoned and accompanied by a specific report from the ARC.

Executive directors’ remuneration shall be regulated in the contract established between the director and the board and shall respect the company’s remuneration policy.

The GGC makes several recommendations on directors’ remuneration. For example, the remuneration should be sufficient to attract and retain the desired directors and to reward their dedication, qualifications and responsibility and moderation, to prevent independent directors from losing this character or to link a relevant percentage of the variable remuneration of executive directors to the delivery of shares or financial instruments linked to their value.

Loans to directors are prohibited and transactions between the company and directors (or relatives) are submitted for prior approval by the board and subsequent review by the auditors and vote by the shareholders.

The foregoing is without prejudice to the specificities established in the regulations for financial institutions.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Subjects who are considered senior management members according to regulations and who are not executive directors shall be remunerated according to the remuneration items established in their employment contracts. Their special employment relationship is regulated by a special regulation.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Yes, it is a trend that did not exist until recently. Companies provide for it on a regular basis as a payment in kind and companies may pay the premiums, although it is not set forth or recommended by regulations. Systems of remuneration should not only promote the long-term profitability and sustainability of the company but also avoid excessive risk-taking and the reward of unfavourable results (see question 28).

This concept of remuneration must be provided for in the contract that the company signs with the director and must, in any case, respect the remuneration policy approved by the general meeting, proposed by the board in a reasoned and justified manner with a specific report from the ARC, and the remuneration system provided for in the company’s by-laws.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

In general, regulations allow companies to compensate their directors for early termination of their duties, provided that this is not owing to a breach of their duties. There are no legal limitations to this effect and these indemnities are common in practice. The GGC recommends that the termination payments should not exceed a fixed amount equivalent to two years of the director’s total annual remuneration and should not be paid until the company confirms that he or she has met the predetermined performance criteria.

On the contrary, a company generally may not exempt a director from liability for any negligence, default, breach of duty or breach of trust in relation to the company, nor indemnify him or her in respect of such behaviour, notwithstanding any liability insurances that directors may have (see question 30).

Although the above indemnities are optional in listed companies, financial institutions are required to provide for such indemnities.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

It is not possible to limit the joint and several liabilities of directors for intentional or culpable breach of their duties, even in those cases in which the harmful act or resolution of the directors is adopted, authorised or ratified by the general meeting. In this sense, regulations presume the wilful or negligent character in the actions of the directors in those cases in which they fail to comply with the legal provisions or the company’s by-laws.

The only way for directors to avoid liability is to prove that they were unaware of its existence by not intervening, consequently, in its adoption and execution, to do everything possible to avoid the damage, or to expressly oppose the harmful act or decision.

33 Employees

What role do employees play in corporate governance?

Companies should establish the mechanisms, systems and procedures that enable their employees to be aware of the corporate governance rules applicable to them (as the internal rules of conduct) and to ensure that they comply with them. In particular, the corporate social responsibility policy approved by the board, insofar as it is recommended that this policy should include the principles or commitments that the company assumes with the different stakeholders and, in particular, specific practices on issues related to shareholders, employees, customers, suppliers, social issues, the environment, diversity, fiscal responsibility, respect for human rights and the prevention of illegal conduct.

In addition, companies must ensure that their employees are aware of and apply the conflicts of interest policies established by the entity and normally set out in the internal rules of conduct.

Finally, because this is such a sensitive matter and has such important legal consequences, employees must also abstain, and the company must ensure that they do so, from engaging in practices or conduct that could be considered market manipulation (for example, by making use of privileged information or without transmitting it).

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Boards must carry out an evaluation of their performance (and that of their committees) on an annual basis. Every three years, the board should engage an external facilitator to aid in the evaluation process. This facilitator’s independence should be verified by the nomination committee.

In this regard, the GGC recommends boards to assess:

• the quality and efficiency of the board’s operation;

• the performance and membership of its committees;

• the diversity of board membership and competences;

• the performance of the chairman of the board and the CEO; and

• the performance and contribution of individual directors, with particular attention to the chairmen of board committees.

As a result of this evaluation the board shall adopt, where necessary, an action plan to correct any weakness detected.

When evaluating the committees, the boards should consider the content of the report that the committees are required to submit to the board on an annual basis and, for their own evaluation they should consider the content of the report that is submitted to them by the ARC. However, in those cases in which there is a coordinating director (see question 24 above), the regulations stipulate that he or she should carry out the evaluation of the executive chairman of the board.

The GGC recommends that listed companies publish on their websites (well in advance of the AGM) the performance reports of the AC and the ARC.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Listed companies must publish the by-laws in their company´s website to make them available not only to shareholders, directors and employees, but also the general public.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The CNMV requires listed companies to disclose on their websites general information regarding the company (such as channels of communication available for shareholders, the share and its share capital, dividends, public offers for the sale and admission of securities, takeover bids, shareholders agreements) as well as economic and financial and corporate governance information.

Corporate governance information shall include internal governing rules (general meeting and board regulations, internal code of conduct), calls to general meetings and their agenda, full texts of the proposed resolutions to be taken and of the documentation available to shareholders for general meetings and proxies and remote voting, requests for information or clarifications requested by shareholders, information regarding the development of general meetings, composition and other information with regard to internal governing bodies, ARCG and the remuneration to directors. Companies shall also make all information available for shareholders through a forum.

All information considered to be price sensitive shall be immediately disclosed by companies through the publication of significant events. However, a delay in the disclosure of this information is possible pursuant to EU regulations.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Executive remuneration shall be specified in the contracts that directors must conclude with the company for the performance of those executive functions. Nevertheless, the remuneration that executive directors receive for performing executive duties shall be adjusted to the remuneration policy that shall be approved by shareholders through the general meeting. Consequently, shareholders have the faculty to vote on the remuneration policy and to approve the sum of fixed annual remuneration and variations thereof, during the period to which the policy refers, as well as the different parameters for fixing variable components and the main terms and conditions of their contracts, compensation for early severance or termination of the contractual relationship and exclusivity, post-contractual non-competence, permanence and loyalty pacts.

Shareholders shall approve the remuneration policy of directors proposed by the board at least every three years.

See question 28 above.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

This is possible through the category of proprietary directors (those who are significant shareholders or appointed by their status as shareholders and those who directly represent the aforementioned shareholders).

The Spanish legal system, without prejudice to the above questions concerning the size of the board and its composition, establishes a system of proportional representation of shareholders on the board (ie, all shareholders who exceed a certain percentage of the shareholding will have the right to appoint a director ‘to represent their interests’; see question 17 above).

Given the dispersion of shareholdings characteristic of listed companies, the regulations allow shareholders to jointly reach the percentage indicated and to appoint the number of directors corresponding proportionally to them. This joint action is done through shareholders agreements (by regulating the exercise of voting rights at general meetings or restricting or conditioning the free transferability of shares). For these shareholders’ agreements to be effective, they must be published on the CNMV website as a relevant event.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

In general, the companies relate to their shareholders through the board. In this respect, regulations provide for information rights in favour of the shareholder and, consequently, obligations for the directors to this effect. The relationship between shareholders and the company intensifies during periods of general meetings.

In any case, the regulations oblige companies to make sections or systems that allow shareholders to exercise their rights to information and publish relevant information on the stock market available on their website. Particularly, companies should have an electronic shareholders’ forum that allows and facilitates communication between shareholders and the company.

As a result of new regulations, shareholders’ information rights have been considerably expanded through the use of online forums as well as through the appointment of a person responsible for shareholder relations. The final goal has been to encourage the relationship between the companies and all stakeholders.

Information on the company published on the CNMV’s website (eg, significant events) must also be considered.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

The regulations do not require publication of the corporate social responsibility (CSR) policies adopted by the company; however, it is possible to find this information in different documents required by regulations. Although it is not mandatory, it is common for companies to publish the policies they adopt in this regard.

For example, the ARGC contains information relating to diversity policy (eg, in relation to the number of women on the board). In addition, following the recommendations of the GGC, companies should prepare and publish on their website a report on the social responsibility policy implemented and report on their corporate social responsibility either in the management report or in another document.

In the management report to be issued by companies, within a maximum period of three months from the close of the financial year, in addition to reporting on the corporate governance report, they must also report on matters relating to the environment and the company’s personnel.

This is without prejudice to the increasingly frequent creation of special committees on this matter by companies that know the importance that corporate governance matters have acquired.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The regulations do not oblige companies to make a comparison between the remuneration of directors or executive directors and that received by other employees of the company. However, the annual report on the remuneration of directors that companies must publish on their websites provides information on the implementation of the remuneration policy and the CNMV provides annual reports with information collected in this regard, along with some statistics.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Regulations do not oblige companies to publish gender pay gap information. Nevertheless, this gender pay gap can be determined by analysing the directors’ remuneration reports (see question 40 above).

Regarding gender equality, director selection policy in listed companies should pursue the goal of having at least 30 per cent of total board places occupied by women directors before the year 2020.

Update and trends

Regarding the CNMV Technical Guide 3/2017 on audit committees at public-interest entities, a circular of the CNMV modifying the models of the annual corporate governance reports and remuneration of directors is now in public consultation. The CNMV is considering the possibility of adopting a technical guide regarding the appointment and remuneration committee.

Also, the European Securities and Markets Authority, the CNMV and the Spanish regulator have been very active concerning the development of more corporate governance rules for investment firms.

Some of the most relevant upcoming trends in corporate governance are the following:

• Cybersecurity and data protection is the global trend par excellence for the coming years, owing to recent and expected cyber threats. Boards may adopt policies as well as define the role of the board in this regard.

• Environmental, social and governance risks, with special consideration to climate change risk and sustainability: these were emerging trends in recent years, and are now a priority trend and a global focus for companies and will be at the forefront of all engagement discussions and shareholder resolutions. In this scenario many companies may amend their CSR policies while assessing the opportunities and risks of climate change on their business.

• Corporate culture has gained more importance. Topics such as effective succession planning, the impact of company culture on performance and the gender pay disparity will become increasingly important. As Spanish social media is echoing the claim for gender pay equality, companies with high pay disparity may become the focus of public attention.

• Apart from these global trends, Spanish investors will foreseeably bring attention to some other topics, such as remuneration, diversity, suitability of directors and strategic plans in which enormous progress has been made over the last few years, but further progress is expected. Also, with the upcoming directive regarding the encouragement of long-term shareholder engagement, companies shall improve transparency and increase their level of compliance to build investors’ confidence.

Finally, some recent studies about the ‘micro-proprietary’ directors (understood as those having less than a 10 per cent share of the share capital) have reached the attention of the CNMV and the regulator has welcome this initiative in a nuanced way that remains to be seen.

Rafael Mateu de Ros

rmateu@ramoncajal.com

Cristina Vidal

cvidal@ramoncajal.com

Calle Almagro 16-18

28010 Madrid

Spain

Tel: +34 91 579 19 00

Fax: +34 91 575 86 78

www.ramonycajalabogados.com

Switzerland

Daniel Schoch, Christophe Pétermann and Stefanie Maurer

Meyerlustenberger Lachenal Ltd (MLL)

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

There are several sources of law relating to corporate governance. The primary sources of law are the provisions on stock corporations (article 620 et seq of the Swiss Federal Code of Obligations (CO), which is currently under review) and the Swiss Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (Financial Market Infrastructure Act (FMIA)), which entered into force on 1 January 2016. Several provisions relating to corporate governance that were previously incorporated in the Swiss Federal Stock Exchanges and Securities Trading Act (SESTA) have been transferred to the FMIA. Such provisions include regulations on market abuse and its sanctions, disclosure of shareholdings and public takeover offers relating to listed companies. The SESTA is still in force but is limited to governing the authorisation and supervision of securities brokers for the professional securities trading. These remaining provisions are expected to be transferred to the Financial Institutes Act, which is still in the legislative process. The FMIA as well as the SESTA are both concretised by ordinances.

Furthermore, the Swiss Financial Market Supervisory Authority (FINMA) has the competence to issue directives and circulars. For this chapter, its circular ‘Minimum standards for remuneration schemes for financial institutions’ (in force since 1 January 2010) is of interest.

The Ordinance against Excessive Compensation in Listed Companies (OaEC) entered into force on 1 January 2014 and is now fully effective. It is only applicable to stock corporations governed by Swiss law whose shares are listed on a stock exchange in Switzerland or abroad.

The SIX Swiss Stock Exchange (SIX) as well as the BX Berne eXchange have been reauthorised by FINMA as self-regulatory organisations under the FMIA. They have issued listing rules that include specific reporting and disclosure requirements. The SIX Directive on information relating to corporate governance (SIX Directive Corporate Governance (DCG)) is of importance, obliging the issuers to disclose certain information with regard to corporate governance in a separate section of their annual reports. While the listing rules are binding, the principle of ‘comply or explain’ applies under the DCG, meaning that if an issuer refrains from disclosing information prescribed in the annex of the DCG, the issuer must point out this fact in the corporate governance report and give substantial grounds for each individual case for which information is not disclosed (for further details, see question 36).

Economiesuisse, an influential association of Swiss businesses, has issued a Swiss Code of Best Practice for Corporate Governance (SCBP, issued in 2002 and amended in 2014). The SCBP sets standards in the form of non-binding recommendations. The code primarily addresses listed companies, but may also serve as guidelines for non-listed, economically significant companies or organisations. Furthermore, the ‘Guidelines for institutional investors governing the exercise of shareholder rights in Swiss listed companies’ aim at enhancing good corporate governance by describing best practices for the exercise of shareholders’ rights by institutional investors. These self-regulating non-binding recommendations have been published by an important group of representatives of Swiss institutional investors, proxy advisers and economic associations.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Besides the Swiss federal government itself, there are two main governmental authorities, the FINMA and the Swiss Takeover Board (TOB), which are the main regulators and enforcers.

On a non-governmental basis, the SIX issues and enforces the SIX listing rules, which first need to be approved by the FINMA.

There has been considerable shareholder activism in recent years and proxy advisers such as Ethos, Swipra, zCapital, ISS and Glass Lewis are gaining importance. They are mandated by a growing number of Swiss pension funds to represent their votes in the general meetings of shareholders of listed companies.

In 2016, the Swiss National Bank also decided to exercise the voting rights of its share portfolio in regard to corporate governance questions.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

One of the fundamental and non-transferable competences of the shareholders’ meeting is to vote on the appointment or removal of the members of the board. Therefore, any shareholder may vote on this in a shareholders’ meeting if the agenda of such meeting provides for the appointment and removal of directors, as the case may be. The shareholders’ meeting of listed companies is required by the OaEC to re-elect annually the members and the chairman of the board as well as the members of the compensation committee. Regardless of whether the board convenes a general meeting, a general meeting may also be convened at any time by one or more shareholders together representing at least 10 per cent of the share capital. Such shareholders or shareholders together representing shares with a nominal value of 1 million Swiss francs may demand that an item be placed on the agenda (see question 7).

The decision is made by an absolute majority of the voting rights represented at the respective meeting, unless otherwise provided for by the articles of association.

The shareholders do not have a direct possibility to require the board to pursue a particular course of action. However, certain matters require a shareholders’ decision (see question 4).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following decisions have to be adopted by the general meeting of shareholders (article 698 of the CO):

• adoption and amendment of the articles of association;

• appointment or removal of the members of the board and the auditors;

• approval or rejection of the management report, including, if applicable, the consolidated financial statements;

• approval or rejection of the use of the balance sheet profit and, in particular, the declaration of dividends;

• discharge of the members of the board from liability; and

• matters that are by law or by the articles of association reserved to the shareholders’ meeting.

Non-binding shareholders’ votes are not provided for under Swiss law and the legal effects of such votes are unclear. However, non-binding shareholders’ votes may be used to limit the liability of the board towards approving shareholders, provided that the shareholders were fully informed about the matter regarding their vote.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Subject to a corresponding provision in the articles of association, companies are entitled to introduce shares with privileged voting rights. Such shares grant the right of one vote per share despite their par value being a fraction of the par value of the ordinary shares. The maximum ratio allowed between the par value of a voting share and an ordinary share is 1:10. Shares with privileged voting rights can only be issued as registered shares and must be fully paid up. Moreover, disproportionate voting rights do not apply for the following decisions of the shareholders’ meeting:

• the election of the auditors;

• the appointment of experts to audit the company’s business management or parts thereof;

• any resolution concerning the instigation of a special audit; and

• any resolution concerning the initiation of a liability action.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

It is each shareholder’s right to participate in the shareholders’ meeting and to exercise its voting rights. The shareholder may have its shares represented by a third party who, unless provided otherwise in the articles of association, does not need to be a shareholder. A shareholder of bearer shares is authorised to exercise its membership rights (which include the voting rights) at the shareholders’ meeting by presenting the bearer share. A shareholder of registered shares is authorised to exercise its membership rights at the shareholders’ meeting if he or she is entered in the share register.

However, the membership rights are suspended until the shareholder complies with its obligation to give notice of the beneficial owner of the shares of a non-listed company. This applies if he or she holds 25 per cent or more of the share capital or votes. In addition, shareholders of bearer shares of a non-listed company must give notice of the acquisition of bearer shares. A failure to comply with this requirement results again in a suspension of the membership rights (see also question 8).

Under the applicable law it is not permissible to pass a shareholders’ resolution without a physical meeting. This also applies for direct electronic voting. However, listed companies are obliged to ensure that powers of attorney and instructions for the independent proxy may also be given electronically (indirect electronic voting).

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

One or more shareholders representing (together) at least 10 per cent of the issued share capital may request the convention of a shareholders’ meeting. Shareholders representing shares with a nominal value of 1 million francs or at least 10 per cent of the issued share capital (if that amount is lower) may demand that an item be placed on the agenda. A demand for the convention of a shareholders’ meeting or the request that an item be placed on the agenda must be made in writing to the board. If the board does not comply with such request within a reasonable time frame, a judge may order the convention upon request of the relevant shareholders.

Dissident shareholders are not entitled to request the board to circulate their statements among the shareholders. However, shareholders are allowed to make statements and bring forward motions at the general meeting of shareholders. A dissident opinion may be expressed on this occasion within the agenda item concerned.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

The only duty of a shareholder of a Swiss company – whether controlling or non-controlling – is to pay the issue price for the shares. However, significant shareholders may have certain disclosure obligations with regard to the company and, with regard to listed companies, the SIX (see question 36). Any shareholder who directly, indirectly or in concert with other shareholders acquires equity securities representing more than one-third of the voting rights of a listed Swiss company is obliged to make a takeover offer to the remaining shareholders for all listed equity securities of the company. The articles of association of a company may provide for an ‘opting up’, meaning that a takeover offer must only be made by shareholders owning more than 49 per cent of the voting rights, or an ‘opting out’, dispensing shareholders to make a takeover offer regardless of the stake held. The disclosure obligations and the obligation to make a takeover offer can be enforced by the TOB and the FINMA.

Any person who acquires bearer shares in a company whose shares are not listed on a stock exchange must give notice of the acquisition within one month. Furthermore, any person who alone or by agreement with third parties acquires shares in a company whose shares – irrespective of whether they are bearer shares or registered shares – are not listed on a stock exchange, and thus reaches or exceeds the threshold of 25 per cent of the share capital or votes must give notice to the company of the first name, the surname and the address of the natural person for whom it is ultimately acting (the beneficial owner) within one month of the acquisition. There is an exemption from these reporting obligations if the indirect owner is a stock-listed company. If the shareholder fails to do so, the membership rights conferred by the shares in respect of which notice of acquisition must be given are suspended and the property rights lapse. If the shareholder gives notice at a later date, they may exercise the property rights arising as from that date. These reporting obligations do not apply if the bearer shares are organised as intermediated securities in accordance with the Swiss Federal Act on Intermediated Securities.

In regard to listed companies, the FINMA has recently modified reporting requirements for the discretionary power to exercise the voting rights set out in the FINMA Financial Market Infrastructure Ordinance. In the case of delegated voting rights, the person deciding how voting rights are exercised is now subject to the reporting requirements. Alternatively, the reporting requirements can be met on a consolidated basis by a controlling person for the units controlled by them.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Without being (de jure or de facto) a body of the company, a shareholder does not act for and is independent from the company, and therefore cannot be held responsible for acts or omissions of the company. Only in exceptional abuse-of-right situations, the corporate veil may be pierced and an individual shareholder could be held accountable.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Certain anti-takeover devices, such as transfer restrictions on registered shares (see question 12), limits on the registration of shares in the company’s share register, the introduction of voting shares (see questions 5 and 12) and the introduction of an increased quorum for specific decisions via a respective provision in the articles of association, are permissible. Different regimes apply to listed and non-listed companies.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

In principle, new shares cannot be issued without approval by an absolute majority of the voting rights of the shareholders represented at the shareholders’ meeting. The board must carry out a capital increase resolution within three months. This is an ordinary capital increase.

Based on an amendment of the articles of association, the shareholders’ meeting may, however, authorise the board to increase the share capital within a period of up to two years. Such authorised capital may not exceed one-half of the existing share capital. Within these limits, the board may carry out an authorised capital increase.

In addition, by amending the articles of association, the shareholders’ meeting may resolve on a contingent capital increase. Creditors of new bonds or similar debt instruments issued by the company, as well as employees, may be granted rights to subscribe to shares to be issued (conversion or option rights).

In principle, each shareholder has a pre-emptive right to acquire new shares in proportion to its actual participation in the company to avoid dilution. Nevertheless, the shareholders’ meeting can exclude such pre-emptive rights by qualified quorum of at least two-thirds of the voting rights represented in the shareholders’ meeting and an absolute majority of the nominal value of shares for important reasons. In particular, the takeover of companies, equity interests and employee share ownership are deemed to be valid reasons stated by law. However, the cancellation of the pre-emptive rights must not result in any improper advantage or disadvantage to the parties involved. In case of an authorised capital increase, the cancellation of the pre-emptive rights may be delegated from the shareholders’ meeting to the board. However, the shareholders’ meeting must outline the reasons under which a cancellation may be implemented. A general referral to the interests of the company or good causes in accordance with the law would not be considered as a sufficient outline for a delegation to the board.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

There is an important distinction between privately held and listed companies in this respect regarding registered shares only.

The articles of association of privately held companies may require that registered shares can only be transferred with the company’s approval (the board is responsible), which can be denied based on important reasons specified in the articles of association. Alternatively, the company may also offer to the seller that it acquires its registered shares for its own account, the account of other shareholders or for the account of a third party at fair market value (the escape-clause). Lastly, the company may refuse the transfer and the registration of the transferee in the company’s share register if the acquirer does not explicitly state that it has acquired the shares in its own name and on its own account. In case the shares were acquired by inheritance, division of estate, matrimonial property law or compulsory execution, the company may withhold its consent only if it offers to purchase the shares from the acquirer at their real value.

A listed company may only refuse to register an acquirer in its share register for two reasons: either the acquirer exceeds a certain percentage of the company’s voting rights, which has previously been declared in the articles of association of the company, or the acquirer fails to state that it holds the acquired shares in its own name and on its own accounts. However, in both cases, a listed company may only prevent the shareholder from exercising its voting rights in respect to the acquired shares but not the transfer of title of the acquired shares. Where listed registered shares were acquired by inheritance, division of estate or matrimonial property law, entry of the acquirer may not be refused.

Fully paid bearer shares may be transferred without such restrictions.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

A company is allowed to repurchase shares up to 10 per cent of its nominal share capital (in case the repurchase is made in connection with transfer restrictions, the threshold is 20 per cent of its nominal share capital) provided that the company has sufficient freely available equity (ie, profit, profit carried forward and general reserves) on a voluntary basis. There are no compulsory share repurchase rules under Swiss law.

However, given specific circumstances, the Collective Investment Schemes Act provides for mandatory share repurchases in corporate investment schemes.

14 Dissenters’ rights

Do shareholders have appraisal rights?

In general, there are no appraisal rights of shareholders under Swiss law. However, legal entities involved in a merger may provide a compensation payment of fair value to objecting shareholders if an acquirer chooses to squeeze out a minority shareholder.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The CO provides for a one-tier board model. However, in larger and listed companies, the daily business is (except for the non-delegable and inalienable competencies of the board) often delegated from the board to the executive management, effectively leading a two-tier structure. The board of directors may assign responsibility for preparing and implementing its resolutions or monitoring transactions to committees or individual members. It must ensure appropriate reporting to its members. In case of listed companies, the members of the compensation committee must be elected by the shareholders’ meeting.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board is responsible for managing the business of the company, unless responsibility for such management has been delegated (see question 21). Generally, the board may pass resolutions on all matters that are not explicitly reserved to the shareholders’ meeting by law or by the articles of association, or delegated to the executive management based on organisational regulations.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

As the governing body, the board represents the company. It is its duty to act in the company’s best interest. Primarily, the interest of the company is defined in the purpose of a company as stated in its articles of association. In line with the prevailing but not undisputed opinion, the long-term interests of the shareholders as well as those of other stakeholders have to be kept in mind in order to determine what ‘in the company’s best interests’ is.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The members of the board or persons who, despite not being appointed as directors, act as such, and who have significant influence on the company’s decision-making process, are jointly and severally liable for damages caused by intentional or negligent breach of their duties. Each member can be held liable with its entire assets.

The action may be brought by the company, its shareholders, by the company’s creditors or in case of insolvency by the insolvency administrators. In each case it must be determined if damage is suffered only by a shareholder or a creditor, or if damage is also suffered by the company. The shareholders or the creditors may sue the company directly if they suffered direct damage. If it is the company that suffers a loss and a shareholder only suffered indirect damage (eg, a loss of value of their shares resulting from damage incurred by the company), shareholders can only ask that compensation of such loss be paid to the company. In the event of an insolvency of the damaged company, the creditors are entitled to claim for compensation for the damages of the company, provided that the insolvency administrators have not taken such action.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The members of the board have duties of care and loyalty towards the company. These duties require the members of the board to act in the same way as a diligent and competent member would have acted in the same circumstances. The compliance with the duties is, hence, assessed by reference to an objective standard, unless a member of the board is an expert in a certain field, in which case the duty of care of such director will be assessed by reference to a diligent and competent director having the same level of expertise in the relevant field.

It is established case law that decisions of the board that are based on adequate information and a reasonable and professional decision-making process do not constitute a breach of duty, even if such decision proves to be wrong retrospectively, provided, however, that board members involved acted in an impartial and independent manner and were free of any conflict of interests when making the decision (the ‘business judgement rule’). If a decision meets these standards, members of the board cannot be held liable for an unfavourable decision.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The duties of the members of the board are defined by objective criteria. As the same duties apply to each individual member of the board, they do not differ based on the skills or experience of the respective member of the board, subject to specific cases (see question 19). Therefore, their background, in terms of professional experience, skills, etc, is in principle irrelevant.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The following board responsibilities are non-delegable and inalienable (article 716a of the CO):

• the overall management of the company and the issue of all necessary directives (strategic governance);

• determination of the company’s fundamental organisational structure;

• the organisation of the accounting, financial control and finance planning systems as required for the management of the company;

• the appointment and dismissal of persons entrusted with managing and representing the company;

• overall supervision of the persons entrusted with managing the company, in particular, in regard to compliance with the applicable law, articles of association, operational regulations and directives;

• compilation of the annual report, preparation for the general meeting of shareholders and implementation of its resolutions;

• notification of the (bankruptcy) court when the company’s liabilities are no longer covered by its assets (over-indebtedness); and

• issuing the annual compensation report on the board’s and senior management’s compensation and election of the compensation committee consisting of members of the board (only for listed companies according to OaEC).

Apart from the above, the board is allowed to delegate its responsibilities to third parties, individual board members or committees, or the executive management based on the company’s organisational regulations.

Even with respect to non-delegable and inalienable responsibilities, the board may delegate the preparation and execution of its decisions, but never the decision-making itself.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

There is no requirement by law, regulation or by the listing rules specifying a minimum number of ‘non-executive’ or ‘independent’ directors.

Nonetheless, the DCG contains specific disclosure obligations for non-executive members. And the SCBP recommends that the majority of the board should consist of independent members, meaning non-executive members who have either never, or at least not for the past three years, been members of the senior management, and who have no (or comparatively minor) business relations with the company.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

There is no mandatory provision on the minimum or maximum number of seats on the board. The SCBP recommends that the size of the board should match the needs of the individual company and be composed by members of both genders. However, often companies set minimum or maximum sizes of their boards, or both, in their articles of association.

Potential board members do not have to meet any formal prerequisites with the exception of being a natural person and not a legal entity. It is required by law, that the company must be represented by at least one person who is resident in Switzerland. However, it is sufficient if this person is an executive officer. In addition, the OaEC obliges listed companies to set a maximum number of permissible mandates a board member may hold in the management or administration of other companies.

In some regulated industries, like the financial markets, it is, however, required that members of the executive bodies have a proper business conduct and the required knowledge and experience (‘fit and proper’).

In regard to gender diversity, there is no law stating a quota for women within the members of the board of directors or executive management. Nevertheless, the Swiss government intends to implement a guideline for listed companies with more than 250 employees to have a minimum of 30 per cent women on the board of directors and 20 per cent in executive management. The guideline shall be implemented on a ‘comply or explain’ basis. Currently, according to the Schilling-Report 2018, the trend with respect to gender diversity on the executive boards of Switzerland’s largest companies is disappointing: after the encouraging figure reported last year, the share of women on these boards has fallen again.

Vacancies on the board can only be filled by the appointment of a new member by the shareholders’ meeting. Unless otherwise provided in the articles of association, the board may appoint a new chairman for the remaining term of office, if this position becomes vacant.

SIX-listed issuers are required to disclose detailed information on individual board members, the organisation of the board and its committees as well as its compensation. The legal basis for these disclosure obligations is found in the DCG.

Lastly, the identity of any member of the board will be disclosed in the commercial register.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

With the exception of banks and insurance companies, there is no law that requires the separation of the functions of board and senior management (including the board chairman and CEO). The SCPB nonetheless recommends – by emphasising the importance of keeping the balance between direction and control on the senior management level – either separating the two functions or adopting other adequate control mechanisms, such as the appointment of an experienced non-executive lead director.

It is common practice in Switzerland for the CEO not to be a member of the board.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

There are no mandatory committees for non-listed companies. For listed companies the OaEC requires the establishment of a compensation committee, whose members have to be elected by the shareholders’ meeting each year. For some banking entities, an internal audit committee and a risk committee are mandatory. Otherwise, there are no requirements or restrictions relating to board committees under Swiss law. The SCBP also recommends establishing further committees, such as a nomination committee. Moreover, executive committees are also known in Switzerland.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

In order to prepare the annual general meeting (AGM) of shareholders (board resolution on the agenda) at least one board meeting is required per year. However, the SCBP recommends for listed companies that at least four annual meetings should be held, depending on the specific requirements of the company. Moreover, each board member is entitled to individually request the chairman to convene an immediate meeting by stating the reasons for the request.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

In general, companies are not required to disclose any board practices. An exception is made for listed companies. The DCG asks companies to disclose a variety of information including their internal organisational structure.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

For non-listed companies, it is in the exclusive competence of the board to determine the remuneration of its members.

Under the OaEC, in force since 1 January 2014, Swiss companies whose shares are listed on a Swiss or foreign exchange are obliged to annually submit the board’s proposal on the compensation of the board members, the senior management and the advisory board to the shareholders’ meeting for a binding vote (binding say-on-pay; see question 37).

Contracts between the company and its members of the board or the senior management on which their compensation is based are limited to a maximum term of one year. Loans or other transactions specified in the OaEC between the company and members of the board, the senior management or the advisory board are only admissible if provided for in the company’s articles of association.

Further provisions on disclosure regarding the remuneration of members of the board as well as other transactions can be found in the CO, the DCG and the SIX Directive on disclosure of management transactions (DMT). The CO requires that companies whose shares are listed on a stock exchange provide additional information in the notes to the balance sheet about all remuneration distributed to current and former members of the board of directors, to current and former members of the executive board, to current and former members of the board of advisers, and to close associates of such persons. In addition, the notes to the balance sheet must contain specific information about certain loans and credit facilities. The DCG requires all issuers with a primary listing at the SIX, irrespective of whether they are incorporated in Switzerland, to disclose information on the basic principles and elements of compensation and shareholding programmes for members of the board and senior management as well as the method for their determination. The DMT obliges listed issuers to disclose any buy or sell transaction concluded by the directors and members of the senior management in the respective issuer’s equity securities or financial instruments.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The remuneration of the senior management is determined by the board. There is no regulation in regard to the determination of the executive management’s remuneration amounts except for the OaEC (see question 28).

However, the remuneration must be justifiable both in regard to the financial situation of the company and the contribution of the individual manager to the company. This is in line with the established case law of the Swiss Federal Supreme Court in respect of the compensation for members of the board and, furthermore, corresponds with the principle of duty of care and loyalty of board members, which also applies when determining the compensation for the senior management.

The Swiss Supreme Court reviews in accordance with its settled case law remuneration decisions with certain restraint, as such decisions are essentially based on commercial experience and the board is best placed to take such decisions. In the event of an obvious disproportionate remuneration, the judge may impose its refund to the company. Under specific circumstances it may even give space to criminal actions for disloyal management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

It is generally considered permissible for companies to insure their directors and officers against D&O liability as well as paying the premiums. This is standard practice in nearly all companies in Switzerland.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no explicit rule of law with regard to the indemnification of directors and officers. Moreover, as far as it is apparent, there is also no established case law in this regard. In general, it is seen as admissible (at least as long as no bankruptcy proceedings are commenced) that a company advances cost in connection with lawsuits and official investigations in relation to a claim for compensation of a third party against a director. The company may only envisage reclaiming such advances in case of an evident breach of the director’s duty of care. If a director has not breached its duty of care intentionally or with gross negligence, is acquitted of the charge or the dispute is settled judicially or extrajudicially, the company may finally bear the cost and indemnify a director for liabilities incurred in their professional capacity. In case of an intentional or gross negligent breach, indemnification seems, in principle, not acceptable.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The preclusion of liability in advance is not possible, neither through charter amendments nor any other shareholder action. But, the shareholders may vote in favour of granting discharge to the directors and officers for the preceding business year at the AGM. By doing so, the company itself and all shareholders voting in favour of the resolution are excluded from bringing forward any action against the directors and officers for facts known at the time of the shareholders’ meeting. Shareholders not participating at the shareholders’ meeting or voting against the discharge are precluded from taking action at the end of six months following the shareholders’ vote on the discharge.

33 Employees

What role do employees play in corporate governance?

Employees do not play a specific role in corporate governance and they are not entitled to be represented on the board.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

There is no such requirement under Swiss Law. There is also no practice in this regard.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The articles of association along with further information on the company must be filed with the commercial register at the registered office of the company. Via the commercial register, the articles of association can either be accessed directly or ordered online (for further details, see question 36). However, the organisational regulations of the board, in general, do not have to be made publicly accessible. Nonetheless, they are often made available on the websites of listed companies.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

All companies must prepare an annual report with the annual accounts (of the individual entity and, if applicable, consolidated accounts), composed of the balance sheet, the profit and loss statement and the notes to the accounts. Larger companies additionally have to draw up a cash-flow statement and a management report. In general, the annual report must be made available to the companies’ shareholders, but not to the public. Only listed companies have to make their annual reports available on their website (see below). Companies also need to register certain fundamental information in the commercial register, the entries of which are available online for public inspection. Such fundamentals comprise:

• the company’s purpose;

• its articles of associations (and any changes thereto);

• its share capital (and any increases and decreases);

• its members of the board and any other representatives;

• its auditors (or the fact that it has waived any audit);

• the fact that, if applicable, the transferability of its shares is restricted; and

• its means of publication.

Filings have to be made upon occurrence and are also published in the Swiss Official Gazette of Commerce. For listed companies, the FMIA and the rules and regulations of the SIX, which are based on the FMIA, set out various additional disclosure obligations:

• First, anyone who acquires or disposes of shares (or options relating thereto) of a Swiss company that is listed, at least partly, in Switzerland, or of foreign company mainly listed in Switzerland must notify the company and the stock exchange within four trading days of reaching, exceeding or falling below the thresholds of 3 per cent, 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 33.3 per cent, 50 per cent or 66.6 per cent of the voting rights.

• Second, SIX listing rules set periodic reporting obligations obliging issuers to publish at least bi annual financial statements in accordance with the applicable financial reporting standards, as well as to publish and keep updated dates of major importance to investors in a corporate calendar. Issuers are also subject to regular reporting obligations with regard to, inter alia, information concerning the issuer or its capital structure.

• Third, issuers listed on the SIX must inform the market of potentially price-sensitive facts (ie, facts that are not publicly known and that (from an ex ante perspective) are capable of leading to a significant price change), which have arisen in the company’s sphere of activity (ad hoc publicity).

• Fourth, the DCG obliges its issuers to include a separate corporate governance section in their annual reports on information on management and control at the highest corporate level of their company. The information to be published (or the substantial reasons for their non-publication – the ‘comply or explain’ principle) comprises information on the company’s group and capital structure, its board, senior management and auditors, compensation, shareholdings and loans, shareholders’ participation rights, and change of control and defence measures.

• Last, members of the board or management committees are required to report within two days to the company transactions in its shares, convertible and purchase rights on its shares, or financial instruments. The issuer must notify the SIX within three trading days of such notifications.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Since the fiscal year beginning in 2015, the OaEC requires the shareholders’ meeting of stock-listed companies to vote annually on the aggregate amount for the compensation of each member of the board, the senior management and, if such exists, the advisory board. This vote is binding for the company, which means that every compensation needs to be ratified by the shareholders’ meeting. This ratification can, however, be retrospective or prospective. The details of this binding say-on-pay need to be specified in the articles of association. In general, the vote shall cover a one-year period. However, it is admissible to set, as an example, the period for the compensation of the board to its term of office, which is often the year between one AGM and the next. There can also be several votes on different components of the compensation (eg, fixed and variable) and the vote may set an exact amount of compensation or a maximum amount.

Furthermore, some companies have their shareholders vote on a non-binding consultative basis on the compensation report. There is no equivalent obligation for non-listed companies.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

The election and removal of directors is an inalienable power of the shareholders’ meeting. In general, individual shareholders neither have the right to nominate directors nor the right to be represented on the board. However, shareholders who alone or together with others hold 10 per cent of the share capital or shares with a nominal value of at least 1 million francs of the company (these conditions may be eased but not tightened in the company’s articles of association) may demand from the company (the board is responsible) that an item be placed on the agenda of the shareholders’ meeting. Such item can consist of the appointment of a specific person to the board. Such right needs to be exercised before the shareholders’ meeting is called, which by law has to be done at least 20 days before the meeting (this deadline may be prolonged but not shortened in the articles of association).

Furthermore, each shareholder (including those holding only one single share) may at the shareholders’ meeting raise motions within the agenda items. Accordingly, a shareholder may nominate a director at the meeting under the common agenda item ‘appointment of the board’.

In case the company has different share classes, the shareholders of each share class are entitled to appoint at least one representative to the board.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Each shareholder is entitled to attend the shareholders’ meetings, to vote, to request information and to inspect documents (confidentiality interests of the company reserved, for further details see question 7). In particular, the right to information is regularly used by activist shareholders to increase pressure prior to shareholders’ meetings. As a first step, it is common for activists to seek personal contact with the company’s executive management or board representatives in order to discuss their demands and ideas. If such private negotiations fail, activists often launch public campaigns in order to gather possible support of other shareholders. In such situations, the board is well advised to listen to the shareholders and consider their concerns. The board should closely examine the raised issues and stay in a constructive dialogue with the shareholders. To preserve credibility, it is important that the board’s engagement is consistent.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

There is no such requirement under Swiss law. However, companies may include certain sustainability topics in their annual report on a voluntary basis. Companies listed on the SIX have the opportunity, by means of an opting in, to inform the SIX that they issue a sustainability report in accordance with an internationally recognised standard. Issuers that decide to make use of the opting in are obliged to publish the report on their website within eight months of the balance sheet date for the annual financial statements for a period of five years. Currently only six companies make use of such opting in.

In October 2016, a popular initiative regarding corporate social responsibility (the Responsible Business Initiative) was submitted to the Federal Council and the Parliament of Switzerland. Under the Responsible Business Initiative, companies would be legally obliged to incorporate respect for human rights and the environment in all their business activities. This mandatory due diligence would also be applied to Swiss based companies’ activities abroad. Whether the initiative succeeds is not known yet.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

There is no Swiss law requiring companies to disclose the pay ratio between the CEO’s annual total compensation and the annual total compensation of other workers.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no Swiss law that requires a disclosure of gender pay gap information.

Update and trends

In November 2017 the Legal Affairs Commission of the National Council (one of the two chambers of the federal parliament) came out in support of the federal government’s plan to require greater gender balance in the boards of Switzerland’s large listed companies.

A commission majority (14 versus 11) would like to see a minimum of 30 per cent of board members and 20 per cent of the management of these companies made up of each gender – a 100 per cent female board would fall foul of planned rules too.

Companies failing to comply would need to explain themselves and present plans to meet the requirements.

A majority of the commission wants the transition period to be three years for boards and five years for management teams. This is shorter than the five and 10-year periods in the federal government’s plan. Transition would start once the rules are in force.

Parliamentary works will continue in Spring 2018. The gender balance question is part of a larger revision of Swiss company law, which also includes legal changes implementing the successful vote to limit excessive pay packages at some large companies (the Minder initiative, after Thomas Minder, the politician behind it), currently regulated by the OaEC, and at law level in the future.

Daniel Schoch

daniel.schoch@mll-legal.com

Christophe Pétermann

christophe.petermann@mll-legal.com

Stefanie Maurer

stefanie.maurer@mll-legal.com

Schiffbaustrasse 2

PO Box 1765

8031 Zurich

Switzerland

Tel: +41 44 396 91 91

Fax: +41 44 396 91 92

www.mll-legal.come

Thailand

Calvin Wilkinson and Puttachard Poolsing

ICR (Thailand) Limited

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Private limited companies

The primary source of law for the formation, registration, management and liquidation of private limited companies is the Civil and Commercial Code (CCC). The primary source of penalties is the Act Prescribing Offences relating to Limited Companies, Partnerships, Associations and Foundations BE 2499 (1956) (the Offences Act).

Public limited companies

Public limited companies (both listed and non-listed) are governed by the Public Limited Companies Act BE 2535 (1992) (the PLC Act), and are subject to certain mandatory provisions and penalties under the Securities and Exchange Act BE 2535 (1992) (the SEC Act).

In addition, the Corporate Governance Code for Listed Companies BE 2560 (2017) (the Code) lists ‘apply or explain’ principles for publicly listed companies. Failure to apply a principle in the Code does not subject the listed company to a penalty, but it is obligated in its annual statement to the SEC, known as SEC Form 56-1, to disclose and succinctly explain the reasons for not following a particular Code Principle or Sub-Principle. The disclosure must include an acknowledgement from the board that it has properly considered and reviewed the application of the Code.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Department of Business Development

The Department of Business Development (DBD) is the relevant agency for enforcing the CCC, the PLC Act, and issuing penalties under the Offences Act. Within the DBD, the Bureau of Business Registration is responsible for registering the incorporation of companies and amendments to companies’ constitutional documents, the Bureau of Business Information is responsible for receiving companies’ annual financial statements, the Bureau of Law is responsible for providing interpretations of the laws relevant to the DBD’s mandate, and the Bureau of Foreign Business Administration is responsible for issuing foreign business licences and certificates.

Office of the Securities and Exchange Commission

The Office of the Securities and Exchange Commission (SEC) is the agency responsible for enforcing public limited companies’ (listed and unlisted) compliance with the SEC Act, including, relevantly, Chapter 3/1 pertaining to the governance of publicly traded companies.

Stock Exchange of Thailand

The Stock Exchange of Thailand (SET) promulgates and enforces rules concerning public listed companies. Its mandate includes listing and disclosure, market surveillance, member supervision and regulatory policy.

Thai Investors Association

The Thai Investors Association is a minority shareholders representative organisation that has an active role in monitoring all listed public limited companies and protecting shareholders’ rights.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Private limited companies

The CCC provides that shareholders have the power to appoint or remove directors from a private limited company by an ordinary resolution, which is a simple majority of votes, cast at a general meeting of the shareholders. The quorum for a general meeting of shareholders requires the attendance of shareholders representing at least one-quarter of the capital of the company, in person or by proxy.

However, these general rules are subject to the company’s articles of association, which may specify higher thresholds in relation to the type of resolution required to appoint or remove directors, the majority of votes required to pass the resolution, and the number of shares represented at a meeting for the meeting to be considered quorate.

Following the removal of a director by the shareholders, the removed director nevertheless still has the prima facie power to bind the company against third parties until the company deregisters the director at the DBD, which requires the submission of certain DBD forms signed by the authorised signatory of the company.

Directors are required to manage the company in accordance with resolutions of the shareholders passed in general meetings and in conformity with the articles of association; accordingly, shareholders can only require the board of directors to pursue a particular action if they hold sufficient shares in the company to pass an ordinary resolution.

Public limited companies

The PLC Act assigns different powers to shareholders according to whether they are appointing or removing directors in a public limited company.

Although shareholders have the power to nominate and appoint directors by ordinary resolution at a general meeting, in practice, the nomination of a director is conducted by a company’s nomination and remuneration committee and board of directors, who will then submit the appointment of the director to the vote of the shareholders at a general meeting.

In voting, each shareholder holds a number of votes equal to the number of shares held, multiplied by the number of directors to be elected, and may cast these votes to any number of candidates. The candidates are elected by a first-past-the-post voting method corresponding to the number of open positions. In the event of an equality of votes cast for candidates, the remaining appointments will be determined by drawing lots.

These general rules are subject to a public limited company’s articles of association. However, any alternative procedure for the election of directors must not deprive the shareholders of their voting rights.

In terms of the power to remove directors, shareholders may by resolution passed in a general meeting remove a director, provided that it is passed by not less than three-quarters of those in attendance and eligible to vote, and provided that they account for not less than half the shares held by the shareholders attending the meeting and having the right to vote.

The quorum for a general meeting of shareholders requires the attendance of shareholders holding shares amounting to not less than one-third of the total number of shares in issue, numbering either 25 persons or not less than one-half of the total number of shareholders.

Shareholders in a public limited company do not have any power to direct the board to adopt a particular course of action beyond what was stated in respect of private limited companies.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Private limited companies

Certain decisions must be approved by the shareholders of a private limited company by ordinary resolution at a general meeting, including the adoption of audited financial statements, the declaration of non-interim dividends, ratification of directors’ actions, and the appointment and remuneration of auditors.

Decisions to increase or reduce the company’s registered capital, the amendment or replacement of the memorandum of association or articles of association, conversion to a public company and the dissolution or amalgamation of the company require a special resolution passed by a majority of not less than three-quarters of the total votes of shareholders attending the meeting and eligible to vote. A higher percentage will be required if the articles of association provide for this.

Other matters may be reserved to resolution by the shareholders when specified by the articles of association.

Public limited companies

Further to the above, in a public limited company certain decisions are reserved to the shareholders by resolution of not less than three-quarters of the total number of votes of shareholders who attend the meeting and have the right to vote, including entrusting other persons with the management of the company, combining business with other persons, the sale or transfer of the company’s business, the purchase or acceptance of the transfer of the business of other public or private companies, and entering into, amending or terminating a lease of the company’s business.

Other matters may be specified in the articles of association as requiring approval of the shareholders at a general meeting.

There is no legal concept of a non-binding shareholder vote in Thailand.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Both private limited companies and public limited companies can issue ordinary and preference shares, which have differing rights.

In terms of voting rights, each ordinary share equals one vote. A preference share may have the same, fewer or more voting rights than an ordinary share. The content of the rights, including voting rights, accruing to the preferential shares are decided at the statutory meeting or pursuant to a capital increase, and cannot be altered. Although Thai law does not prescribe or proscribe the content of preferential voting rights, a common preferential right will involve the reduction of voting powers, for example, allowing only one vote for 10 preference shares held.

Further differentiation in the classes of shares can be made in the articles of association. For example, certain decisions at a general meeting of shareholders, such as the nomination of directors, can be made to require the approval of a particular class of shareholders.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Both private limited companies and public limited companies specify similar rules in this area.

With regard to attendance, there are no special requirements for shareholders to participate in a general meeting of shareholders, although every shareholder whose name is recorded in the register of members has the right to be present at any general meeting.

A shareholder will be barred from voting if all calls due from the company have not been paid, the shareholder has a special interest in a particular resolution, or the articles of association require the possession of a certain number of shares in order to vote.

With regard to voting by proxy, any shareholder may choose a proxy to attend the meeting and vote on their behalf, provided that the instrument appointing the proxy is dated and signed by the shareholder and states the number of shares held by the shareholder, the name of the proxy and the meeting for which the proxy is appointed. The instrument appointing a proxy must be deposited with the chairman of the meeting at or before its beginning.

A company may hold a general meeting of shareholders by electronic means, provided that all attendees are located in Thailand, one-third of the quorum physically attend the meeting at the same venue, and in the case of a public limited company, provided that it is specifically allowed for in its articles of association. Based on the foregoing restrictions, there would appear to be little practical utility in holding virtual meetings in Thailand.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Private limited companies

Shareholders representing at least one-fifth of a company’s total voting rights can, by writing to the board of directors, request that they call a general meeting of the shareholders with a specified agenda. If the meeting is not summoned within 30 days of the written request, any group of shareholders comprising one-fifth of the company’s total voting rights may themselves summon it.

Any shareholder may challenge the calling of a meeting or a resolution passed contrary to the provisions of the CCC or the company’s articles of association by petitioning the court, provided that the application is filed within one month of the date of the resolution.

Public limited companies

Shareholders comprising at least one-fifth of a company’s total voting rights, or being no fewer than 25 in number and holding in aggregate not less than 10 per cent of total issued shares in a public limited company, may by subscribing their names to the board of directors request that they call a general meeting of shareholders for a specified agenda. However, there is no legal mechanism by which the shareholders can themselves call the shareholders’ meeting, even if the directors refuse their request.

Furthermore, under the SEC Act, any shareholder or group of shareholders holding shares amounting to at least 5 per cent of the total voting rights may submit a written proposal to the board of directors requesting that certain matters be on the agenda of a general meeting of shareholders.

The board of directors may refuse to include such a proposal in the agenda of the general meeting. However, their denial must be based on a reason listed in the SEC Act, and shall be notified as a matter of information in the meeting. If the directors do refuse, the shareholders in that meeting may pass a resolution, by majority vote of the total number of shareholders present and having the right to vote, to include the matter in the agenda of the next general meeting.

Shareholders comprising not fewer than five in number or holding not less than one-fifth of the total number of issued shares may contest the calling of a meeting, or a resolution passed contrary to the provisions of the PLC Act or the company’s articles of association, by petitioning the court, provided that the application is filed within one month after the date of the contested act. If the application is successful, the company shall notify the shareholders within one month from the date of the final judgment.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

In both private limited companies and public limited companies, controlling shareholders do not owe duties to the company or to non-controlling shareholders. However, if a shareholder who votes has a ‘special’ or ‘vested’ interest in that resolution, it may be cancelled pursuant to a shareholder’s petition to the court in accordance with the procedures outlined in question 7 above.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

A dispute between consumers and business operators is one of the few areas, if not the only one, where legislators have explicitly given Thai courts the power to pierce the corporate veil. The Consumer Case Procedures Act BE 2551 (2008) provides that where a company acting as a business operator was incorporated in bad faith, or exhibits deceitful behaviour against a consumer, or there is an embezzlement of the company’s property that affects the interests of the claimant consumer, and the company’s property is insufficient to satisfy the complaint, the court has the power to summon, inter alia, a shareholder of the company and make them jointly liable for the obligation owed by the company to the consumer, unless the shareholder proves his or her innocence, or in the case of receiving property from the company, proves that he or she acquired the property in good faith and for value.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

There are limited restrictions on anti-takeover devices under Thai law, pertaining primarily to share repurchases by a company of its own shares. In private limited companies, this is strictly outlawed under the CCC. For public limited companies, there is scope to repurchase shares under the PLC Act; however, it can only be done for a reason specified by the PLC Act, and by a process prescribed by ministerial regulation.

Shares repurchased by the company will not be counted towards the quorum of a meeting of shareholders, nor will they have voting and dividend rights. The company must completely dispose of the shares repurchased within three years of the completion of the share repurchase. If it fails to do so, the company must reduce its paid-up capital by cancelling the remaining repurchased shares.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Private limited companies

As there is no concept of unissued stock in private limited companies, new shares can only be offered pursuant to a capital increase and must be issued upon creation.

The capital of a private limited company can only be increased by the passing of a special resolution, which requires that 14 days’ notice be given to all shareholders of the meeting, as well as the resolution itself being approved by no less than three-quarters of the total votes of shareholders attending the meeting and eligible to vote.

All new shares must be offered to existing shareholders in proportion to their existing shareholdings for a specified period. If all of the offered shares are not taken up by that date, the board of directors may offer such shares for subscription to other shareholders or to the directors themselves.

Public limited companies

In public limited companies, the board of directors may in its discretion offer previously unissued stock to selected existing shareholders, selected third parties, or the public, subject to a resolution of the shareholders requiring that they first be offered to existing shareholders pro rata.

The capital of a public limited company can only be increased by a resolution of not less than three-quarters of the total votes of shareholders attending the meeting and eligible to vote.

Pursuant to a capital increase, the shareholders at a general meeting must adopt a resolution specifying whether the company will offer the new shares to existing shareholders pro rata, or to selected third parties, or to the public.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Private limited companies

Although transfers of shares in a private limited company are not required by law to receive the consent of the company, the articles of association of the company may freely place restrictions on the transfer of shares. A commonly adopted restriction is that all transfers of shares entered in a name certificate have the assent of the directors of the company.

Public limited companies

Transfers of shares in public limited companies do not require the assent of the company. The company is only permitted to restrict the transfer of shares for the purpose of preserving the company’s lawful rights and interests, or to maintain the ratio of shareholders between Thais and foreigners.

A public limited company may also refuse to register a transfer of shares occurring 21 days or less prior to a general meeting of shareholders.

Additionally, the promoters of a public limited company, being not fewer than 15 individuals, must subscribe to at least 5 per cent of the authorised capital at incorporation, and for two years henceforth require approval from the shareholders at a general meeting in order to transfer those shares.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Private limited companies

As discussed in question 10 above, a private limited company may not own its own shares, therefore the existence of compulsory share repurchase rules would be in contravention of the CCC.

Public limited companies

Although there are certain narrowly prescribed conditions where a public limited company may repurchase shares, discussed in question 10 above, none of these conditions contemplate the making of compulsory rules by a company in respect of a share repurchase. Furthermore, any mandatory share repurchase by a public limited company without the consent of the transferor would appear to be in contravention of the ministerial regulations pertaining to share repurchases.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Private limited companies

No.

Public limited companies

Shareholders only have appraisal rights in respect of an amalgamation. In the event that a shareholder raises an objection to an amalgamation, the company shall arrange for the purchase of shares belonging to that shareholder at the price last traded on the stock exchange prior to the date on which the resolution of the amalgamation was passed. Where there is no traded price on the stock exchange, an independent appraiser shall be appointed by both parties to appraise the shares pursuant to the making of a purchase offer. If the shareholder does not agree to sell the shares within 14 days of the date of receipt of the purchase offer, the company shall proceed with the amalgamation, and the objecting shareholder shall be deemed a shareholder of the company formed by the amalgamation.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

All Thai companies, including listed companies, have a unitary board structure.

In terms of composition, a private limited company must have at least one director, and at every annual general meeting (AGM), one-third of the directors or the number nearest to one-third must retire from office, but can be re-elected.

In a public limited company, including a listed company, the board of directors must comprise at least five directors, and the whole board is elected annually, unless otherwise provided by the articles of association. A director may be re-elected.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

In a private limited company or a public limited company, the primary duty of the board of directors is to operate the business of the company in accordance with its objectives, its articles of association and the resolutions of the shareholders at general meetings.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The relationship between the board of directors and the company is characterised under the CCC as that of principal and agent. The board of directors represents the company and expresses the will of the company as a juristic person. This is subject, however, to any limitations imposed on the directors in the company’s articles of association, as well as the signing powers of the directors as reflected in the company affidavit. The board of directors owes legal duties to the company, its shareholders and third parties.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

All directors, whether in private or public limited companies, can face enforcement actions for criminal or civil penalties in respect of breaching a duty owed to the company, shareholders or third parties.

Criminal

Directors owe specific duties to the company, shareholders and third parties, the breach of which may result in criminal penalties of fines or imprisonment. In terms of enforcement, an investigation can be initiated on behalf of the company, shareholder or third party by the relevant Thai authority, such as the Department of Business Development, the Securities and Exchange Commission or the Royal Thai Police.

There is not space here to consider all the statutes in Thailand that impose criminal sanctions on directors for breaching duties owed to the company, shareholders and third parties. Even a careless but unintentional act on the part of a director could give rise to a potential prison sentence. For example, where a director certifies the minutes of a general meeting in which it is falsely stated that all of the shareholders were present in person or by proxy, this is prima facie an offence against the company and its shareholders. If the director then certifies this false statement in an application made to the DBD to register a change to the company, another offence potentially incurring imprisonment is committed against a third party, that being an officer of the DBD.

Civil

Directors owe duties of a fiduciary nature to the company, broadly categorised as duties of care, obedience, loyalty and disclosure.

A breach of any of these fiduciary duties resulting in damage to the company could result in civil proceedings being made by the company against the director.

Furthermore, civil actions can also be brought by third parties, including a company’s employees, creditors or consumers, if a director carries out an act outside the scope of the company’s objectives that causes damage to the third party.

Statutory derivative actions

Shareholders may also bring civil actions against directors in respect of duties owed to the company. The process by which shareholders may initiate a statutory derivative action differs in respect of private limited companies and public limited companies.

Private limited companies

The CCC allows any shareholder to bring an action against directors for their breach of duty if the company refuses to do so. As a precondition, the claiming shareholder shall not have approved the act of the directors and must enter an action within six months of the date of the general meeting in which such act was approved.

Public limited companies

The PLC Act allows any one or more shareholders owning 5 per cent or more of total sold shares in a public limited company to bring an action on behalf of the company for an act or omission of a director causing damage to the company, if the company refuses to do so following a written request by the shareholders. Furthermore, the shareholders can request that the court prohibit the act or omission of a director or remove a director from office.

In a public listed company, any one or more shareholders owning 5 per cent or more of its total sold shares can by written notice request that the company take legal action against the directors for disgorgement of profits wrongfully obtained. The shareholder may further receive compensation ordered by the court from the company for pursuing the action.

19 Care and prudence

Do the board’s duties include a care or prudence element?

The duties of care that directors owe to the company can be categorised into two elements.

The first is in regard to the standard of skill and judgement that a director must demonstrate; the second is with respect to the steps that a director must take when he or she has competing interests with the company.

Private limited companies

The CCC requires that the director of a private limited company exercise the skill and judgement of a careful businessman. In addition, directors must not, without the consent of the general meeting of shareholders, directly or indirectly undertake commercial transactions of the same nature, or competing with that of, the company.

Public limited companies

Under the PLC Act, directors must act in good faith and with due care to preserve the interests of the company. A director must not, unless having notified the general meeting of shareholders prior to his or her appointment, operate, become a director of, or become a partner of any business that is of the same nature and competing with that of the company. In board meetings, a director may not vote on a matter if he or she has a personal interest in it. Furthermore, a director has a duty to notify the company without delay if he or she has a direct or indirect interest in any contract that is entered into by the company.

The SEC Act provides a further formulation of the duties of care to which directors of public limited companies must adhere. In conducting the business of the company, a director must act with responsibility, due care and loyalty.

The standard by which a director must act responsibly and with due care is that of an ordinary person undertaking a similar business under similar circumstances. According to the SEC Act, a director can prove that he or she acted responsibly and with due care if he or she can prove that the decision to act was made in the honest and reasonable belief that it was in the best interests of the company; the decision was made in reliance of information honestly believed to be sufficient; and the decision was not made to benefit his or her personal interests, whether directly or indirectly.

In considering whether a director has performed his or her duty responsibly and with due care under the SEC Act, the court should consider, inter alia, the scope of responsibility that the director held and his or her qualifications, knowledge, capabilities and experience.

20 Board member duties

To what extent do the duties of individual members of the board differ?

The existence of a duty owed by an individual director can depend on whether the director had management responsibility over the matter or not.

In terms of criminal liability, a director responsible for the business operations of a company may be found liable for the same offence committed by the company if it results from the instructions, actions or omission of the director. On that basis, directors with management responsibilities are more likely than independent directors and audit committee members to be found to have owed a duty.

As discussed in question 19, the SEC Act prescribes that the court shall, in considering whether a director of a public limited company has performed his or her duty responsibly and with due care, take into account, inter alia, the scope of responsibility that the director held and his or her qualifications, knowledge, capabilities and experience.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Private limited companies

The CCC provides that directors may delegate any functions to any person or a committee of persons who shall be responsible to the board of directors. This delegation of power will typically be evidenced in the form of a power of attorney.

Public limited companies

The board of directors of a public limited company may delegate any of its duties to one or more directors or any other person, unless it is expressly stipulated otherwise in the articles of association.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Private limited companies

There is no minimum number of non-executive or independent directors required by law, as the concept does not exist in the context of a private limited company.

Public limited companies

A non-listed public limited company is not required to have non-executive nor independent directors.

A public limited company that is listed must have at least three independent directors amounting to one-third of the composition of the board of directors, and at least three audit committee members.

As definitions of ‘independent director’ vary across SET and SEC rules, it is instructive to consider the restrictions and obligations placed on holders of this position.

To ensure their impartiality, independent directors must comply with certain restrictions, including non-involvement in the management of the company in a remunerated role for at least two years, not being related to an executive or major shareholder of the company or its subsidiaries, and holding no more than 1 per cent of voting shares in the company or its related entities.

The key mandate of independent directors is to provide advice to the board of directors and shareholders to ensure, inter alia, that the company meets its corporate governance requirements under law, that internal processes are developed and evaluated that prevent conflicts of interest, and that the concerns of the company and its shareholders are adequately met by the directors.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

With respect to both private limited companies and public limited companies, directors must be natural persons of at least 20 years of age and must not be declared bankrupt or legally incompetent. All the directors of a private or public limited company are disclosed on the company’s affidavit, which is a publically accessible statutory record.

Regarding authorisation to appoint a director, there exists an exception to the general rule discussed at question 3 above that it is the shareholders who must approve the appointment of a director. Both the CCC and PLC Act provide that any vacancy occurring in the board of directors other than by rotation may be filled by the selection of the directors. However, any director so appointed shall hold office only for the remainder of the term of the director who was replaced.

Private limited companies

The CCC further prescribes that a company must have a minimum of one director. However, a company in its articles of association may set a minimum or maximum number of directors.

Public limited companies

Under the PLC Act, a public limited company’s board of directors must have at least five directors and no fewer than half shall be resident in Thailand. The company cannot, in its articles of association, restrict a shareholder from becoming a director. In terms of specific qualifications, a director must never have been sentenced to imprisonment by final judgment for an offence against property with dishonest intent, nor expelled or removed from official service in a state organisation or a state agency on the basis of dishonest performance of duties.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Private limited companies

Flexibility on board leadership is allowed in a Thai private limited company, and neither the term nor the functions of a CEO are mentioned by the CCC. Interestingly, the CCC does not prescribe that a private limited company must have a chairman; instead it provides that a chairman may be elected by the board of directors, either for a fixed period of time or for a particular board meeting. With regard to general meetings of shareholders, the chairman of the board of directors will preside as chairman of the meeting. If there is no such chairman, or he or she does not present within 15 minutes of the beginning of the meeting, the shareholders present may elect one of their members to be chairman. A common practice in paper meetings for both the board of directors and the general meeting of shareholders is to elect a chairman at the beginning of each meeting.

Subject to the company’s articles of association, the chairman has certain privileged voting rights, both at board meetings and at shareholders’ meetings, whereby in the case of an equality of votes, the chairman has a casting vote.

Public limited companies

Similarly, neither the concept nor functions of a CEO are mentioned by the PLC Act. The PLC Act does prescribe that the board of directors shall elect one of the directors to be the chairman of the board, and may elect one or several directors to be vice chairman with such duties as stipulated in the articles of association. The chairman of the board shall be the person who calls the meetings of the board of directors and presides at board meetings and general meetings of shareholders. In the event that the chairman of the board is not present at a board or shareholders meeting, the vice chairman shall preside over the meeting. If there is no vice chairman, then either the directors (in the case of a board meeting) or the shareholders (in the case of a shareholders’ meeting) shall elect one among themselves to preside over the meeting.

The chairman has the casting vote when there is an equality of votes, both at board meetings and at shareholders’ meetings – but subject to the company’s articles of association. The chairman at a general meeting of shareholders also has a duty to conduct the meeting in accordance with the articles of association and to follow the agenda as stipulated in the notice.

With respect to public listed companies, the Code states that the roles of chairman and CEO are different from one another and should be clearly defined as such by the company. To ensure effective checks and balances, the two positions should not be occupied by the same person. Failing that, the board should preserve the balance of power in the company by either ensuring that the board of directors comprises a majority of independent directors, or by appointing a designated independent director to participate in setting the agendas of board meetings.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

With respect to both private limited companies and unlisted public limited companies, there are no mandatory board committees. All forms of board committees are in principle allowed, as the directors may delegate any of their powers to a committee.

Public listed companies must have an audit committee comprising at least three persons, all of whom must be independent directors appointed by the board of directors or the general meeting of shareholders. In terms of composition requirements, at least one member must have expertise in finance or accounting. The members must comply with a number of restrictions, such as the prohibition on taking part in any business decisions of the company or its related entities, and not being a director of the company’s related entities.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Private limited companies

Private limited companies have no prescribed minimum number of board meetings per year. That said, although the CCC does not explicitly require that a board meeting be held in order for the directors to call a general meeting of shareholders, a company will usually have at least one board meeting per year, the purpose of which is to call an AGM.

Public limited companies

Public limited companies are required by the PLC Act to have at least one board meeting every three months in the province or neighbouring province of the head office of the company, unless the articles of association permit it to be held elsewhere.

With regard to public listed companies, the Code provides that the board should meet at least six times per financial year. If board meetings are not held monthly, the board of directors should receive a report on the company’s performance for the months in which the board of directors does not hold a meeting.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Private limited companies

Every year, within four months of the company’s preceding financial period end, the directors must lay before the AGM the audited financial statements and a report showing how the business of the company was conducted during the year under review. That said, in paper meetings it is common practice that no such report is prepared in writing, although the adoption of audited financial statements is mandatory.

Public limited companies

An AGM must be held within four months of the company’s preceding financial period. Prior to the AGM, the directors must submit copies of the audited financial statements and the annual report of the board of directors to the shareholders, along with written notice of the meeting.

The annual report of the directors must specify particulars about the company, its directors and affiliated companies. The report must state each director’s remuneration, shares, debentures, or other benefits received from the company, as well as any personal interest in any contract made by the company.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Private limited companies

The CCC specifies that the remuneration of the directors shall be fixed by general meeting of the shareholders. Outside that, the director is not an employee of the company and the company has no general obligation to provide a salary. With respect to the length of service contracts, although directors must retire by rotation over a period of three years, or such shorter period as specified in the articles of association, there is no legal bar to reappointment. Furthermore, there is no restriction on a private limited company granting loans to directors.

Public limited companies

The PLC Act provides that directors shall not be remunerated unless provided for by the articles of association, or in accordance with a resolution at a general meeting of shareholders by not less than two-thirds of the total number of votes of those shareholders in attendance.

In practice, the remuneration of a director is set by a company’s Nomination and Remuneration Committee, which will then submit the decision to the vote of the shareholders at a general meeting.

For public listed companies, the Code further states that the shareholders must approve the board remuneration structure, including level and pay components, which should be consistent with the company’s strategies and long-term objectives, and reflect the experience, obligations, scope of work, accountability and responsibilities of the directors.

A public limited company cannot provide loans to directors and their related persons or entities, except to the extent that the articles of association prescribes staff welfare, and with regard to loans under laws on commercial banking, life insurance or related businesses.

The entire board of directors is elected annually, although there is no legal bar to reappointment.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The salaries of senior management personnel are determined by the company under the supervision of the directors. As senior managers are considered employees of the company, the terms of their remuneration fall under the scope of the Labour Protection Act BE 2541 (1998).

A public limited company cannot provide loans to any employee, except to the extent that the articles of association prescribe staff welfare, and in regard to loans under laws on commercial banking, life insurance or related businesses.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

There is no restriction on a director or officer taking out liability insurance, or the company doing so on their behalf and paying the premiums. However, careful consideration should be given to the specific policy chosen, as unlicensed foreign insurers are unlikely to be able to indemnify and assist directors in Thailand.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There are no explicit constraints on a company indemnifying and holding harmless its directors for liabilities and costs incurred in their professional capacity, including in relation to civil claims and administrative penalties. An indemnification can be made by an agreement signed by the company and the director, in the company’s articles of association, or by resolution of the shareholders in a general meeting.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

With respect to third parties, Thai law does not make allowance for any company to preclude or limit the liability of directors or officers. However, in the context of directors’ liability with regard to the company, its shareholders and creditors, both the CCC and PLC Act make certain allowances for ratification of the act by the shareholders.

Private limited companies

Under the CCC, when acts of a director have been approved by a general meeting, such director is no longer liable for the said acts to the shareholders who have approved them, or to the company. Furthermore, shareholders who did not approve of such acts are precluded from taking action six months after the date of the general meeting in which such acts were approved.

Public limited companies

Under the PLC Act, a director who has performed an act that has been authorised, approved or ratified by a resolution of the meeting of shareholders, notwithstanding that such resolution may later be cancelled, shall not be liable to the company, its shareholders or creditors.

33 Employees

What role do employees play in corporate governance?

Private limited companies

A private limited company is not required to employ a company secretary, therefore compliance matters are typically left to the directors, legal and administrative staff, although it is not uncommon for a company to engage a professional corporate services firm to provide assistance.

Public limited companies

A public limited company is similarly not required to employ a company secretary.

A public listed company must, through its board of directors, appoint a company secretary to be responsible for preparing and maintaining the register of directors, the notices and minutes of meetings and annual reports on the directors’ and executives’ interests. The Code further provides that the board should disclose the qualifications and experience of the company secretary in its annual report and on the company’s website, and provide the company secretary with ongoing training and education relevant to performing his or her duties.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Apart from the annual directors’ report mentioned at question 27 above, there is no law or regulation that requires the evaluation of the board, its committees or individual directors in a private or public limited company.

However, with respect to public listed companies, the Code states that the board should annually conduct a formal performance self-evaluation of the board, its committees and each individual director, the criteria, process, and results of which should be disclosed in the company’s annual report. Furthermore, every three years, the company should appoint an external consultant to set guidelines and provide recommendations for the assessment of the board.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

A private limited company and public limited company files a memorandum of association (the corporate charter) once prior to incorporation, and the articles of association (the by-laws) once upon incorporation and subsequently upon every amendment to these statutory records at the DBD. These documents are publically available and published in the Thai language.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Upon incorporation, private and public limited companies must register the statutory meeting minutes, the shareholders list, the company seal (if any), the directors’ signing powers and the registered office with the DBD. With regard to ongoing public disclosures, all Thai companies must, when registering a change to the company such as the composition of the board of directors, the registered capital or registered office, disclose and certify details of the change and the meeting at which it was approved, including the number of the meeting, its presiding chairman and the number of shareholders in attendance. All companies must annually submit the audited financial statements and shareholders list. All these documents are publicly available at the DBD and published in the Thai language.

Shareholders of both private and public limited companies have the right to inspect the audited financial statements and share register during working hours. In a private limited company, shareholders have an additional right to inspect the minutes of board meetings and general meetings.

With respect to public listed companies, additional public disclosures must be made to the SEC, including quarterly financial statements reviewed by an auditor, and an annual report (form 56-1) concerning the company’s business and operations, financial status, risk factors, operations, assets, legal disputes, capital structure, management controls and remuneration paid to directors and executives in the past year.

A public listed company must also make disclosures to the SEC in the event that the company suffers serious damage, ceases operating all or part of its business, alters its objects or the nature of its business, entrusts other persons with power in the management of the company, takes over another company or is taken over, or any other incident specified in a notification of the SEC.

As noted under question 1, the Code additionally provides that a public listed company must in its annual report disclose and succinctly explain the reasons for not following a particular Code Principle or Sub-Principle.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Shareholders do not have a specific legal mandate to require an advisory vote regarding executive remuneration. To the extent that they have the ability to determine the agenda of a general meeting, as discussed in question 7, the shareholders may be able to raise the issue of executive remuneration for consideration at a general meeting.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Shareholders do not have a specific power to nominate directors, apart from their general ability to determine the agenda of a general meeting, as referred to in question 7. With regard to public listed companies, the Code provides that the board of directors should establish criteria to allow minority shareholders to nominate persons to serve as directors of the company.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Typically, engagement between the company and its shareholders is limited and occurs pursuant to the compliance matters discussed herein. This includes the AGM, whereby shareholders will receive notice, the audited financial statements, the report of the directors, and the opportunity to attend the meeting itself, as well as the holding of an extraordinary general meeting in order to obtain shareholders’ approval in respect of proposed changes to the company.

With regard to public listed companies, the Code states that the board should ensure that significant corporate decisions are considered and approved by the shareholders pursuant to applicable legal requirements. Furthermore, the board should encourage the participation of all shareholders through reasonable measures, including establishing criteria that allow minority shareholders to propose agenda items for consideration at general meetings.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Private limited companies and unlisted public limited companies have no disclosure requirements regarding corporate social responsibility matters.

Public listed companies are required to disclose CSR matters either in the Form 56-1 annual report or in a separate sustainability report.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Companies are not required to disclose the individual salaries of CEOs, nor the pay ratio between the CEO’s annual total compensation and the annual total compensation of other workers.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Thailand does not have any rules requiring the disclosure of information pertaining to the gender pay gap.

Update and trends

On 4 April 2017, an amendment to the CCC was promulgated, which states that a private limited company must, within one month of a resolution declaring dividends, pay to the shareholders such dividends.

On 17 October 2017, the Thai Cabinet approved draft amendments to the CCC and the Offences Act that would significantly liberalise the capital structure of private limited companies.

Pursuant to the passing of these draft amendments into law, a private limited company would be able to sell shares and debentures to the public in accordance with the applicable provisions of the SEC Act. The preferential rights ascribed to preference shares could be amended, and preference shares could be converted into ordinary shares. A company could own its shares if the purchase of the shares was approved by a special resolution of the shareholders and in compliance with the SEC Act. A company could also offer its shares to its executives or employees without first offering them to existing shareholders. With regard to debt-equity conversions, a payment of the share subscription price could be set off against a debt owed by the company if a special resolution approving such payment was passed at a general meeting of the shareholders.

Calvin Wilkinson

calvin.wilkinson@icr.co.th

Puttachard Poolsing

puttachard.p@icr.co.th

17th Floor, ITF Tower

140/35 Silom Road

Bangkok 10500

Thailand

Tel: +66 2 231 6090

Fax: +66 2 231 6093

www.icrasia.com

Turkey

Pelin Baysal and Görkem Bilgin

Gün + Partners

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The Turkish Commercial Code (TCC) dated 13 January 2011 (Law No. 6102) (TCC) entered into force on 1 July 2012. The TCC has important objectives such as ensuring transparency, adopting corporate governance standards and introducing internationally accepted auditing and reporting standards.

In addition to the above, the laws, communiqués and principles governing corporate rules and practice are as follows:

• Law No. 6335 amending the TCC (the Amendment Code);

• the Capital Markets Law (CML) dated 6 December 2012 (Law No. 6362) entered into force on 30 December 2012 replacing the former Capital Markets Law dated 30 July 1981 (Law No. 2499);

• the Capital Markets Communiqués (the CMB Communiqués); and

• the Corporate Governance Communiqué (CGC) dated 3 January 2014, serial II, No. 17.1 and Corporate Governance Principles (CGP) that are listed as annex 1 of the CGC.

According to the CGC, publicly held companies that have shares traded on the stock exchange are subject to the mandatory implementation of certain corporate governance principles; however, there are minor exceptions to mandatory principles (eg, the number of independent board members). As per the CGC, the criteria regarding the number of independent board members shall not be applied to third-group corporations (corporations that are excluded from the first and second groups, the shares of which are traded on National Market, Second National Market and Collective Products Market) and two board members are sufficient for third-group corporations.

There are also some listing requirements that are applied on a ‘comply or explain’ basis. For example, article 4.2.5 of the CGP stipulates that the responsibilities of the chairman of the board of directors and the chief executive officer or general manager must be explicitly separated; however, if it has been resolved that the roles of chairman of the board of directors and the chief executive officer or general manager are considered the same, this decision (and grounds for this decision) must be disclosed at the Public Disclosure Platform (PDP) (CGP, article 4.2.6).

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The Ministry of Customs and Trade is the regulatory body responsible for enforcing the TCC’s provisions on corporations (article 210 of the TCC). The disputes arising from the TCC are mainly resolved before commercial courts.

The CML, CMB Communiqués and the CGP are enforced by the Capital Markets Board (CMB). The CMB is the regulatory and supervisory authority in charge of the securities markets in Turkey. The CMB is entitled to hand out administrative sanctions to companies or individuals in the event of non-compliance. In the event the conditions set forth under the CML and the relevant legislation occur, the public prosecutor may prepare an indictment upon the written request of the CMB.

As regards the associations whose views are often considered, two associations, namely the Capital Market Investors’ Association (BORYAD) and the Turkish Industry and Business Association (TUSIAD), can be mentioned. TUSIAD was established in 1971 to represent the business world and BORYAD was established in 2001 to defend shareholder rights and promote investment.

Under the TCC there are legal grounds for proxy advisory firms, especially to protect the rights of minority shareholders in public companies.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

According to the TCC, apart from specific exceptions (ie, appointment of the initial board members of companies by the articles of association (AOA)), shareholders have exclusive authority to appoint or remove board members. As per article 407 of the TCC, shareholders may use this authority during the general assembly (GA). An exception to this rule is that, in the event a board member leaves their post, the board may also temporarily appoint a new member. However, temporary appointments must also be approved during the next meeting of the GA by shareholders.

Article 408 of the TCC similarly determines the authority of the GA to appoint and dismiss board members. Accordingly, the GA is authorised to make decisions as set forth under the law and the AOA. The same article also stipulates the non-transferable duties and authorities of the GA. Accordingly, privileges may be granted in respect of the election, nomination, release and dismissal of board members.

Under Turkish law, shareholders holding at least 10 per cent of the share capital of non-public companies and 5 per cent of the capital of public companies are defined as minority shareholders. The minority shareholders may:

• request the board to call an extraordinary meeting of the GA to question the company’s management and request that additional items be added to the agenda (TCC, article 411);

• ask the GA to appoint a special auditor to investigate and clarify certain issues even if it is not on the agenda. In order for shareholders to use this option, they must first exhaust their rights of information and examination. If the GA accepts this request, minority shareholders can request the commercial court to appoint a special auditor (TCC, article 438). This is applicable not only for minority shareholders, but for all;

• request the board to issue registered share certificates. If made, such request of the minority shareholders must be accepted and registered share certificates must be delivered to owners (TCC, article 486); and

• request the company to be dissolved, if there is a ‘just cause’ in that regard. The TCC does not define what a just cause would be, but it is accepted among scholars that there would be a just cause to request the dissolution of the company if the GA was called to numerous meetings contrary to the law, if the rights of minority shareholders are violated, especially the right to examine and demand information, if the company constantly loses its assets and does not generate any profit etc (TCC, article 531).

Further, all shareholders are entitled to request information and examination. Pursuant to article 1.2.1 of the CGP, which is applicable to public companies, this right cannot be limited or cancelled by the AOA or by a decision of the company.

In addition, any shareholder has the right to ask the GA to file a lawsuit for damages against board members or auditors (TCC, articles 553 to 555), request to inspect the company’s books and records and request information from the company’s auditor. Shareholders may also request from courts, if there is a just cause, that the managers’ right to manage the company be limited or completely abolished (TCC, article 630).

The shareholder vote required to elect and dismiss directors is the simple majority of the votes represented in the GA meeting, unless provided otherwise by law or the AOA. The necessary quorum for the GA meeting is shareholders or their representatives corresponding to at least one-quarter of the capital. If this quorum cannot be reached in the first meeting, no quorum is sought for the second meeting (TCC, article 418).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

According to article 408 of the TCC, the GA has exclusive authority over:

• amending the AOA;

• releasing the auditors and the board of directors or holding them liable;

• appointing the members of the board of directors, determining their fees, term of duties, discharging and replacing them;

• appointing and discharging the auditor except for the cases set forth under the law;

• taking decisions regarding the financial statements, the annual report of the board of directors, savings on the annual profit, determination of the dividend and gain margin and including the injection of the reserve fund into the capital or into the profit to be distributed and deciding on the use of the reserve fund;

• deciding on the dissolution of the company except for the cases set forth under the law; and

• sale of a substantial part of the company.

In the event the conditions stated under the CML and the related legislation are met, some exclusive powers of the GA may be transferred to the board of directors. For example, if a company chooses the registered capital system, the share capital of the company can be increased upon the board of directors’ resolution. Also, when it is permitted by the AOA, the board of directors may restrict the pre-emptive rights of shareholders (CML, article 18/5).

Under Turkish law, there are no matters that are resolved by a non-binding shareholder vote.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

As regards disproportionate voting rights, it should be noted that the TCC adopts the ‘one share, one vote’ principle. Accordingly, each share grants at least one voting right (TCC, article 434).

Pursuant to article 479 of the TCC, disproportionate voting rights may be granted to privileged shares. However, the voting privileges for private companies are limited to a maximum of 15 votes per share. This number can be increased only by a court decision for the sake of institutionalisation or because of a just cause. Thus, under the TCC regime, it is no longer possible to block a capital increase through the use of privileged shares. Further, privileged votes do not extend to resolutions regarding the amendment of the AOA of a company, or filing of discharge or liability suits.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Article 1.3.1 of the CGP stipulates that the announcement regarding GA meetings should be made at least three weeks in advance of the meeting on the company’s corporate website and on the PDP.

According to the TCC, shareholders are invited to the meeting as stipulated under the AOA, through an announcement published on the company’s website (if the company is required to have a website) and in the Turkish Trade Registry Gazette. This announcement must be made two weeks before the GA meeting (TCC, article 414).

Article 415 of the TCC stipulates the shareholders who are entitled to attend meetings. Accordingly, shareholders whose names are written in the attendance list prepared by the board of directors have the right to attend the meeting.

Pursuant to article 437 of the TCC, regulating the right to examine and demand information, financial statements, consolidated financial tables, annual reports of the board, audit reports and suggestions of the board regarding the method of distribution of dividends shall be made available to the shareholders at least 15 days before the meeting.

Pursuant to the TCC, e-signatures can be used to prepare meeting documentation and meetings can be held electronically (TCC, article 1527).

The following requirements have to be met in order to vote online:

• the company must have a website allocated for this purpose;

• shareholders who wish to participate in the online GA meeting must make such a request in advance;

• a technical report must be produced to prove that the electronic platform tools are sufficient for efficient participation and this report should be registered and published; and

• the identities of the online voters must be kept confidential.

The Ministry of Customs and Trade issued the Regulation on General Assembly Meetings of Joint Stock Companies held electronically, regarding the procedures of online GA meetings, published in Official Gazette No. 28481 of 28 November 2012. The companies shall have integrated in their AOA the sample article stating that the meetings can be held electronically. The said article can be found in the Regulation published by the Ministry of Customs and Trade. The company shall integrate the article as is because it is not possible to amend the article while adopting it.

Electronic meetings are mandatory for publicly listed companies.

The shareholders acting by written consent without a meeting can be realised by meetings that are held electronically, as explained above.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Article 411 of the TCC stipulates that shareholders holding at least 10 per cent of the company’s capital and for public companies, shareholders holding at least 5 per cent of the company’s capital may request a general meeting. If such a meeting has already been convened, then they have the right to request certain topics to be included on the agenda including director nominations. If their request is not accepted by the board or not responded to within seven days, such shareholders have the right to apply to the commercial court to enforce their request.

According to article 446 of the TCC, the dissenting opinions of the shareholders must be recorded in the minutes of the GA meeting to grant shareholders a right to claim invalidity of such decisions.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Under Turkish law, controlling shareholders do not have any specific duties to the company or to non-controlling shareholders. However, it should be noted that all controlling shareholders must exercise their rights by complying with good faith principles. Further, there are special provisions for minority shareholders.

Additionally, the TCC regulates provisions with regard to group companies and article 202 of the TCC specifically stipulates that the dominant (controlling) company cannot exercise its dominance in a way that may give rise to a financial loss on the subsidiary (eg, instruct the subsidiary to be the guarantor of a loan), unless such loss is compensated within the same financial year or a right to claim compensation is granted to the subsidiary within the same financial year by providing details on when and how the loss will be compensated. The loss concept herein covers causing a potential risk to the company’s financial assets or future profitability as well as value depreciation on them. Therefore, not only the actual losses sustained but also potential risks that may arise thereof fall within the definition of loss.

Both the shareholders of the subsidiaries and the creditors of the same may claim the indemnification of the loss of the subsidiary company from the dominant company by filing a lawsuit.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

According to the TCC, the shareholders’ liability is normally limited to their subscribed capital contribution. This rule is applicable for both joint stock companies and limited liability companies (LLCs). There is an exception for LLCs as concerns governmental debts. Accordingly, shareholders of a LLC are liable with their personal assets for the governmental debts and the responsibility should be calculated over the shareholding ratio in the company capital. Other than this, the shareholders are not responsible for the acts or omissions of the company, unless such an act or omission results from the shareholders’ own acts and has criminal elements.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

At present, share transfer restrictions are not permitted except for legal grounds determined under the TCC. However, the TCC introduces specific provisions regarding the restriction of share transfers through the AOA separately for LLCs and joint-stock companies (JSCs). Article 492 of the TCC requires JSCs to include in their AoA the specific reasons why share transfers may be rejected. Reasons related to the nature of the shareholders’ composition or the scope of the company’s activities or the economic independency of the company are deemed as important grounds for rejection as per the TCC. This is not an exhaustive list, therefore shareholders will need to select and predetermine the grounds for share transfer rejections and be very specific about it, if they want this protection to be reflected in the AOA. Otherwise, limitations on share transfer will continue as a contractual obligation pursuant to the shareholders’ agreement.

Article 493/1 of the TCC provides an escape clause for JSCs through the option to reject a share transfer, without basing its decision on the grounds explained above, by offering to acquire, at real value, the transfer shares itself or on behalf of its shareholders or a third party.

For shareholders to resolve on the transfer restrictions of registered shares, an affirmative vote of 75 per cent of the shareholders or their representatives is required (TCC, article 421/3).

In contrast to the JSCs, the TCC explicitly allows LLCs to limit share transfers based on pre-emptive purchase rights, call options or other ancillary or additional obligations by so providing for them in their AOA. Such limitations may also be subsequently included into the AOA by a decision of the GA. In this regard, the positive vote of two-thirds of the GA is required (TCC, article 621).

In LLCs, share transfers are subject to the approval of the GA and may be rejected without a just reason, unless otherwise stipulated in the AOA (TCC, article 577).

Given the differences between LLCs and JSCs, investors aiming to reflect the provisions of the shareholders’ agreement to the AOA may prefer to incorporate an LLC, provided that the regulations in their field of activity allow this.

Any agreement between the JSC and a third party for the acquisition by that third party of the JSC’s shares in lieu of the JSC itself or its affiliate or the parent company must comply with the terms set forth under articles 379 and 380 of the TCC. An agreement or obligation to this effect in violation of the terms of article 379 of the TCC will be invalid.

The TCC bans a JSC, a third party or the JSC’s subsidiary acting for the JSC, or the JSC’s subsidiary promising shares in its parent company, from undertaking to sell treasury shares (TCC, article 380/2).

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Under the TCC, new shares are issued upon capital increases and this requires a shareholders’ resolution. In public JSCs that adopt a registered capital system, capital can be increased without the approval of the shareholders, thus new shares can be issued accordingly, within the registered share capital (TCC, articles 459 and 460). In addition, according to article 461 of the TCC, existing shareholders have pre-emptive rights to acquire newly issued shares in proportion to their shareholding. Pre-emptive rights of shareholders may be restricted by a decision of the GA meeting, in the presence of just causes and with the positive vote of shareholders representing at least 60 per cent of the capital (TCC, article 461).

The TCC has introduced two new systems regarding capital. First, there is the new registered capital system for private JSCs, which was previously available only for public companies. A private JSC can adopt the registered share capital system by a provision to this effect in its AOA. The AOA must indicate the aggregate ceiling of the capital and the time limit for the board of directors’ authority to increase capital within that set limit, which cannot be longer than five years. The company may then increase its capital without going through the burdensome procedures of holding a GA meeting up to a predetermined ceiling (TCC, articles 459 and 460). The minimum capital requirement for a JSC adopting the registered capital system is 100,000 Turkish lire (TCC, article 332).

Second, as a financing method for JSCs, the TCC brings a conditional capital increase system, through which the company’s creditors (such as holders of bonds or other debt securities) and employees may partake in its equity. The conditional capital increase is not triggered by new capital commitments of the shareholders, but through the exercise of exchange (conversion option) and pre-emptive rights by creditors and employees (TCC, article 463).

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The CMB prohibits the restrictions on the transferability of shares of a public company. Accordingly, the transfer of the shares must not be limited and other restrictions must not be imposed on the shareholders to prevent them from going public.

Further, pursuant to article 8(ç) of the Quotation Directive issued by Borsa Istanbul, a company is prohibited from including any share transfer restrictions in its AOA regarding the securities to be listed on Borsa Istanbul.

Article 490 of the TCC stipulates that fully paid, registered shares can be transferred without any restriction, unless otherwise provided by law or by the AOA. The transfers of bearer shares are subject to the transfer of possession.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

A share buyback system that was already available for listed companies under capital markets legislation has been introduced by the TCC for JSCs, in exceptional cases. The conditions for the buyback are as follows (TCC, article 379):

• authorisation of the board of directors by a GA meeting;

• acquisition and pledge may be accepted on condition that the shares it will acquire in the future and the shares held by its subsidiary companies do not exceed 10 per cent of the company’s authorised or issued capital;

• the GA meeting can only delegate such authority for a maximum period of five years;

• the board of directors is required to state in the authorisation that these legal requirements have been fulfilled;

• the nominal value of the shares that will be accepted as an acquisition or pledge by the authority must be stated;

• the minimum and maximum limits of the consideration that will be paid for the shares must also be stated; and

• acquired shares must be fully paid-up. Shares so issued are stripped of any voting rights.

Further, article 385 of the TCC stipulates that shares acquired or accepted as a pledge in a way that is contrary to the principles set forth under the TCC shall be disposed of, or the pledge on them shall be released within six months of the date of their acquisition or acceptance as a pledge. Any specific procedure regarding selling off or disposing of the pledge has not been provided. The authority to sell off such shares is held by the board of directors, which shall perform its duty according to the principles of equality and public disclosure.

Similar principles apply to share buybacks in LLCs as well. An LLC may acquire its own capital shares with two conditions (TCC, article 612): it must have the necessary equity that may be freely used to purchase these shares; and the nominal value of the shares to be purchased must not exceed 10 per cent of the total share capital.

Capital shares acquired in excess of this amount must be disposed of or redeemed through a capital reduction within a maximum period of two years (TCC, article 612/2).

The Communiqué on Share Repurchase (the Communiqué) issued by the CMB entered into force on 3 January 2014. According to the Communiqué, the board of directors must be authorised by the GA in order for a publicly held company to repurchase its own shares (Communiqué, article 5/1). There is an exception to this rule where listed companies are allowed to repurchase the shares without the necessity of a GA authorisation, if such repurchase is necessary for the purpose of avoiding a probable and serious loss. A probable and serious loss is deemed to exist where the daily average price of shares is below the nominal value or has lost value over 20 per cent. Unless such circumstances are present, the only way for a listed company to repurchase its shares without a GA authorisation is to obtain the approval of the CMB (Communiqué, subparagraphs 4 and 5 of article 5).

The nominal value of the repurchased shares cannot exceed 10 per cent of the paid-in capital where the total value of the shares cannot exceed the total value of the resources subject to profit distribution. Repurchased shares may be kept for an indefinite period as long as they do not exceed the aforementioned limits. The shares repurchased in breach of the Communiqué must be sold within one year of the date of repurchase or else they will be amortised by way of capital decrease (Communiqué, article 19).

The maximum duration of the repurchase programme is three years for the companies listed on the stock exchange and one year for other publicly held companies, unless the repurchase programme does not foresee any specific duration (Communiqué, article 7).

The repurchase of shares is not permitted if there is any postponed disclosure process regarding internal matters or significant transaction that has not yet been disclosed to the public.

14 Dissenters’ rights

Do shareholders have appraisal rights?

The TCC also provides categories of important reasons that allow JSCs to reject the transfer of registered shares under their respective AoAs. The company may choose not to approve the share transfer by claiming an important reason stated under the AOA, or to acquire the shares to be transferred on its or a shareholders’ or any third party’s behalf by offering nominal value of the shares to the transferee (TCC, article 493).

If the company prefers to use an escape clause, the nominal value of the shares must be offered to the transferee. There is no definite basis for how the nominal value of shares will be determined and the transferor may apply to court for a determination of the nominal value of the shares to be transferred. If the transferee is offered a nominal value and does not reject such value within one month of its acknowledgment, the acquisition offer will be deemed accepted. If the company remains silent for a period of three months from the date of the transferee’s application for approval, it will be deemed that the company has approved the share transfer. As long as the company does not approve the share transfer, the ownership of shares will remain with the transferor together with all monetary and management rights (TCC, articles 493 and 494).

In addition, the TCC regulates an escape fund to be paid to shareholders in the event of a merger or change in the type of company. In this regard, if the shareholders disagree with a merger or change in the type of company, they have the right to sell their shares to the company at a fair value (TCC, articles 141, 183 and 202/2).

Moreover, the Communiqué on Common Principles of Significant Transactions and Retirement Rights issued on 24 December 2013 determines the extent of significant transactions and shapes the limits of voting rights and shareholders’ retirement rights in publicly held companies. According to this communiqué, mergers, division transactions, change in the type of company or termination, along with other important transactions listed in article 5, require GA approval.

This communiqué details the provision regarding the retirement right in article 24 of the CML and determines the circumstances where the retirement right does not arise. In this respect, shareholders who voted against a significant transaction at the GA meeting and had their dissenting vote recorded in the minutes of that meeting will be able to sell their shares to the subject company.

According to this communiqué, it may be possible to abandon significant transactions where the total cost of the exercise of retirement rights exceeds the predetermined cost of the same or where certain shareholders, whose qualifications are specified beforehand, exercise the retirement right. Similar provisions are recognised for mandatory tender offers arising from a significant transaction. With an amendment dated February 2015, pursuant to article 11/1, in order to protect the rights and interests of investors, it has been provided that in case of a non-public company acquiring a publicly listed company, the controlling shareholders together with those acting with the controlling shareholders shall make a mandatory tender offer.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Turkish law, the board structure for both listed and unlisted companies is one-tier.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The principal duties of the board members are as follows:

• to act prudently and diligently when conducting business and performing their duties and the business of the company;

• to monitor and supervise the management and the business of the company to ensure that it is in compliance with principles of good faith, and for the interests of the company and its shareholders;

• to keep confidential the information obtained during and after the term of duty;

• to refrain from attending board meetings regarding their own interests or the interests of certain close relatives; and

• not to engage in transactions with the company unless the GA meeting authorises the board for a maximum period of five years regarding the repurchase of shares.

In addition to the above, the TCC sets forth the non-transferable duties of board members. The most important non-delegable and indispensable duties and powers of the board of directors are as follows (TCC, article 375):

• determining top-level management of the company and giving instructions in this regard;

• establishing the necessary system for financial planning to the extent required, and for accounting and finance audit;

• appointing and dismissal of managers and persons performing the same function and authorised signatories;

• high-level supervision of whether the persons in charge of management act in accordance with the law, the AOA, internal regulations and written instructions of the board;

• keeping the share book, resolution book of the board and the GA meeting and discussion register, preparation of the annual report and corporate governance disclosure and submission thereof to the GA, organisation of GA meetings and enforcement of GA resolutions; and

• notifying the court regarding the company’s state of excess of liabilities over assets.

It must be noted that neither of these duties and authorities of the board of directors can be delegated to a duly authorised representative, the company management, a committee or the managers (TCC, article 367). The GA meeting cannot seize or deprive these duties and authorities of the board of directors, or transfer them to the GA meeting or the committees established under the provisions of the AOA. Similarly, the board of directors cannot waive such duties and authorities.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board is responsible for the management and representation of the company (TCC, article 365). Pursuant to article 553 of the TCC, in the event that the board is liable owing to their own faults arising from the law and the AOA, then the board will owe legal duties to the company, to the shareholders and to the company’s creditors.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

According to the TCC, the company, its shareholders and its creditors are entitled to file indemnification actions against the board members to indemnify the damages that occurred owing to their faults. Shareholders may initiate actions against the directors and request the indemnification of the damages that they directly incurred or request indemnification on behalf of the company for the damages that the company has incurred (TCC, article 553).

A voluntary insurance system for the damage incurred by the company through the fault of board members while performing their duties has been introduced by the TCC.

If the damage is insured at a price exceeding 25 per cent of the company capital and the company is secured, in the case of public companies, this matter shall be announced in the bulletin of the CMB, and if the shares are listed on a stock exchange this shall also be announced in the stock exchange bulletin, and such matter shall be taken into account in the assessment of compliance with the principles of corporate governance (TCC, article 361).

With regard to the civil and criminal liabilities of board members, unlike the previous TCC, the new TCC specifically regulates (in a separate article) the civil and criminal liabilities (TCC, article 553 and 562). If the board members do not comply with the obligations set forth under the law or under the AOA, they will be subject to civil and criminal liability.

19 Care and prudence

Do the board’s duties include a care or prudence element?

According to the TCC, members of the board of directors and third parties in charge of management are under an obligation to act with care and in compliance with the rules of good faith (TCC, article 369).

20 Board member duties

To what extent do the duties of individual members of the board differ?

According to the TCC, it is possible for a legal person to become a member of the board of directors (TCC, article 359/2).

The TCC requires that a chairman and at least one vice chairman be appointed among the board members (TCC, article 366). It should be noted that the board members do not have any special duty that should be performed individually except calling for board meetings. Also, under Turkish law, the board members do not have specific duties individually assigned to them. However, by inserting a relevant provision to the AOA or regulating an internal regulation, the board can always assign different duties to its members. Therefore, each board member can be held to be authorised and liable for different business transactions and may have different specific duties in that regard. If there is such distribution of duties, the duties and authorities of individual board members shall be disclosed in the activity report of the company (CGP, article 4.2.2). In the event the duties are not assigned, the management is performed by all board members (TCC, article 367).

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

According to the TCC, the board of directors can transfer all the management rights of the company to one or more executive members or to a third party as the manager. However, at least one of the board members must be entitled to represent the company (TCC, article 370). In such an instance, the transferee party would have the same responsibilities that the board of directors had pre-transfer.

The CGP stipulates that if there is a delegation of authority among board members, it should be specifically disclosed under the activity report of the company (CGP, article 4.2.2).

An addition has been made to article 371 of the TCC, relating to the representative authority of companies, by the Omnibus Law No. 6552 adopted on 10 September 2014. Pursuant to the aforementioned addition, the board of directors may appoint non-representative members of the board of directors or persons bound to the company by a labour contract, as commercial representatives with limited authority or as other commercial assistants. This act of the board of directors and the powers and duties of the appointed persons shall be explicitly reflected in the internal directive issued in accordance with article 367 and such internal directive shall be registered and announced. This amendment has enabled companies to impose different kinds of limitations or categorisations for their representative authorities.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Non-executive and independent membership structures are regulated mainly under the CGP and in certain CMB communiqués. Pursuant to the CGP, the majority of the board members should consist of non-executive members (CGP, article 4.3.2) and some of these members should be independent board members (CGP, article 4.3.3). Because all members of the audit committee are independent board members (CGP, article 4.5.3), the audit committee comprises only non-executive members.

Additionally, the TCC also regulates the non-executive board members. Accordingly, members of the board may solely have non-executive powers provided that it is explicitly stated in the internal guidelines.

According to the CGP, the board must include the following:

• the majority of the board must consist of non-executive members;

• the total number of independent members shall not be less than one-third of the total number of members;

• in any case the number of independent members cannot be fewer than two; and

• a person who has been acting as a board member for more than six years within the past 10 years cannot be appointed as an independent board member (CGP, article 4.3).

Pursuant to the CGP, an individual not having any administrative duties within the company is defined as a non-executive member.

As per the definition of the independent member, the CGP sets forth specific requirements to be met by independent members (CGP, article 4.3.6).

Under Turkish law, non-executive or independent directors do not have different duties from the executive directors. It should be noted that, as a general principle, all members of the board are jointly and severally liable to the company, the shareholders and the creditors of the company for damage occurring owing to their fault and owing to the non-fulfilment of the duties stated in the law or the AoA (TCC, article 553).

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The TCC allows the board of directors to consist of just one member (real person or legal entity) assigned by the AOA or elected by the GA and the requirement that a member of the board of directors has to be a shareholder in the JSCs has been abolished. In the event that a legal entity is elected as a member of the board of directors, a real person should be determined by the legal entity on its behalf and such a decision needs to be registered and announced with the trade registry (TCC, article 359).

Both in the TCC and the CML, there is no ceiling stipulated for the size of the board of directors. For listed companies, it is stated that the number of members of the board of directors – provided that the number is not less than five in any case – shall be determined in order to ensure that the board members conduct productive and constructive activities, make rapid and rational decisions and efficiently organise the formation and activities of the committees (CGP, article 4.3.1). Regarding female members on the board, the company shall determine a target percentage no less than 25 per cent and a target time, and shall establish a strategy to reach these targets (CGP, article 4.3.9).

In LLCs, the management and representation of the company may be left to a shareholder or non-shareholder that has been elected as the manager. However, at least one of the shareholders must possess the right to management and representation of the company in the widest manner. If there is more than one manager of the company, one of these managers must be elected as the chairman of the management board by the GA.

Article 363 of the TCC stipulates that in the case of a vacancy on the board, the board of directors shall temporarily choose someone who satisfies the legal conditions and presents it for the approval of the GA. The member chosen this way carries out their duties until the GA meeting and, if he or she is approved, he or she continues working until the end of the mandate of their predecessor.

In listed companies, if there is a vacancy on the board and it is not possible to satisfy the board meeting quorum, or it is not possible for the shareholders to convene a meeting to appoint a new board member within 30 days of the vacancy, the CMB is entitled to appoint an independent board member (CML, article 128/1(k)).

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Under Turkish law, it is possible for the same board member to hold both the titles of chairman and CEO. According to the CGP, the duties and authorities of the CEO and the chairman of the board must be specifically distinguished from each other and stipulated under the AOA. In addition, if it is decided that the CEO and the chairman of the board are one person instead of two separate persons, then this should be published on the PDP with its reasons (CGP, articles 4.2.5 and 4.2.6).

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

According to article 25 of CMB Communiqué, serial X No. 22 regarding the standards of independent audit in capital markets (as updated with the Communiqué serial X No. 28, published on the Official Gazette on 28 June 2013), it is required that, within the framework of the CGP, the board appoints an audit committee constituting a minimum of two members of the board. In enterprises where it is not obligatory to establish an audit committee, the duties of the audit committee are fulfilled by the board of directors.

According to the CGP, an audit committee, a corporate governance committee, an early detection of risk committee, a nomination committee and a price committee must be formed. Regarding banks, only a corporate governance committee shall be formed. If the nomination committee and price committee cannot be formed, then the corporate governance committee will supersede the duties of such committees (CGP, article 4.5.1). Pursuant to the TCC, listed companies are under the obligation to constitute a committee that will be in charge of detecting and managing the risks in advance. In the event the auditor of the company deems it necessary, such a committee must also be formed by companies other than the listed ones. The committee submits an evaluation report to the board every two months and informs the board of the problems and solutions. The report shall also be sent to the auditor (TCC, article 378).

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Frequency of board meetings is regulated under article 390 of the TCC. Accordingly, the law does not require a minimum number of board meetings per year. Therefore, in practice, the board convenes a meeting when it is deemed necessary, unless the AOA requires a minimum number of board meetings. The CGP states that the board of directors convenes the meeting on a regular basis in order to fulfil their duties effectively (CGP, article 4.4.1).

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The structure, members of the board, their term of office and remuneration of the members are determined in GA meetings and the minutes of GA meetings are registered with the relevant trade registry and published in the Turkish Trade Registry Gazette.

In addition to the TCC, capital stock companies subject to auditing will be required to set up and maintain a company website within three months following the incorporation of the company, and must allocate part of the website to the announcements legally required to be made (TCC, article 1524) (see question 36).

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration

According to the TCC, provided that the amount is determined by the AOA or the GA resolution, directors can be paid a remuneration (TCC, article 394).

The CGP stipulates that the remuneration of independent board members cannot be determined by taking into account the profit share, share options or the company’s performance-related payment schedules (CGP, article 4.6.3). Pursuant to the same principle, the remuneration to be paid to independent board members shall be satisfactory so as to protect their independence. The remuneration to be paid to board members and all managers having administrative responsibilities shall be made available to the public in the annual activity report (CGP, article 4.6.5).

Length

There is no requirement as to the length of the service contract of the board members under the TCC. According to the TCC, board members can be appointed for a maximum term of three years and unless otherwise specified in the AOA of the companies, board members may be re-elected (TCC, article 362). The CGP also sets forth that the term for independent members is three years and that they may be re-elected (CGP, article 4.3.5).

Transactions between company and board members

In strengthening the arm’s-length principle, the TCC prohibits a JSC from financing its shareholders and directors, aiming to preserve the company assets and protect the creditors of the JSCs. In this regard, a board member cannot conduct any transaction with the company in his or her or any other person’s name without permission from the GA, otherwise the company can claim that the transaction is null and void. The counterparty cannot make such a claim (TCC, article 395).

In addition, in the case of a board member who is not a shareholder, his or her relatives including spouses, descendants, lineal ancestors and relatives by blood or marriage to (and including) the third degree, cannot be indebted in cash to the company. The prohibition provided for board members includes guarantees as well. In other words, the company cannot provide surety, guarantee or security for the persons listed above, undertake their liability or take over their debts. Otherwise, the creditors of the company are entitled to start execution proceedings directly against these people for the debt of the company in the amount for which the company is liable (TCC, articles 393 and 395).

If the related-party transaction principle is violated, a judicial fine will be imposed on the shareholder or board members (TCC, article 562).

Also, shareholders cannot become indebted to the company unless the debt arises from their due capital commitments and the company’s profit, together with the legal reserves, do not meet the company’s losses for the previous years (TCC, article 358). In LLCs, the same principles apply only for partners of the company (TCC, article 644).

In addition, according to article 1.3.6 of the CGP, majority shareholders, members of the board, managers having administrative responsibilities and their relatives (spouse, direct offspring or relatives up to the second degree by blood or by marriage) are obliged to provide information in the GA about the transactions that may be conflicting with the interests of the company or its affiliates. Also, according to article 1.3.10 of the previous CGP, the approval of the GA meeting was required for significant transactions, namely transferring or renting out all or a significant portion of company assets, establishing rights in rem on all or significant amounts of company assets, granting concessions to third parties or changing the scope and subject of already provided concessions, acquiring or renting significant amount of assets and delisting from Borsa Istanbul. Unless the decision of a GA meeting is not required by the relevant board for the execution of such a transaction, affirmative votes from the majority of independent directors are required. If this is not achieved, the transaction will be submitted to the approval of the GA meeting. In such a case, the reasoning of the independent directors will be disclosed to the public, notified to the CMB and explained to the shareholders in the next general meeting. Article 1.3.9 of the current CGP provides the same rule, by elaborating the definition of ‘significant transactions’. Accordingly, when the ratio between the value of the purchase or sale of assets and services, as well as the transfer of obligations and similar transactions, and the value of the company exceeds 10 per cent, the mechanism described above has to be implemented.

If the above transactions fall under the category of related-party transactions, those parties shall not vote in the relevant GA meeting. Accordingly, there is no minimum meeting quorum requirement for the approval of the above transactions (CML, article 29/6).

Also, as per article 21(1) of the CML, in the case of transactions with another enterprise or individual with whom there is a direct or indirect management, administrative, supervisory, or ownership relationship, publicly held JSCs, collective investment undertakings and their subsidiaries shall not damage their profits or assets by engaging in deceitful transactions by applying a price, fee or value clearly inconsistent with similar transactions with unrelated third parties, market practices or principles of commercial prudence and honesty.

Compensatory arrangements between the company and board members

As mentioned above, under the TCC, the board members are under an obligation to act with care and in compliance with the rules of good faith (TCC, article 369). If they fail to do so and the company incurs damages as a result, shareholders and creditors of the company may initiate actions against the board members and request indemnification (TCC, article 553). In this context, there is no regulation regarding compensatory arrangements between the company and board members, but it is possible to lay down a clause in the agreement between the company and the board member stipulating how such damages shall be compensated. Accordingly, damages that were incurred owing to the fault of board members can be compensated by the relevant board members.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

According to the TCC, the board shall review the remuneration of the key executives and include the information in the activity report of the board of directors. However, there is no regulation that affects the remuneration of senior managers (TCC, article 516/2).

According to the CGP, remuneration of the senior management must be prepared in a written form and submitted for the approval of the shareholders. The remuneration paid to the board members and the key executives who have administrative duties and all other benefits to be provided to them are disclosed to the public through the activity reports. It is essential to disclose the remuneration for each of them. In the event specific disclosure is not made, at the very least a separation must be made between the key executives and board members. The remuneration policies of the company must be published on the company’s website (CGP, article 4.6.2). There is no regulation regarding compensatory arrangements between the company and senior managers. However, similarly to the board members, the managers are under an obligation to act with care, and according to article 553 of the TCC, they can be held liable if they fail to do so. In this context, it is possible to lay down a clause in the agreement between the company and the manager stipulating that the damages incurred owing to the fault of the manager shall be compensated by the relevant manager.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

A voluntary insurance system for the damage incurred by the company through the fault of board members while performing their duties has been introduced by the TCC. If the damage is insured at a price exceeding 25 per cent of the company capital and the company is secured, in the case of public companies, this matter shall be announced in the bulletin of the CMB, and if the shares are listed on a stock exchange this shall also be announced in the stock exchange bulletin, and such matter shall be taken into account in the assessment of compliance with the principles of corporate governance (TCC, article 361). The CGP stipulates this point as a requirement (ie, states that the damage shall be insured at a price exceeding 25 per cent of the company capital and this shall be announced in the bulletin of the CMB) (CGP, article 4.2.8).

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

There is no regulation preventing a company from indemnifying a director or officer against liabilities, but it should be noted that such indemnification claims are not common and have not been tested in the courts.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

As stated in question 21, the liabilities of board members can be restricted by delegating his or her duties to other board members or managers. Such limitation can be realised through issuing an internal directive in accordance with article 367 of the TCC, and such internal directive shall be registered and announced with the trade registry. However, the board members have a continuing duty to observe the acts and actions of the third parties to whom liabilities are delegated. The restriction on authority of representation is not effective against third parties in good faith; however, the restrictions that are registered and announced in relation to limiting authority of representation solely to the business of the headquarters or to the exercising thereof jointly are valid. In addition, they still have the duty to prudently and diligently delegate the responsibilities to persons who are qualified enough and supervise them (TCC, article 371).

As per the addition to article 371 of the TCC, explained under question 21, limiting the liability of the board members or managers is only effective in the company and does not relieve them from responsibility against third persons. In this regard, the board of directors shall be liable jointly and severally towards the company or third persons for any damages caused by the commercial representatives with limited authority or other commercial assistants appointed pursuant to an internal directive.

33 Employees

What role do employees play in corporate governance?

According to the TCC, employees do not have a specific duty in terms of corporate governance. However, under the CGP, employees are also listed as stakeholders and companies must ensure that the rights and benefits of the stakeholders are protected (CGP, article 3.1.1).

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

In listed companies, the board of directors shall issue its annual report in a detailed way that should include, among other things:

• information on the duties of the members of the board of directors and executives conducted out of the company and declarations on independence of the members of board of directors;

• information on the members of the committees formed within the structure of the board of directors, the meeting frequency of these committees, the evaluation of the board of directors regarding the working principles including the conducted activities and the efficiency of the committees; and

• number of meetings of the board of directors in a year and attendance of the members of board of directors to these meetings.

The annual report shall be published so that the public can access the complete and accurate information with respect to the activities of the corporation. Additionally, the nomination committee that is mandatory in listed companies regularly evaluates the structure and productivity of the board of directors and submits its advice regarding possible amendments in this respect to the board of directors.

In non-listed companies, a similar annual activity report is also annually prepared by the board including information on management, activities of the company and related important developments, financial status, risk assessment, etc, and submitted to the GA meeting.

The shareholders discuss the activities of the board and decide on the release of the board members’ liabilities in the annual general meeting. This is one of the non-transferable duties of the general assembly (TCC, article 408).

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The AOA of a company and any amendments thereto must be registered in the relevant trade registry and announced in the Turkish Trade Registry Gazette as of its incorporation. Further, the AOA of a company that is obliged to launch a website (see question 36) is also announced on the company website. According to the CGP, the AOA of a company must also be published on the company’s website (CGP, article 2.1.1).

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

With the TCC, each capital stock company subject to independent audit is obliged to maintain a company website within three months following the incorporation of the company and must allocate a specific part of the website to making the announcements legally required (TCC, article 1524).

Pursuant to the relevant provision of the TCC, companies that are subject to the independent audit must be determined by the Council of Ministers. The Council of Ministers issued this decision on 19 December 2012 (the Decision Regarding the Determination of the Companies to be Subject to an Independent Audit (the Decision), which has been revised by the Council of Ministers decision dated 16 February 2016 and published in the Official Gazette on 19 March 2016).

As per article 3 of the Decision, companies that fulfil at least two of the three conditions given in article 3 together with their affiliates, subsidiaries or by themselves for two consecutive account periods shall be subject to the independent audit.

These conditions are: companies with aggregate assets amounting to 40 million or more Turkish lire; companies with annual net sale revenues amounting to 80 million or more Turkish lire; and companies with 200 or more employees.

In addition to the above, the Amendment Code has narrowed the scope of the announcements to be made by the companies on their websites and has regulated that the announcements legally required to be made must be announced on the website, as well as having introduced certain time periods for publication of the commercial papers and documents, which are required to be published on the website of a company.

Companies that do not launch a website within three months of the date the TCC entered into force will be subject to a judicial fine of between 100 and 300 days, and authorised bodies of companies that do not allocate part of the website to public information within the same period of time will be subject to a judicial fine of up to 100 days (see question 27) (TCC, article 562/12).

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

According to the CGP, a written remuneration policy should be submitted to the shareholders during the GA meetings and discussed as a separate agenda article to give them the opportunity to air their views and suggestions in relation to the remuneration policy that applies to members of the board of directors and key executives. The remuneration policies of public companies are announced on their websites (CGP, article 4.6.2).

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

As per the TCC, shareholders have the ability to appoint directors provided that it is explicitly stipulated under the AOA of the company. Such ability can be granted to specific share groups, shareholders of a specific nature (eg, the founding family shareholders) or minority shareholders. Unless there is a just cause, the nominated director must be appointed as a member of the board of directors. In listed companies, the nominated directors of a corporation must be mentioned in the mandatory information form required to be published by proxy solicitors.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

The shareholders exercise their rights during the GA meetings; companies engage with shareholders mainly within the scope of GA.

Under the TCC, the management of a company is generally conducted by the board of directors, but GA is also an essential organ of the company and has fundamental duties. Duties such as the amendment of the AOA, appointment and removal of the board members, appointment of the auditor, passing of decisions concerning financial tables, the annual report of the board of directors, determinations of annual income, profit share and revenues, inclusion of reserve fund to the capital and profit to be distributed to the shareholders etc, must be determined by the GA (TCC, article 408).

An ordinary GA shall be convened within three months of the end of each activity period. An extraordinary GA can be convened whenever required. The board of directors invites the shareholders to GAs. This invitation shall be made in the form provided in the AOA. The invitation to the GA shall also be published in the Turkish Trade Registry Gazette. The invitation shall be issued at least two weeks prior to the date of the GA meeting (excluding the dates of announcement and meeting). All shareholders whose names appear on the attendance list prepared by the board of directors have the right to attend the meeting.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Pursuant to article 11-h of the Regulation on the Minimum Contents of the Annual Activity Reports of Companies issued by the Ministry of Customs and Trade, the annual activity report should include the information on expenses for donation, philanthropy and social responsibility projects. Within this context, if the company held any social responsibility projects, the companies are required to disclose the information on expenses in the annual activity report.

Further, article 2.2.2-g of CGP also stipulates the general content of the annual report by explicitly stating each clause shall be in the report. Accordingly, in the listed companies, the board of directors shall issue its annual report in a detailed way that should include, among other things: ‘Information on the corporate social responsibility projects conducted with respect to the corporate activities result in the social rights and technical trainings of employees and other social and environmental consequences.’

In addition, the listed companies are obliged to be aware of the rules of social responsibility and comply with the established regulations with respect to the environment, consumers, public health and rules of ethics. The relevant provision sets voluntary requirements for companies to support and to respect the human rights that are considered valid in accordance with international criteria.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Pursuant to article 7/1-b of the Regulation on the Minimum Contents of the Annual Activity Reports of Companies issued by the Ministry of Customs and Trade, the financial rights provided to the board members and the key executives should be stated in the annual activity report.

On the other hand, pursuant to the CGP, the general principles of remuneration of the board members and the key executives who have administrative duties must be prepared in a written form. In the listed companies, the written remuneration policy should be submitted to the shareholders during the GA meetings and discussed as a separate agenda article to give them the opportunity to air their views and suggestions in relation to the remuneration policy that applies to members of the board of directors and key executives. The remuneration policies of public companies are announced on their websites (CGP, article 4.6.2).

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The law does not mandate any specific requirement to disclose gender pay gaps from a corporate governance perspective. However, the law mandates not to discriminate between employees.

Update and trends

Wide ranges of studies are being carried out for the improvement of investment environment. As to these studies, a new law called the Law on the Amendment of Certain Laws for the Improvement of the Investment Environment numbered 7099 (the Law) has been published in the Official Gazette on 10 March 2018 in order to: support the investors; speed up the investment process and establishment process of a company; reduce the costs; and boost the economy. There have been several changes made with respect to the regulations in Property Law, Law on Municipal Revenues, Customs Law, etc, including the ones that are stated below. These changes came into effect as of its publication in the Official Gazette (ie, 10 March 2018) unless otherwise mentioned below.

Amendments to the Turkish Commercial Code No. 6102

Pursuant to the amendments made in article 40/2, every merchant shall submit its business name and signature to be used during the transactions of the company to the relevant Trade Registry. If the merchant is a legal entity, the business name and the signatures of the signatories, which have the authority to sign on behalf of the legal entity, shall also be submitted to the Trade Registry. The signature specimen should be given in the presence of a designated officer of the Trade Registry by submitting a written statement and the procedures and principles as to the implementation of the same shall be regulated under a Communiqué to be issued by the Ministry of Customs and Trade. This amendment abolished the stage of notarisation of the business name and the signature before Notary Publics prior to submitting them to the relevant Trade Registry.

As to the changes made in article 64, during the registration of JSCs and LLCs, the opening approvals of the company books shall only be issued by directorates of the Trade Registry, so the authority of Notary Publics to carry out the opening approvals of the company books is cancelled. If the company books are kept electronically, there will be no need for the approval of Notary Publics or directorates of Trade Registry in their opening processes and in the closing process of the general journal and board of directors’ resolution book.

Prior to the abolishment of articles 428, 430 and 431, in case the company shall recommend a person, related to the company in any way, for the shareholders to appoint as their representatives to vote and carry out other related actions in the general assembly meeting on their behalf, the company should also recommend another person being totally independent and neutral for the same position and should announce these two persons pursuant to the articles of association and publish in its website. However, in order to remove the additional obligations imposed for the small-scale JSCs, articles 428, 430 and 431 are abolished.

As introduced with the amendments in articles 575, 585 and 587, the authority of notaries public to approve the signatures of founders and articles of associations of companies are cancelled for LLCs. With the concerned amendments, the AOA will need to be signed by the founders in the presence of the designated officers of the directorates of the Trade Registry. As this amendment shall only be applicable for LLCs, the articles of association of joint stock companies may continue to be executed before notaries public or before the director or deputy director of the relevant Trade Registry. This amendment has been applicable as of 15 March 2018.

As a significant novelty introduced under article 585, the pre-condition of payment of at least one-quarter of the undertaken capital prior to the establishment is cancelled for LLCs. In this context, the founders of LLCs shall be no longer obliged to make an upfront payment of at least one-quarter of their undertaken capital prior to the establishment. This amendment has been applicable as of 15 March 2018.

Amendments to the Tax Procedure Law No. 213

As to article 223 of the Tax Procedure Law No. 123 (TPL), the opening approvals of company books kept physically by companies have to be conducted by the relevant directorates of the Trade Registry during the establishment process. This article is parallel to the amendment made in article 64 of the TCC, so the authority of notaries public to carry out the opening approvals of the company books is also removed. This amendment has been applicable as of 15 March 2018.

Amendments to the Social Security and General Health Insurance Law No. 5510

In accordance with the amendment made in article 11/3, during the establishment process of a company, the notification form shall be directly sent to the Social Security Institution (SSI) by the relevant Trade Registry so that the workplace registration will be conducted without any application to the SSI physically. This amendment envisages shortening the time spent in the process of establishment.

Ukraine

Oleksandr Nikolaichyk and Mykhailo Grynyshyn

Sayenko Kharenko

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The primary sources of law relating to corporate governance in Ukraine are:

• the Civil Code of Ukraine (2003);

• the Commercial Code of Ukraine (2003);

• the Law of Ukraine on Joint Stock Companies (2008); and

• the Law of Ukraine on Limited and Additional Liability Companies (2018).

The focus of this chapter is on limited liability companies (LLCs) and joint-stock companies (JSCs) – the most popular organisational forms of commercial companies for medium-sized and large businesses.

The Civil Code of Ukraine contains general provisions on legal entities, including the general regulatory framework for commercial companies. Scarce regulation concerning commercial companies can be found in the Commercial Code of Ukraine, which is primarily concerned with enterprises – a loosely regulated corporate form used by small businesses and in the state sector. The Law of Ukraine on Limited and Additional Liability Companies (the LLC Law) and the Law of Ukraine on Joint Stock Companies (the JSC Law) stipulate rules for the governance of LLCs and JSCs, respectively. The JSC Law envisages two types of JSCs – public JSCs, whose shares are publicly offered and listed on a stock exchange, and private JSCs, whose shares may not be publicly offered, but in some cases may be traded on a stock exchange.

Please also note that the Law of Ukraine on Limited and Additional Liability Companies, on which the part of this chapter related to LLCs is based, is effective from 17 June 2018.

In addition, there are specific laws relating to corporate governance in certain business sectors, such as the Law of Ukraine on Banks and Banking Activity for banks or the Law of Ukraine on Management of State Property Objects for state-owned companies. The peculiarities of corporate governance in state-owned companies are established in the regulations of the Cabinet of Ministers of Ukraine.

The National Securities and Stock Market Commission (the Securities Commission) approved the Principles of Corporate Governance (2014) (the Corporate Governance Principles), which are mandatory for public JSCs with the first level of listing. Such JSCs are required to explain non-compliance with these principles in the annual management report. Other JSCs may adhere to the Corporate Governance Principles voluntarily. The National Bank of Ukraine (NBU) adopted the Methodological Recommendations on Improvement of Corporate Governance in Banks in Ukraine (2007) – non-binding recommendations that apply to Ukrainian banks.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The general framework for corporate governance is established in the codes and laws enacted by the Ukrainian parliament.

The Securities Commission is the primary regulator for JSCs and professional participants of stock market (securities traders, asset managers, depositories, stock exchanges, etc). The Securities Commission elaborates corporate governance rules for JSCs, oversees their application and has certain enforcement powers (eg, by ordering to remove violations or imposing fines). The NBU enforces corporate governance rules in Ukrainian banks.

The Ministry of Justice is responsible for ensuring operation of the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations – the public register containing information on all legal entities registered in Ukraine.

The enforcement of corporate governance rules may also take place in Ukrainian courts pursuant to actions brought by shareholders in their own name or derivative suits brought by shareholders on behalf of the company.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Corporate governance in Ukrainian JSCs is comprised of the general meeting of shareholders (GMS) as the highest governing body, a sole director or a management board as the executive body, and a supervisory board as the non-executive governing body overseeing and regulating the activity of the management board and protecting shareholders’ rights. Creation of a supervisory board is mandatory for all public JSCs and banks and in private JSCs with 10 or more shareholders (unless all shareholders are affiliated). For private JSCs with fewer than 10 shareholders, creation of a supervisory board is optional. In addition, an audit commission (or a sole internal auditor), a corporate body separate from the supervisory board, may be created in a private JSC for auditing the company’s financial and commercial activities.

As a general rule, members of the supervisory board are elected and removed by the GMS, and members of the management board are elected and removed by the supervisory board. However, the JSC’s charter may determine that election or removal of the management board is a matter reserved for the GMS, in which case the supervisory board will not have the right to elect or remove the management board.

Supervisory board members of a JSC are elected for a term not exceeding three years. In public JSCs and banks, supervisory board members are elected by way of cumulative voting. In private JSCs, the type of voting for election of supervisory board members (ie, by cumulative voting or by simple or qualified majority of votes) is determined in the charter, but the default rule is cumulative voting.

The GMS may terminate the powers of supervisory board members at any time, and in cases where the supervisory board was elected by cumulative voting, the decision on termination applies to the whole composition of the supervisory board. The GMS does not need to have any grounds for such termination. In addition, if a supervisory board member was elected as a representative of a shareholder (as opposed to an independent member), the shareholder may replace its representative in the supervisory board at any time by giving a written notice to the company (ie, without the need to convene a GMS and, in case the supervisory board is elected by cumulative voting, re-elect the whole composition of the supervisory board).

The procedure of appointment and removal of the director or management board members in a JSC is prescribed in its charter. The GMS may not appoint and remove the director or management board members if the respective matters are within the exclusive competence of the supervisory board under the JSC’s charter. This is because of a rule established by the JSC Law, according to which the GMS may not decide on matters within the exclusive competence of the supervisory board unless the supervisory board itself brings such matter for consideration at the GMS (this rule may be waived only in private JSCs without majority stake of the state, and if such private JSC has more than 100 shareholders, a decision on waiving this rule has to be taken by more than 95 per cent of votes of all shareholders).

As regards LLCs, their corporate governance is comprised of the general meeting of participants (GMP) as the highest governing body and a sole director or a board of directors as the executive body. LLCs may also establish supervisory boards. Appointment and removal of supervisory board members is within the exclusive competence of the GMP. Appointment and removal of a sole director or a management board of an LLC is by default within the exclusive competence of the GMP and may be delegated to the supervisory board, if established. The relevant decision may be taken by the GMP at any time by a simple majority of votes of participants (unless a higher vote is required by the charter). Moreover, the GMP generally has the right to decide on all matters relating to the activity of an LLC, including matters delegated to the supervisory board or executive body.

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Ukrainian law reserves a number of decisions to the exclusive competence of the GMS or GMP (depending on the corporate form). Exclusive competence of the GMS of a JSC includes:

• determination of main areas of activity of the company;

• amending the company’s charter;

• increasing or decreasing the company’s charter capital;

• placement, cancellation, split-up, consolidation, redemption of shares, placement of securities convertible into shares, waiver of shareholders’ pre-emptive right to purchase new shares placed by the company;

• determination of the type of the JSC (public or private);

• approval of internal regulations on the GMS, the supervisory board, the management board and the audit commission, and of the corporate governance code;

• approval of internal regulation on remuneration of supervisory board members and reports on remuneration of supervisory board members;

• approval of annual reports of the company;

• hearing of the report of the supervisory board and approval of measures based on consideration of such report;

• hearing of the results of independent audit and approval of measures based on consideration of such results;

• distribution of profit and covering losses, approval of the amount of annual dividends;

• election of supervisory board members, approval of the terms of their engagement and remuneration, termination of their powers;

• election of audit commission members (internal auditor), termination of their powers, approval of conclusions of the audit commission (internal auditor);

• approval of significant transactions if the market value of the property, works or services in the transaction exceeds 25 per cent of the company’s assets;

• approval of interested-party transactions if the market value of the property, works or services in the transaction exceeds 10 per cent of the company’s assets; and

• spin-off from the company, wind-up and liquidation of the company.

Exclusive competence of the GMP of an LLC includes:

• determination of main areas of activity of the company;

• amending the company’s charter;

• changing the company’s charter capital;

• approval of monetary value of in-kind contributions to the charter capital;

• redistribution of participation interests between the company’s participants in cases determined in the law;

• appointment and removal of the supervisory board or its individual members, establishing the amount of their remuneration;

• appointment and removal of the sole executive body or members of coactive executive body, establishing the amount of their remuneration;

• determination of forms of control over the executive body;

• creation of other bodies of the company and determination of procedures of their activity;

• redemption of participation interest in the company;

• approval of annual reports or reports for other periods;

• distribution of profit, payment of dividends;

• wind-up and liquidation of the company.

In addition to the decisions listed above, the law allows for the designation of additional matters to the exclusive competence of the GMS or GMP.

The concept of non-binding shareholder votes is not common in Ukraine.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

As a general rule, one ordinary share in a JSC gives the shareholder one vote to decide on all issues considered at the GMS, but there are a number of exceptions, outlined below.

Cumulative voting is a type of voting used at the GMS for electing members of coactive bodies. Cumulative voting is mandatory for the election of supervisory board members in public JSCs and banks, and may be used in private JSCs or for the election of management board members if this is provided for in the charter. During cumulative voting, the total number of votes of a shareholder is multiplied by the number of members to be elected and the shareholder may give all votes to one nominee or distribute the votes between several nominees. Cumulative voting takes place for all nominees simultaneously. The nominees who receive most votes secure election.

During votes at the GMS on the issue of approval of an interested-party transaction, the interested shareholders do not vote, and the decision is passed by a majority of those participating shareholders who do not have a conflict of interest. This rule may be waived in private JSCs.

Treasury shares and shares owned by companies controlled by the JSC in question are not taken into account for the purpose of determination of quorum and voting at a GMS.

The Law on the Depository System of Ukraine, which took effect in October 2013, established that all shares must be converted into non-documentary (electronic) form and required owners of all JSC shares existing in documentary form to open securities accounts with depository institutions and transfer their shares to such accounts by October 2014. If a shareholder failed to do so, their shares are not taken into account for the purpose of determining a quorum and voting at the GMS.

JSCs may issue preference shares or several classes of preference shares with limited voting rights. Preference shares may not exceed 25 per cent of charter capital of the JSC. Owners of preference shares of a certain class have voting rights on the following decisions:

• wind-up of the company that provides for conversion of preference shares of this class into preference shares of another class, ordinary shares or other securities;

• making amendments to the company’s charter providing for limitation of rights of owners of this class of shares;

• making amendments to the company’s charter providing for the placement of a new class of preference shares whose owners will have priority for receipt of dividends or distributions in case of the company’s liquidation or the increase of shareholder rights of owners of preference shares having priority for receipt of dividends or distributions in case of company liquidation; and

• decrease of the company’s charter capital.

The charter of a private JSC may also provide owners of preference shares with voting rights on other issues.

A JSC may not establish limitations on the amount of shares or the amount of votes under shares owned by one shareholder.

Participants of an LLC by default have a number of votes at the GMP proportional to their participation interests (ie, stakes held in the charter capital of an LLC), unless otherwise established in its charter. Participation interest redeemed by the company is not taken into account for the purpose of voting at the GMP.

It should be mentioned separately that the NBU, the Securities Commission and the National Commission on State Regulation of Financial Services Markets may temporarily restrict the use of voting rights of shareholders of banks, professional participants of stock market and non-banking financial institutions, respectively. This is a sanction for certain violations of legislation (eg, failure to obtain prior approval for acquisition of a significant shareholding in a regulated entity).

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Persons included on the list of shareholders having the right to participate in the GMS and their proxies may participate in the GMS. This list is prepared by the central depository three business days in advance of the GMS. Amendments to this list following compilation are prohibited. Shareholders or their proxies must register with the registration commission, which is appointed by the supervisory board for each GMS. Powers of attorney for representation at the GMS must be made in writing, and, if issued by an individual, must be notarised or certified by a depository institution.

A GMS is deemed quorate if shareholders owning more than 50 per cent of voting shares register for participation in the GMS. The quorum requirement is mandatory and may not be derogated in the charter of a JSC.

Voting at the GMS may be carried out only with the use of voting bulletins.

Absentee voting may be allowed in JSCs having not more than 25 shareholders in cases provided for by the charter. In such cases, the draft resolution in question is sent to shareholders, who must return their votes within five days from receipt thereof. A unanimous vote of all shareholders with voting shares is required to take a decision via absentee voting.

If a JSC has a sole shareholder, written resolutions of this shareholder have the status of GMS decisions and there is no need to convene and hold a GMS.

As regards LLCs, all participants of the LLC or their proxies have the right to participate in the GMP. GMP envisages joint presence of the participants in one place, but may also be held as a videoconference, provided that all participants of the GMP may see and hear each other simultaneously. Absentee voting is allowed by way of notarised notice to the GMP or by way of affirmative polling vote of all participants. A GMP decision may also be taken by a written resolution, signed by all participants.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

A JSC is obliged to convene an annual GMS to be held not later than 30 April each year. An extraordinary GMS can be convened by the supervisory board at its own initiative, at the request of the executive body, audit commission or shareholders owning at least 10 per cent of voting shares, and in other cases provided by the charter. If the supervisory board does not convene an extraordinary GMS within 10 days of receipt of the convocation demand, the GMS may be convened by the requesting shareholders.

Each shareholder of a JSC has the right to submit proposals to the agenda of the GMS at least 20 days in advance of the GMS and propose nominees to the company’s governing bodies at least seven days in advance of the GMS. Proposals of shareholders owning at least 5 per cent of voting shares are mandatory for inclusion into the agenda of the GMS.

Annual GMP of an LLC is convened within six months from the end of the year. Participants of an LLC owning more than 10 per cent of charter capital have the right to demand convocation of an extraordinary GMP at any time and on any matter. If the company fails to convene the GMP within 10 days, the participants may proceed with the convocation themselves. Any participant owning more than 10 per cent of charter capital may demand an issue to be considered at the GMP. The GMP may take decisions on issues that were not included into the agenda if all participants are present at the GMP and agree to consider such issues.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

The law does not generally prescribe any specific duties of controlling shareholders of JSCs or participants of LLCs with respect to the company and non-controlling shareholders or participants. At the same time, owners of a substantial interest in a bank are specifically obliged to sustain the bank’s capital adequacy ratio at a level established by the NBU and to take timely measures for avoidance of the bank’s insolvency.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

As a general rule, shareholders of a JSC and participants of an LLC are not liable for the obligations of the company and bear the risk of losses related to the company’s activity within the value of their shares or contributions into the company’s charter capital. However, shareholders or participants may face subsidiary liability for the company’s obligations if the company is declared bankrupt owing to their fault.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Because of a lack of actual public takeovers, the concept of anti-takeover devices has not been developed in Ukraine. The JSC law provides that any person (or persons acting in concert) intending to acquire a significant shareholding in a JSC (more than 10 per cent of voting shares) must give a 30-day written notice to the JSC, the stock exchange where the JSC’s shares are traded, and the Securities Commission, and to publish such notice in the public securities market database administered by the Securities Commission. The JSC Law expressly states that the target JSC does not have the right to take measures aimed at preventing such acquisition.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Taking decisions on the issuance of new shares is within the exclusive competence of the GMS. The supervisory and management boards are not permitted to issue new shares or securities convertible into shares or decide on increases of charter capital.

Owners of ordinary shares of a JSC enjoy a pre-emptive right of purchase of newly issued ordinary shares proportionally to their shareholding. Owners of preference shares enjoy a pre-emptive right of purchase of newly issued preference shares of the same class or of a new class of preference shares, if such shares grant their owners priority for receipt of dividends or distributions in case of the company’s liquidation.

Pre-emptive right to acquire newly issued shares may be waived by a GMS decision taken by more than 95 per cent of votes of all shareholders.

LLCs do not have shares as such, but rather participation interest in the charter capital, which do not qualify as securities.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Shareholders of public JSCs may freely dispose of their shares. A charter of a private JSC with not more than 100 shareholders may provide for the shareholders’ right of first refusal in cases involving the transfer of shares to third parties. Transfer of participatory interest in an LLC to third parties without consent of other participants may be prohibited by the charter. Participants of an LLC have the right of first refusal in respect of participatory interest of other participants sold to a third party (unless expressly provided otherwise in the charter).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Compulsory share repurchase in a JSC at the company’s initiative is not allowed. Shareholders may force the JSC to redeem its own shares at market value if they disagree with certain decisions at the GMS (see question 14).

14 Dissenters’ rights

Do shareholders have appraisal rights?

Owners of ordinary shares of a JSC have the right to demand the mandatory buyout of their shares by the company if they voted at a GMS against any of the following decisions: corporate reorganisation or change of company type; approval of a significant or interested party transaction; change of the amount of charter capital; or waiver of pre-emptive right of shareholders to acquire newly issued shares.

Owners of preference shares of a JSC have the right to demand mandatory buyout if they voted at a GMS against any of the following decisions: making amendments to the company’s charter providing for placement of a new class of preference shares whose owners will have a priority for receipt of dividends or distributions in case of the company’s liquidation; increase of rights of shareholders – owners of preference shares having priority for receipt of dividends or distributions in case of the company’s liquidation; or waiver of the pre-emptive right of shareholders to acquire newly issued shares.

The JSC is obliged to buy shares from shareholders who have made a mandatory buyout demand at a price that may not be lower than market value determined based on stock exchange quotations or, failing that, by an independent valuator.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Ukraine has adopted a two-tier board structure: JSCs have a supervisory board and a management board (executive body). Members of the supervisory board may not be members of the management board. Most LLCs have only an executive body (either a sole director or a board of directors) and do not form a supervisory board.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The supervisory board of a JSC is responsible for protecting shareholder rights while controlling and regulating the activity of the management board. The JSC law refers a number of matters to the exclusive competence of the supervisory board that cannot be delegated to the management board. Such matters include the appointment and removal of the executive body, convocation of a GMS, placement and buyout of securities (other than shares and securities convertible into shares), selecting the company’s auditor, approval of qualifying significant and interested party transactions, etc. The charter may extend the exclusive competence of the supervisory board.

The supervisory board of an LLC controls and regulates the activity of the executive body. The LLC law does not prescribe the competence of the supervisory board leaving this matter for the charter, it only mentions that its competence may include appointment and removal of the executive body and determining remuneration of its members.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The supervisory board of a JSC represents its shareholders and protects their rights. At the same time, supervisory board members, as well as other officers of a JSC, are obliged to act in the company’s interests. The duties of supervisory board members are outlined in the company’s charter and by-laws, as well as agreements between the supervisory board members and the company.

Members of the supervisory board of an LLC must act reasonably and in good faith in the interests of the company.

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Officers of JSCs and LLCs (including members of the supervisory and management boards) are liable for damages caused to the company by their guilty actions, in particular, if such damages were caused by: excess or abuse of the officer’s powers or actions committed by the officer without prior approval when required, or if they received prior approval for such actions by providing false information. A claim against the officer for recovery of such damages may be filed by the company or by shareholders or participants owning at least 10 per cent of the company’s charter capital on behalf of the company (a derivative suit).

19 Care and prudence

Do the board’s duties include a care or prudence element?

The JSC law does not expressly impose duties of care or prudence upon supervisory board members. However, the Corporate Governance Principles provide that officers of a JSC (including members of the supervisory and management boards) must act in good faith, reasonably, and in the best interests of the company. The LLC law provides that members of the supervisory board of an LLC must act reasonably and in good faith in the interests of the company.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Ukrainian law does not provide for any differences in the duties of individual supervisory board members depending on their skills or experience, etc.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Powers and responsibilities of the supervisory board that fall under its exclusive competence in accordance with the law or the company’s charter may not be delegated to its committees, the management board or other persons. The supervisory board may create committees for reviewing and preparing conclusions on issues within its competence, and even though in public JSCs the supervisory board may adopt decisions on matters within the competence of its committees only based on such committee’s proposals, the supervisory board committees as such are not vested with decision-making powers.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Ukrainian law does not distinguish between ‘executive’ and ‘non-executive’ directors owing to the two-tier board structure where supervisory board members do not have executive functions.

The supervisory board of a public JSC, a bank or a JSC in which the state owns more than 50 per cent of shares must have at least one-third and no fewer than two (in case of a bank, three) independent members. The JSC law does not establish any different duties and responsibilities of shareholders’ representatives and independent supervisory board members save for an obligation of an independent supervisory board member to step down should they cease to comply with the independence criteria. A supervisory board member may not be deemed independent if such member:

• was a member of a governing body of the company or its affiliate within the last five years;

• receives or received within the last three years additional remuneration exceeding 5 per cent of gross annual income of such person in the respective year from the company or its affiliate;

• is a direct or indirect owner of 5 or more per cent of charter capital or an officer or manager of a legal entity or an individual contractor who had substantial business relations with the company or its affiliate within the last year;

• is or was within the last three years an independent auditor or an employee of an independent auditor of the company or its affiliate;

• is or was within the last three years an employee of the company or its affiliate;

• is an owner of a controlling shareholding in the company or a proxy of an owner of a controlling shareholding in any civil relations;

• was the company’s supervisory board member for more than 12 years in total; or

• is a close relative of the above-mentioned persons.

The above criteria do not apply to matters arising out of holding the office of an independent supervisory board member. Additional independence criteria may be envisaged in the charter or by-laws.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The size of the supervisory board is determined in the JSC’s charter as long as the minimal size of the supervisory board of a public JSC or a bank is five members. The election of supervisory board members is within the exclusive competence of the GMS. If the supervisory board is elected by cumulative voting, filling a vacancy is possible only by termination of powers of the entire supervisory board and election of a new supervisory board by the GMS. These rules do not affect the rights of shareholders whose representatives were elected to the supervisory board to replace such supervisory board members at any time by notice to the company (ie, without the need to convene a GMS).

Supervisory board members must have full legal capacity. Persons with a criminal record of offences against property or white-collar crime may not become officers (including supervisory board members) of a JSC.

JSCs are required to disclose to the Securities Commission the following information on supervisory board composition on a regular basis:

• information on members of the supervisory board (name, passport data, date of birth, education, work experience, number of shares of the JSC owned by the member, criminal record, if any) and their terms of powers, specifying whether they are independent members or shareholders’ representatives; and

• information on changes in the composition of the supervisory board, specifying reasons.

The size of the supervisory board of an LLC is not regulated by the law and may be determined in the charter.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

As the supervisory board and the management board are separate bodies, the CEO may not sit on the supervisory board.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Establishing an audit committee, a nomination and a remuneration committee is mandatory in public JSCs and JSCs in which the state owns more than 50 per cent of shares, given that nomination committee and remuneration committee may be joined. These committees must be composed predominantly of independent supervisory board members and presided over by them. JSCs may establish other temporary or permanent supervisory board committees for consideration of issues within the supervisory board’s competence.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The JSC law requires supervisory board meetings at least once a quarter. The charter may provide for more frequent meetings of the supervisory board.

Frequency of meetings of the supervisory board of an LLC is not regulated and may be determined in the charter.

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

A publicly disclosed annual report on corporate governance in a JSC should contain, inter alia, information on the composition of the supervisory board, average annual number of supervisory board meetings for the last three years, committees created in the supervisory board, and how the amount of remuneration of supervisory board members is defined.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

In JSCs, approval of by-laws and reports on the remuneration of the supervisory board members and establishing the amount of remuneration of supervisory board members is within the exclusive competence of the GMS. Remuneration must be determined in a civil law or labour contract with the supervisory board member. The length of contracts with supervisory board members is dependent on the term of powers for which they are appointed.

The Corporate Governance Principles recommend that supervisory board members receive reasonable remuneration for their work, providing incentives including variable remuneration elements dependent on the performance of the respective member and the company as a whole. The Corporate Governance Principles also recommend that the company’s policy on lending officers should be clearly defined in its internal documents and that decisions to provide a loan to a company’s officer are approved by the supervisory board.

In LLCs, remuneration of supervisory board members is approved by the GMP.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

In JSCs, approval of by-laws and reports on the remuneration of the management board members (director) and establishing the amount of remuneration of management board members (director) is within the competence of the supervisory board or the GMS. Remuneration must be determined in the labour contract with the management board member (director). The length of contracts with management board members (director) is dependent on the term of powers for which they are appointed.

According to the Corporate Governance Principles, the amount and form of remuneration of management board members should be determined by the supervisory board pursuant to recommendations of the nomination and remuneration committee (if created) and should correlate with the company’s performance in view of the company’s and shareholders’ long-term interests.

In LLCs, establishing officers’ remuneration is within the exclusive competence of the GMP, unless delegated to the supervisory board. Levels of remuneration are determined in labour contracts.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurance is permitted and the company may pay premiums, but it is not common in Ukraine.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Ukrainian law does not prohibit or constrain indemnification of officers for liabilities incurred in their professional capacity, but is not very common in practice.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

According to the law, officers of JSCs and LLCs (ie, members of the supervisory and management boards) are liable for damages caused to the company if these damages were caused by: excess or abuse of the officer’s powers; actions committed by the officer without prior approval if required, or if they received prior approval for such actions by providing false information; or other guilty damaging actions of the officer. The law does not allow limits to officers’ liability for damages caused to the company as a result of their actions.

Moreover, the JSC Law stipulates that shareholders are jointly liable for damages caused to the company by their representatives in the supervisory board.

The LLC law establishes a general rule that the members of the supervisory board and the management board, respectively, bear joint and several liability before the company. However, a member of the supervisory board or management board will not be held liable if they prove that they are not guilty of causing damages to the company.

33 Employees

What role do employees play in corporate governance?

In JSCs, a labour union representative may be present at any GMS and meeting of the management board, and may be invited to supervisory board meetings with the right of advisory vote. Other than that, employees do not have powers to affect the decision-making process in governing bodies, unless otherwise provided for by the company’s by-laws.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The supervisory board of a public JSC and of a bank is required to prepare an annual report on evaluation of its work, which should include evaluation of:

• composition, structure and activity of the supervisory board as a coactive body;

• competence and efficiency of each member of the supervisory board, including information on their activity as officers of other companies or other activity, whether paid or not;

• independence of each independent member of the supervisory board;

• competence and efficiency of each of the supervisory board’s committees, in particular, information on the list and personal composition of committees, their functional competence, number of meetings held and description of main issues dealt with by the committees; and

• performance of the aims set by the supervisory board.

In addition, according to the Corporate Governance Principles, the supervisory board should annually evaluate its performance as a whole and the performance of each member individually. The main tasks of determining evaluation criteria and procedures should be performed by the nomination and remuneration committee or other committee composed predominantly of independent members, with at least the following criteria taken into account: attendance of meetings, level of preparation for meetings and impartiality in decision-making. The supervisory board should also regularly evaluate the performance of the management board.

Publicly disclosed annual information on corporate governance in a JSC should specify whether the supervisory board carried out self-evaluation of its composition, organisation of activity and, if so, information on the competence and effectiveness of the supervisory board (or its members and committees) and performance of its tasks.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

A public JSC must publish its charter and by-laws on its governing bodies on its own website.

In addition, charters of all companies registered after 1 January 2016, and charters restated after that date are contained in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations in electronic form; however, they can only be downloaded with an access code that should be requested from the respective company.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The Securities Commission requires JSCs to disclose regular and special information in a publicly available database (www.stockmarket.gov.ua), official printed media and on their website. In addition, issuers of publicly traded securities or securities admitted to trade on a stock exchange are obliged to disclose on their websites an annual calendar plan for their information disclosure.

Regular information includes annual and interim reporting information on the issuer’s activity. Regular annual information of a JSC should be disclosed no later than on 30 April of the year following the reporting year and includes:

• name and address of the company, amount of its charter capital;

• information on the company’s governing bodies, officers and founders;

• information on the company’s commercial and financial activity;

• information on the company’s securities, including whether they were publicly offered or admitted to trade on a stock exchange;

• annual financial statements, if applicable, confirmed by an independent auditor;

• a list of owners of 5 per cent or more of the company’s shares and information on change of owners of voting shares whose shareholding reaches or crosses the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting shares;

• information on change of owners of financial instruments attached to voting shares of the company reaching or crossing the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting rights;

• management report;

• assurance of the management that the annual financial statements and the management report are true and accurate;

• information on the company’s participation in other legal entities;

• information on capital structure indicating the types and classes of shares and the rights and obligations of shareholders;

• information on any limitations on trading of the company’s securities, including the requirement to receive consent of the company or other owners of securities for transfer of such securities;

• information on ownership by the company’s employees of any securities of the company and the company’s shares in an amount exceeding 0.1 per cent of the company’s charter capital;

• information on shareholders’ agreements known to the company;

• information on any agreements or transactions, the validity of which is dependent on absence of change of control over the company;

• information on the total number of voting shares, the number of voting shares with restricted voting rights and the number of voting shares, voting rights under which were transferred to another person due to such restrictions;

• information on payment of dividends and other return on securities in the reported period;

• information on repurchase of the company’s shares; and

• information on branches and other separated subdivisions of the company.

Annual information of a public JSC or a bank should additionally include:

• a report by the independent auditor on the audit of the company’s financial statements;

• information on the conclusion of significant or interested party transactions or pre-approval of such transactions;

• information on persons interested in conclusion by the company of interested party transactions and circumstances existence of which causes such interest;

• information on the change of owners of voting rights reaching or crossing the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting rights; and

• information on any remuneration or compensation to be paid to the company’s officers in case of their dismissal.

Regular interim information must be disclosed quarterly by public JSCs whose shares were publicly offered or are admitted to trade on a stock exchange and banks and includes:

• the name and address of the company, amount of its charter capital;

• information on the company’s governing bodies, officers and founders;

• information on the company’s commercial and financial activity;

• information on the company’s securities;

• interim financial statements accompanied by the auditor’s confirmation;

• an interim management report;

• assurance of the management that the interim annual financial statements and the interim management report are true and accurate;

• information on the company’s participation in other legal entities;

• information on the conclusion of significant or interested party transactions and on persons interested in conclusion by the company of interested party transactions and circumstances existence of which causes such interest; and

• information on the total number of voting shares, the number of voting shares with restricted voting rights and the number of voting shares, voting rights under which were transferred to another person due to such restrictions.

Special information must be disclosed by the JSCs within one business day upon occurrence of the respective event:

• a decision on the placement of securities for the amount exceeding 25 per cent of charter capital;

• a decision on the repurchase of the company’s shares;

• facts of listing or delisting of securities on a stock exchange;

• a decision on the approval of significant transactions, pre-approval of significant transactions or approval of interested party transactions

• information on persons interested in conclusion by the company of interested party transactions and circumstances existence of which causes such interest;

• a change of the company’s officers;

• a change of owners of voting shares whose shareholding reaches or crosses the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting shares;

• a decision on establishing or liquidation of branches or representative offices;

• a decision to reduce charter capital;

• initiation of proceedings on recovery by the company’s officer of damages caused to the company;

• initiation of bankruptcy proceedings;

• a decision of the company’s GMS to liquidate the company or of the court on declaring the company bankrupt; and

• direct or indirect acquisition by a person or persons acting in concert of a block of shares exceeding 50 or 95 per cent of the company’s shares.

For public JSCs and banks, the following events also have to be disclosed as special information:

• the existence, effective period and parties of a shareholders’ agreement;

• a change of owners of voting rights reaching or crossing the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting rights;

• a change of owners of financial instruments attached to voting shares of the company reaching or crossing the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting rights;

• a repurchase of shares exceeding the thresholds of 5, 10, 15, 20, 25, 30, 50, 75 or 95 per cent of voting shares;

• the approval of amendments to the charter affecting the shareholder rights;

• the number of voting shares and the amount of charter capital as a result of its increase or decrease; and

• direct or indirect acquisition by a person or persons acting in concert of a block of shares exceeding 75 per cent of the company’s shares.

JSCs are also obliged to publish in the above-mentioned manner notices on convocation of the GMS and on changes in its agenda (if any).

In addition, public JSCs are obliged to disclose the following documents on their websites:

• the company’s charter and by-laws on the GMS, the supervisory board, the management board, the audit commission and other governing bodies (if any);

• the by-laws of branches and representative offices;

• the corporate governance code;

• GMS minutes;

• conclusions of the audit commission and independent auditor;

• annual financial statements;

• reports submitted to the state authorities;

• securities issue prospectuses or decisions on issue of securities, certificates on registration of securities;

• a list of the company’s affiliated persons;

• the company’s special information;

• reports of the supervisory board, the management board and the audit commission (internal auditor);

• the by-laws on remuneration of members of the supervisory board and management board; and

• the protocols of voting results at the GMS.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

In JSCs, the GMS may not decide on remuneration of the management board if according to the charter such decisions are within the competence of the supervisory board (except for private JSCs whose charters expressly provide that the GMS may decide on any matters of the company’s activity). In LLCs, deciding on the remuneration of the management board (director) is within the exclusive competence of the GMS, unless delegated to the supervisory board. There is no limitation on the frequency of such decisions.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

In JSCs, each shareholder may nominate candidates to the company’s governing bodies to be appointed by the GMS as long as the number of nominees from one shareholder does not exceed the number of members of the respective body. Nominations must be made at least seven days prior to the GMS. Nominations from shareholders owning 5 per cent or more of shares are mandatory for inclusion into the GMS agenda.

Procedure of nomination of officers of an LLC is not regulated in detail by the law and is determined in the charter.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

In Ukraine, shareholders are typically actively engaged in the company’s activity throughout the year, and not only during the annual meeting season. This engagement is typically through the company’s senior management. The law provides that the supervisory board of a JSC may appoint a corporate secretary, who is responsible for interaction with the company’s shareholders. However, in practice corporate secretaries are rarely appointed.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Ukrainian companies are not required to provide disclosure with respect to corporate social responsibility matters.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Ukrainian companies are not required to disclose the ‘pay ratio’ between the officers’ compensation and compensation of other workers.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Ukrainian companies are not required to disclose ‘gender pay gap’ information.

Update and trends

Over the past year, Ukrainian corporate law has undergone a significant transformation. In particular, the Ukraine parliament adopted a number of laws that were highly anticipated by both the Ukrainian business community and foreign investors:

• Law of Ukraine No. 1983-VIII dated 23 March 2017 ‘On Amendments to Certain Legislation of Ukraine Regarding Improvement of Corporate Governance of Joint Stock Companies’ (Law 1983);

• Law of Ukraine No. 1984-VIII dated 23 March 2017 ‘On Amendments to Certain Legislation of Ukraine Regarding Corporate Agreements’ (Law 1984);

• Law of Ukraine No. 2210-VIII dated 16 November 2017 ‘On Amendments to Certain Legislation of Ukraine Regarding Simplifying Business Activity and Attraction of Investments by Securities Issuers’ (Law 2210); and

• Law of Ukraine No. 2275-VIII dated 6 February 2018 ‘On Limited and Additional Liability Companies’ (the LLC Law).

Law 1983 implements provisions of EU Directive 2004/25/EC on takeover bids into Ukrainian joint-stock company legislation. In accordance with the law, direct or indirect acquisition by a person (or persons acting in concert) of a shareholding exceeding 95 per cent of ordinary shares of a joint stock company triggers the right to squeeze out the remaining minority shareholders. In turn, minority shareholders will have the right to sell out their shares should the majority shareholder omit to use the right of squeeze-out. Notably, during a two-year transition period following the effective date of the law, persons owning more than a 95 per cent shareholding as of that date will also have the right to trigger a squeeze-out. In addition, the law also exempts public joint-stock companies that have decided to change their status to private joint-stock company or to reorganise into another corporate form such as a limited liability company from the requirement to procure the reissue of licences, permits and other documents, which would otherwise be triggered as a result of a change of the company’s official name. This is one of the moves encouraging ‘quasi-public’ companies to transform into private companies following other legislative amendments enhancing corporate governance and disclosure requirements for public companies.

Law 1984 introduced a legal framework for agreements between shareholders of Ukrainian limited liability companies and joint-stock companies. This law also sets out a general framework for the enforcement of shareholder agreements and introduced certain legal instruments that should ensure the performance of obligations under shareholder agreements, such as an irrevocable power of attorney and specific contractual termination rights.

Law 2210 was also aimed at approximation of the legislation on joint-stock companies with European Union standards. The law changes the approach to defining a public joint stock company, which is defined now as a joint-stock company whose shares were publicly offered or whose shares are admitted to trade on a stock exchange. In addition, Law 2210 introduced numerous changes regarding the issue of the securities process, new requirements to the scope and methods of issuer disclosure, and improved corporate governance in joint stock companies.

The LLC law overhauled a legal framework for LLCs in Ukraine. Generally, the law aims to give more discretion to LLC participants in arranging the management of the company. In particular, it allows the creation of supervisory boards in LLCs, simplifies the participatory interest transfer procedure, increases liability and duties for LLC’s executives, etc.

On 29 March 2018, the Securities Commission approved the Concept of Corporate Governance for professional participants of capital markets implementing provisions of OECD Principles of Corporate Governance, EU Directive 2014/65/EC (MiFID II) and Regulation (EU) No. 600/2014 (MiFIR). The Concept aims to establish a systematic approach for corporate governance of professional participants of capital markets based on proportionally principle (balance between requirements and size of the business).

On 3 May 2018, the Securities Commission approved a draft resolution on amending the rules of functioning of stock exchanges. According to the proposed amendments, the two levels of listing will be abolished, and the listing requirements will be the same as the existing requirements for the second level of listing. It is expected that the resolution will be passed upon its public discussion and concurrent review by interested state bodies.

Oleksandr Nikolaichyk

onikolaichyk@sk.ua

Mykhailo Grynyshyn

mgrynyshyn@sk.ua

10 Muzeyny Provulok

Kiev 01001

Ukrain

Tel: +380 44 499 6000

Fax: +380 44 499 6250

www.sk.ua

United Kingdom

Victoria MacDuff

Slaughter and May

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The UK’s corporate governance regime consists of laws, rules and practices, which ensure that companies operate with integrity and that those responsible for their management are accountable for their actions. Its purpose is to encourage investor and public confidence in UK companies and thus to promote economic stability. The main sources of corporate governance in the United Kingdom are as follows:

Statute

The Companies Act 2006 (CA 2006) is the principal statute relating to corporate governance in the United Kingdom. CA 2006 codifies and replaces certain common law duties of directors (CA 2006, section 170(3)) (see ‘Common law’). The statutory duties of directors under CA 2006 are as follows:

• to act within powers (ie, in accordance with the company’s constitution) (section 171);

• to promote the success of the company (section 172);

• to exercise independent judgement (section 173);

• to exercise reasonable care, skill and diligence (section 174);

• to avoid conflicts of interest (section 175);

• not to accept benefits from third parties (section 176); and

• to declare any interest in a proposed transaction or arrangement with the company (section 177).

However, these statutory duties must be interpreted and applied in accordance with the common law duties that are discussed below (CA 2006, section 170(4)). Indeed, in respect of directors’ duties that have not been codified under CA 2006 (such as the duty to keep the affairs of the company confidential) the common law rules remain the only relevant law. CA 2006 contains further provisions relevant to corporate governance, which are discussed at various points in this chapter.

Statutes including the Corporate Manslaughter and Corporate Homicide Act 2007, the Financial Services and Markets Act 2000 (FSMA 2000), the Criminal Justice Act 1993, the Insolvency Act 1986, the Bribery Act 2010, the Financial Services Act 2010 and various statutory instruments also contain provisions relating to corporate governance.

Common law

Company directors have a range of fiduciary, or common law, duties derived from a long line of case law dating back to the early nineteenth century. These fiduciary duties include a requirement:

• to exercise skill and care;

• to act in good faith in the best interests of the company;

• to act within the powers conferred by the company’s constitution and to exercise these powers for proper purposes;

• not to fetter discretion;

• to avoid interests that conflict with those of the company and to avoid duties that conflict with the director’s duties to the company;

• not to make a secret profit; and

• to keep the affairs of the company confidential.

Some of these common law duties have now been codified and replaced by CA 2006, sections 171 to 177 (see ‘Statute’).

The listing regime

The Listing, Prospectus, Disclosure Guidance and Transparency Rules (the LPDT Rules) play a significant part in regulating UK-listed companies. They form part of the Financial Conduct Authority’s (FCA) Handbook, which contains the rules and guidance made under FSMA 2000, the principal statute relating to financial services in the United Kingdom. The LPDT Rules comprise the following sets of rules, which are mandatory for those companies to which they apply.

• The Listing Rules (LRs), which apply to issuers who have applied for their securities to be listed, or whose securities are already listed, on the United Kingdom Listing Authority’s (UKLA) Official List and set out:

• the requirements a company must meet for its securities to be admitted to listing;

• rules relating to listing particulars; and

• certain obligations that a company must continue to comply with after its securities have been admitted to listing (known as ‘continuing obligations’). Note that certain LRs will apply only to companies with a premium listing and not to those with a standard listing.

• The Prospectus Rules (PRs), which implement the Prospectus Directive and require issuers of securities, subject to certain exemptions, to publish a prospectus if they offer their shares to the public or make a request for their shares to be admitted to trading on a regulated market in the United Kingdom. The PRs contain rules on the contents of a prospectus and the approval process for such a document; and

• The Disclosure Guidance and Transparency Rules (DTRs), which apply to a company that has applied for its securities to be admitted, or whose securities are already admitted, to trading on a regulated market in the United Kingdom (this includes companies whose shares are admitted to the Official List and are traded on the London Stock Exchange (LSE), but not companies whose securities are quoted on the Alternative Investment Market).

Perhaps the two most important elements of the LPDT Rules are the Listing Principles set out at LR7 (which assist companies in understanding their duties under the LPDT Rules and encourage issuers of securities to take their role in maintaining market confidence and ensuring fair and orderly markets seriously) and the continuing obligations contained in the LRs and DTRs with which a UK-listed company must comply in order to maintain its listing. Broadly speaking, in terms of complying with corporate governance disclosure obligations, listed companies must ensure that they comply with DTRs 7.1 and 7.2, and LR9.8. Additionally, there are various disclosure requirements contained in the UK Corporate Governance Code, the details of which are outlined in schedule B to the Code (see question 27).

The United Kingdom has a two-tier listing regime, which, as of 6 April 2010, is divided into a premium listing and a standard listing (before this date the two tiers were referred to as a primary listing and a secondary listing). Issuers of securities with a premium listing must comply with super-equivalent standards (standards that exceed the minimum standards set down by the relevant EU Directive). Issuers of securities with a standard listing need only comply with the minimum standards of EU legislation.

The UK Corporate Governance Code (the Code)

The UK Corporate Governance Code (the Code) represents key corporate governance recommendations of best practice for companies. The Financial Reporting Council (FRC) first published the Code on 28 May 2010 when it superseded the existing Combined Code on Corporate Governance (Combined Code). A new version of the Code was published in September 2012, applying to accounting periods beginning on or after 1 October 2012, a further revised version was published in September 2014 applying to accounting periods beginning on or after 1 October 2014 and the most recent version was issued in April 2016 applying to accounting periods beginning on or after 17 June 2016. The old versions of the Code will continue to apply to the historic accounting periods to which they relate. This chapter concentrates on the application of the Code. It is applicable to all companies with a premium listing of equity shares in the United Kingdom, regardless of whether the company is incorporated in the United Kingdom or elsewhere. The Code is divided into main principles, supporting principles and provisions. The Code does not have statutory force, rather it establishes principles of good governance and provides recommendations and guidance. However, companies with a premium listing of equity shares incorporated either in the UK (LR9.8.6R(5)) or overseas (LR9.8.7R) are required to include a statement in their annual financial report that explains how the company has applied the main principles of the Code, in a manner that would enable shareholders to evaluate how the principles have been applied. Such companies must also set out in the annual financial report whether or not they have complied with all the provisions of the Code over the course of the accounting period and give reasons for any non-compliance (the ‘comply or explain’ regime) (LR9.8.6R(6)). Companies are not obliged to comply with the Code and the board may explain why it has not complied, but failure to comply with the Code could damage investors’ confidence in a company if good governance has not been adhered to. This could ultimately lead to its shareholders voting against resolutions proposed by the company or even selling their shares. The FRC acknowledges that a listed company may wish to deviate from the provisions of the Code, and the intention of the ‘comply or explain’ approach is to encourage engagement with the shareholders and to ensure good governance, perhaps in a different guise.

The Code states that the purpose of corporate governance ‘is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’. Some of the crucial principles and provisions that the Code encompasses are:

• effective board management in the long-term interests of the company;

• definitions of the role of the board, the chairman and the non-executive directors of a company;

• the separation of the roles of the chairman and the chief executive officer of a company;

• the role of the chairman in leading the board and ensuring effectiveness;

• the role of non-executive directors in constructively challenging strategy and scrutinising performance;

• the composition of the board;

• open and rigorous procedures for the appointment of directors from a wide pool of candidates, with due regard for the benefits of diversity;

• formal evaluation of the performance of boards, committees and individual directors, along with provision for the induction and professional development of non-executive directors;

• the number of independent non-executive directors that a company must have on its board;

• close relationships between the chairman, the senior independent director, non-executive directors and major shareholders of a company;

• the role of a company’s audit committee in monitoring the integrity of its financial reporting, reinforcing the independence of the external auditor and reviewing the management of financial and other risks;

• the composition of the board to be such that it has a balance of skills, experience, independence and knowledge of the company; and

• the requirement for all directors to allocate sufficient time to the company to discharge their responsibilities effectively.

The Combined Code was renamed the UK Corporate Governance Code in May 2010 in an effort to make its status as the UK’s corporate governance standard apparent to foreign investors and foreign companies listed in the United Kingdom. The May 2010 version of the Code was largely influenced by the third FRC review of the Combined Code and an independent review led by Sir David Walker into corporate governance in the financial services sector (the Walker Review). The Walker Review was also instrumental in the implementation of the Stewardship Code (see ‘The UK Stewardship Code’). The May 2010 version of the Code therefore evidenced a number of significant changes to the Combined Code, including a greater emphasis on long-term success, a requirement for a clearer statement of the board’s responsibilities relating to risk, greater focus on the importance of board diversity and a recommendation that all directors of FTSE 350 companies be put up for re-election every year.

By introducing new main principles and by elevating certain existing supporting principles, the FRC ensured that listed companies would have to explain in their annual financial reports how they have applied them. It should be noted that there is technically no such obligation to demonstrate compliance with supporting principles, though by their nature the supporting principles are closely linked to the main principles. The following principles of the Code were substantively extended or amended:

• the board became responsible specifically for the long-term success of the company, whereas in the 2008 version of the Combined Code the board was simply responsible for the ‘success’ of the company (main principle A.1);

• the chairman of the board of directors is required to promote a culture of openness and debate, and to ensure that adequate time is available for discussion (supporting principle A.3);

• the board must specifically consider the benefits of diversity, including gender diversity, when appointing new directors to the board (supporting principle B.2);

• the board became responsible for determining the nature and extent of the significant risks it is prepared to take in achieving its strategic objectives, whereas previously it was simply required to maintain sound risk management and internal control systems (main principle C.2); and

• the chairman of a company should ensure that all directors are made aware of their major shareholders’ concerns (supporting principle E.1).

The following provisions were introduced into the Code for the first time:

• the chairman should regularly review and agree with each director their training and development needs (provision B.4.2);

• the evaluation of the boards of FTSE 350 companies should be externally facilitated every three years, and any link between the company and the facilitator should be disclosed (provision B.6.2); and

• the board must provide an explanation of the company’s business model in its annual report (provision C.1.2).

Certain existing provisions were also amended and extended:

• the senior independent director should provide a sounding board for the chairman and act as an intermediary for the other board directors when necessary (provision A.4.1);

• FTSE 350 directors should be put forward for re-election annually (provision B.7.1);

• the remuneration of non-executive directors should not include performance-related elements (provision D.1.3);

• non-executive directors should be offered the opportunity to attend scheduled meetings with major shareholders and should expect to attend meetings if requested by major shareholders (provision E.1.1); and

• where resolutions are passed by a show of hands at a general meeting, specific information relating to the resolution must be given at the meeting and made available on the company website as soon as reasonably practicable (provision E.2.2).

The FRC also concluded that companies need to focus more on following the spirit of the Code, and not simply adhering to the letter of the Code. The 2012 update to the Code followed an FRC consultation document, published on 20 April 2012, which suggested potential amendments both to the Code and the accompanying guidance on audit committees. Changes to the 2012 Code included requirements for:

• FTSE 350 companies to put the external audit contract out to tender at least every 10 years (provision C.3.7);

• audit committees to report to shareholders on how they have carried out their responsibilities (provision C.3.8);

• boards to confirm that the report and accounts, taken as a whole, are fair, balanced and understandable and provide the information needed for shareholders to assess the company’s performance, business model and strategy (provision C.1.1);

• companies to explain and report on their policies on boardroom diversity (provision B.2.4); and

• provision of fuller explanations to shareholders as to why they chose not to follow a provision of the Code (paragraph 3).

The FRC published a further consultation document on 24 April 2014, which considered its biennial review of the Code. The consultation proposed a number of changes, including:

• amending main principle D.1 relating to remuneration of executive directors, such that the requirement that remuneration levels be sufficient to ‘attract, retain and motivate directors’ be replaced with the requirement that remuneration levels be designed to promote the long-term success of the company;

• amending provision D.1.1, to require schemes of performance-related remuneration to include provisions allowing the company to claw back or withhold payment; and

• changing the approach to assessing and reporting on the company’s future viability through changes to the Code provisions relating to risk management and internal control (provision C.2.1).

On 17 September 2014 the FRC published a feedback statement of the April review (above), along with a new version of the Code. This 2014 version of the Code is applicable to financial years beginning on or after 1 October 2014. The changes reflect much of the April consultation proposals; for example, at D.1.1 – ‘[schemes of performance-related remuneration for executive directors] should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so’.

Minor changes were also made to the Code in April 2016, effective for financial years beginning on or after 17 June 2016. This update has been implemented predominantly to reflect the requirements of the new EU Regulation (537/2014) and Directive (2014/56), which prescribe more robust provisions to protect auditor independence in public interest entities (meaning large listed companies and insurance and banking companies). Provision C.3 of the Code on audit committees has been updated accordingly.

In November 2016, the government published a Green Paper on corporate governance reform. The consultation focused on proposals designed to:

• increase shareholder engagement on the subject of executive remuneration;

• enhance interaction between the board and stakeholders in the company; and

• strengthen corporate governance and reporting standards in the largest private companies.

The results of the consultation process were published in August 2017 in ‘Corporate Governance Reform: The Government response to the Green Paper Consultation’ (the Paper). The key outcomes of the consultation included:

• the government’s plans for reform in relation to executive pay involving revisions to the Code, secondary legislation to require quoted companies to report their CEO pay ratio and an invitation for the Investment Association to implement its proposal to maintain a public register of listed companies encountering shareholder opposition to pay awards of 20 per cent or more; and

• plans to strengthen stakeholder voices by introducing secondary legislation to require private and public companies of significant size to explain their directors’ section 172 compliance with regard to employees and other interests, an invitation to the FRC to consult on the development of a new Code principle to encourage a stronger employee voice and the encouragement of industry-led solutions and guidance led by the Institute of Chartered Secretaries and Administrators and the Investment Association.

Following the results of the consultation process, and the publication of the House of Commons’ Business, Energy and Industrial Strategy Committee’s Report on Corporate Governance published in April 2017, the FRC published its proposed revisions to the Code in December 2017 as part of a consultation process. The proposed revised code will be shorter than the current Code with the number of provisions reduced by one-third. There are five proposed sections:

• Section 1: Leadership and Purpose;

• Section 2: Division of Responsibilities;

• Section 3: Composition, Succession and Evaluation;

• Section 4: Audit, Risk and Internal Control; and

• Section 5: Remuneration.

The majority of proposed changes have been made to sections A (Leadership) and B (Effectiveness) of the current Code. The revised Code includes the following proposed changes:

• the board establishing a method of gathering the view of the workforce through a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director;

• means for the workforce to raise concerns in confidence and anonymously and an emphasis on engagement with the workforce;

• consideration by companies of their responsibilities to shareholders and stakeholders and the contribution made to wider society;

• where 20 per cent of votes have been cast against a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult with shareholders to understand the reasons behind the vote with an update to be published not later than six months after the vote;

• inclusion of social impact aspects in companies’ considerations; and

• regular engagement by the chairman with major shareholders to understand their views on governance and performance against strategy.

Following the closure of the FRC’s consultation on 28 February 2018, the FRC will consider the responses and make appropriate amendments. The FRC aims to publish a final version of the Code by early summer 2018, to apply to accounting periods beginning on or after 1 January 2019.

Additionally, reform is planned regarding the corporate governance of large privately held businesses. The government, in its August 2017 response to its corporate governance consultation, invited the FRC to work with the Confederation of British Industry (CBI), the Institute for Family Businesses and other trade associations to develop a voluntary set of corporate governance principles for large private companies. James Wates, Chairman of the Wates Group, was appointed as the chairman of this report in January 2018. Additionally, the government stated that it will introduce secondary legislation to require companies of a significant size to disclose their corporate governance arrangements in the Directors’ Report and on their website, including whether they follow any formal code. This requirement will apply to all companies of significant size unless they are subject to an existing corporate governance reporting requirement. The government will also consider extending a similar requirement to limited liability partnerships of equivalent scale.

The Code is supplemented by the following published guidance, and it is considered good practice to comply with this guidance, although it has no formal status:

• FRC Internal Control: Guidance for Directors (formerly known as the Turnbull Guidance), which assists companies in complying with the internal control requirements of the Code (namely section C.2);

• FRC Guidance on Audit Committees, which was updated by the FRC in December 2010, September 2012 and April 2016;

• FRC Guidance on Board Effectiveness, which replaced the Good Practice Suggestions from the Higgs Report following a review undertaken by the Institute of Chartered Secretaries and Administrators (ICSA) and was last updated on March 2011; and

• FRC Guidance on Risk Management, Internal Control and the Going Concern Basis of Accounting.

The Guidance on Board Effectiveness was published in March 2011 in order to assist companies in applying the Code, primarily sections A and B on Leadership and Effectiveness. The Guidance on Board Effectiveness is not intended to be prescriptive but a means of stimulating thought on board governance. Areas that the Guidance on Board Effectiveness address are:

• the role of the board and directors;

• board support and the role of the company secretary;

• decision-making;

• board composition and succession planning;

• evaluating the performance of the board and directors;

• audit, risk and remuneration; and

• relations with shareholders.

The UK Stewardship Code

The FRC first published the UK Stewardship Code (the Stewardship Code) on 2 July 2010 and it came into immediate effect. This version of the Stewardship Code was replaced by a new version published on 28 September 2012 and effective from 1 October 2012. The Stewardship Code is applicable to those firms who manage assets on behalf of institutional shareholders, including pension funds, insurance companies, investment trusts and other collective investment vehicles. The Stewardship Code, like the Code, operates a ‘comply or explain’ approach and the FRC recommends that a company publishes a statement of compliance on its website. At present, there is no requirement to disclose whether or not a relevant company has complied with the Stewardship Code principles, though this is being reviewed. However, all institutional investors are encouraged to observe the Stewardship Code and to observe the ‘comply or explain’ approach, on the same basis as asset managers. The Stewardship Code is complementary to the Code and replaced Schedule C of the Code, which was removed with effect from 1 August 2010. The intention of the Stewardship Code is to promote greater engagement between institutional shareholders and company boards and to encourage greater transparency about the way in which institutional investors oversee the companies they own. The FRC believes that good governance is underpinned by high-quality dialogue between boards and investors. The principles of the Stewardship Code are that institutional investors should:

• publicly disclose their policy on how they will discharge their stewardship responsibilities;

• have a robust policy on managing conflicts of interest in relation to stewardship, which should be publicly disclosed;

• monitor their investee companies;

• establish clear guidelines on when and how they will escalate their stewardship activities;

• be willing to act collectively with other investors where appropriate;

• have a clear policy on voting and disclosure of voting activity; and

• report periodically on their stewardship and voting activities.

The Stewardship Code is based upon the Code on the Responsibilities of Institutional Investors, published by the Institutional Shareholders’ Committee, which is discussed further below.

In December 2011, the FRC published a report on the impact and implementation of the Code and the Stewardship Code, revealing a broadly positive reception to the Stewardship Code. The later published version of the Stewardship Code, which applies to relevant companies with accounting periods beginning on or after 1 October 2012, does not represent a change in policy or direction, but attempts to create a common understanding of the term ‘stewardship’, with greater clarity on the roles and responsibilities of asset owners and managers. The revised Stewardship Code also takes into account changes in market practice, such as the issuance of standards on assurance reports, and the FCA’s requirement that firms authorised to manage funds on behalf of others disclose the nature of their commitment to the Code.

In 2016, the FRC introduced a tiering system, whereby signatories to the Stewardship Code are categorised according to the quality of their statements, in an effort to improve standards of reporting against the seven principles. The FRC believes that the quality of reporting has improved substantially as a result of the exercise. In November 2016, of the nearly 300 signatories to the Stewardship Code, over 120 were placed in the highest tier (of three for asset managers and two for other signatories), representing an increase from approximately 40 at the beginning of the exercise. Although those with weaker reporting standards are encouraged to engage with the FRC to discuss improvements, asset managers who have not achieved at least Tier 2 status by mid-2017 are set to be removed from the signatory list, as their reporting fails to demonstrate the level of commitment expected by the FRC to the objectives of the Stewardship Code.

In December 2017, alongside its proposed revision of the Code, the FRC published the results of its consultation on the future direction of the Stewardship Code. The revisions to the Stewardship Code discussed in the December 2017 consultation paper include:

• clarifying the expectations of best practice stewardship applicable to different elements of the investment chain;

• including more specific expectations about best practice investor behaviour in a more traditional ‘comply or explain’ format than currently exists; and

• greater focus on how investors assist companies to build long-term success (ie, through the use of a ‘section 172’-like requirement for asset managers).

City Code on Takeovers and Mergers

The City Code on Takeovers and Mergers (the Takeover Code) regulates takeovers and mergers of certain companies in the United Kingdom, the Isle of Man and the Channel Islands, including companies whose shares are listed on the LSE. It consists of six general principles that set out the standards of behaviour expected of companies engaged in a merger or takeover and 38 rules (with accompanying notes) that expand on the general principles and provide detailed guidance on the conduct of takeovers and mergers.

Broadly, the aim of the Takeover Code is to ensure that:

• shareholders of the same class in a target company are treated equally and have adequate information so that they can reach a properly informed decision about whether to approve the proposed takeover or merger;

• a false market is not created in the securities of the offeror or the target company; and

• the management of the target company do not take any action that would frustrate an offer for that company without the consent of its shareholders.

The Takeover Code has statutory force and the Panel on Takeovers and Mergers (the Takeover Panel) has statutory powers in respect of transactions to which the Takeover Code applies. Breach of any Takeover Code rules that relate to the consideration offered for a target company could lead to the offending party being ordered to compensate any shareholders who have suffered financial loss as a result of this breach. A person who breaches any Takeover Code rules relating to the content requirements of offer documents and response documents may be guilty of a criminal offence and liable to a fine (subject to certain exceptions) (CA 2006, section 953(2), (3), (4) and (6)). The Takeover Panel may also issue rulings compelling parties who are in breach of the Takeover Code to comply with its provisions. Such rulings are enforceable by the court (CA 2006, section 955(1)). In addition, the Takeover Panel may require a party who is in breach of the Takeover Code to remedy such breach and may withdraw or impose conditions on any exemption from the Rules that it has granted and issue a private or public reprimand to companies in respect of any breach.

Institutional investor guidelines

Bodies representing institutional investors, most notably the Association of British Insurers (ABI) and the Pensions and Lifetime Savings Association (until October 2015 known as the National Association of Pension Funds (NAPF)), issue guidelines to their members advising them how to vote in relation to certain resolutions proposed by companies. The ABI, for example, has published guidelines relating to the level of authority to allot shares that should be granted to directors, which it updated in December 2009. The ABI’s Investment Affairs division merged with the Investment Management Association (IMA) on 30 June 2014 to form a body called, since January 2015, the Investment Association (IA), which is now responsible for issuing guidance that used to be issued by the ABI. Before it was renamed, the enlarged IMA issued updated guidelines on share capital management in July 2014. The Pre-Emption Group, a body consisting of listed companies and their investors, has issued guidance as to how its members should vote on resolutions to disapply shareholders’ pre-emption rights. This guidance, originally published in May 2006, was updated in July 2008 and again in March 2015.

The Pension and Lifetime Savings Association (PLSA)’s corporate governance policy and voting guidelines (the PLSA Guidelines) aim to assist its members to interpret the Code when considering how to vote on certain resolutions proposed by the company. The PLSA Guidelines are updated on a regular basis to reflect amendments made to the Code, and the most recent PLSA Guidelines were published on 25 January 2018. The PLSA Guidelines cover the following matters, among others:

• how to vote if the chairman is not sufficiently independent (on appointment);

• the separation of the role of the chairman and the chief executive officer (and how shareholders should vote if these roles are not properly divided);

• the independence of non-executive directors;

• how shareholders should vote if the board contains insufficient non-executive directors;

• how shareholders should vote if the company’s audit, remuneration and nomination committees are improperly constituted;

• the standards to which the board should hold itself, to ensure pay is aligned to long-term strategy and the desired corporate culture throughout the organisation;

• how to vote if a company fails to properly disclose its strategic objectives or fails to properly report on its risk management and internal control principles;

• the processes that a company should have in relation to appointments to the board, including the need to disclose its diversity policy and its application of that policy;

• how to vote in relation to the remuneration report and new share scheme proposals;

• the re-election of directors;

• the ability of companies to hold meetings at short notice;

• how to vote when a company fails to comply with the Code and does not provide an adequate explanation;

• how shareholders should vote on proposed changes to the company’s memorandum and articles of association;

• how shareholders should vote if their approval is not sought for final dividends;

• how shareholders should vote on share issues and share purchases;

• how to vote if shares have been issued in excess of the Pre-Emption Group guidelines; and

• the payment of political donations.

The PLSA notes the growing trend towards shareholder resolutions in recent years and encourages their use only where engagement has failed.

In October 2009, the ABI Investment Committee published updated guidance on various provisions that it believes public companies should include in their articles of association. This guidance covers the following areas, among others: corporate representatives; directors’ fees (the guidance recommends that a company’s articles of association should contain a cap on the fees paid to directors); and penalties for shareholders who fail to comply with CA 2006, section 793 (which relates to notice given by a company requiring information about interests in its shares). The ABI published a position paper in relation to directors’ remuneration on 15 December 2009, and a full set of Principles of Remuneration in September 2011, following the implementation of the Code. These Principles were updated in November 2013 to reflect changes to the CA 2006 (see question 28), and following the merger of the ABI’s Investment Affairs division with the IMA were updated in October 2014, again in November 2015 under the IA name and most recently in November 2017.

The key changes to the IA Remuneration Principles made in 2017 to reflect the shifting culture and shareholder expectations of shareholders were:

• relocation benefits to be disclosed at the time of appointment, be in place for a limited time and fully detailed in the Remuneration Report;

• annual bonus targets to be disclosed within 12 months of the bonus payment and for deferral to be expected for any bonus opportunity greater than 100 per cent of salary; and

• a reorganisation of the guidelines on long-term incentive schemes to give a clearer picture of IA members’ attitudes to specific examples of schemes.

These Principles set adherence to the CA 2006, the LRs and the Code as a minimum standard to be followed, and call for remuneration policies to be set up so as to promote value-creation through transparent alignment with the agreed corporate strategy. They call for remuneration principles to have a long-term focus and incentive structures to be based on a similar approach. It is advised that attention be paid to market environment, company performance, and the possibilities of divergence between executive and shareholder interest in relation to remuneration strategy. Further, in September 2011, the ABI had also published a paper on Board Effectiveness, highlighting the need for succession planning, and diversity on boards, and setting out best practice in this regard, including reporting and monitoring progress. This paper was updated in December 2012 to reflect additions made to the new Code.

The ABI and the then NAPF also issued a joint statement entitled ‘Best Practice on Executive Contracts and Severance’, which was last updated in February 2008.

In November 2009, the Institutional Shareholders’ Committee, of which the ABI and the PLSA were members, published its Code on the Responsibilities of Institutional Shareholders (the ISC Code). The ISC Code is based on a statement of principles that was originally published by the ISC in 2002 and revised in 2007. The statement of principles highlights the corporate governance duties of institutional investors in relation to the companies in which they invest, and these principles are supplemented by additional guidance. The ISC Code operates on a ‘comply or explain’ basis. The principles of the ISC Code that institutional investors should adhere to have been largely replicated in the Stewardship Code, and for that reason they are not repeated here. The Institutional Shareholders’ Committee was renamed and reconstituted as the Institutional Investor Committee on 18 May 2011 and was dissolved in 2014 after the merger of the Investment Affairs division of the ABI and the IMA.

The ICSA, although not a body representing institutional investors, is an important authority on corporate governance. It has published guidance on a range of corporate governance matters including corporate representation at general meetings, matters reserved for the board, voting at general meetings and model terms of reference for audit, remuneration and nomination committees. Its terms of reference for audit committees were updated in June 2013 and then again in March 2017 (see question 25). On 16 April 2012, the ICSA Registrars Group published guidance on the practical issues of voting at general meetings. The aim of the guidance is to address the perceived misconceptions in the market regarding management of general meetings, and it covers areas such as proxy voting, notice of meetings and voting periods. The guidance recommends, among other things, that all issuers with CREST shareholders announce meetings via CREST, encourages electronic voting and states best practice for proxy voting. The ICSA also launched a consultation document in October 2012 on stewardship titled ‘Improving Engagement Practices by Companies and Institutional Investors’ designed to examine the efficiency of investor-director communications. On 14 March 2013, the ICSA published its guidance ‘Enhancing Stewardship Dialogue’. This guidance provides four key messages for how to improve engagement practices: the need to develop an engagement strategy; the importance of getting housekeeping issues right; strengthening the conversation on strategy and long-term sustainable performance; and providing feedback in a way that adds value for all participants. In April 2015, the ICSA published guidance on Code provision E.2.4 (relating to the notice requirements for AGMs and other general meetings) and on good practice and the required contents of annual reports. Finally, in September 2017 the ICSA, jointly with the IA, published practical guidance aimed at assisting boards to understand and engage effectively with the views of employees and other stakeholders. This guidance identified 10 principles to guide the way boards approach these issues.

The Pensions Investments Research Consultants (PIRC) is an independent body that publishes guidance of relevance to institutional investors. The PIRC’s UK Shareholder Voting Guidelines, published yearly, set out its views on issues such as board structure, remuneration policy and the management of social and environmental issues, applying these to the listed companies it covers in the UK market. Notably, the 23rd edition of the Guidelines, published in 2016, gave support for the recommendation in Lord Davies’ final report on improving gender balance on boards. The report, which was published on 29 October 2015, recommends that a target of 33 per cent of board positions in FTSE 350 companies be held by women by 2020. The 2017 version of the Guidelines reiterates this position, and states that the PIRC will not support the re-election of a nomination committee of a FTSE 350 company where current female representation on the board falls below these expectations, and there are no clear and credible proposals for reaching these objectives.

In January 2015, Institutional Shareholder Services (ISS) published its first stand-alone UK and Ireland Proxy Voting Guidelines: 2015 Benchmark Policy Recommendations. These guidelines constitute a codification and update of ISS’s approach and align with the NAPF Guidelines but do not represent a materially different approach to the previous one. These were updated in 2017 guidance published in November 2016 and effective for meetings on or after 1 February 2017. This updated guidance clarified the definition of overboarding (regarding the number of directorships held by a director) and revised the guidelines relating to remuneration.

The guidance issued by bodies representing institutional investors does not have statutory force but failure to comply with it could lead to institutional investors voting against any resolutions proposed by it or selling their shares in the company.

Articles of association

A company’s articles of association will contain provisions as to what its directors may and may not do in respect of the company. Directors who do not comply with the provisions of their company’s articles of association may be in breach of their statutory duty to act within their powers under CA 2006, section 171. A company may place additional corporate governance requirements on the board of directors, beyond the scope of CA 2006 and the statutory framework.

European legislation

In May 2003, the European Commission released an action plan on company law and corporate governance (entitled ‘Modernising Company Law and Enhancing Corporate Governance in the EU’). The action plan’s main objectives are to strengthen shareholders’ rights and protection for third parties who deal with companies and to encourage companies to improve their efficiency and competitiveness.

A number of corporate governance measures have already been implemented under the action plan, including:

• the Company Reporting Directive (2006/46) (which has been implemented in the UK by DTR7);

• the Shareholder Rights Directive (2007/36) (which was implemented in the UK on 9 July 2009 by the Companies (Shareholders’ Rights) Regulations 2009 (SI 2009/1632) (the Shareholders’ Rights Regulations));

• a recommendation aimed at enhancing the role of non-executive directors; and

• a recommendation aimed at giving shareholders greater control over directors’ remuneration (which has been implemented in the UK by the Directors’ Remuneration Report Regulations 2002 (SI 2002/1986) and schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410)).

At present, the European Union does not intend to introduce its own corporate governance code but hopes that the measures implemented under the action plan will increase consistency between national corporate governance codes. The European Commission published a Green Paper on 5 April 2011 and launched a consultation into the effectiveness of the existing EU corporate governance framework for listed companies, with a view to improving the way in which companies are run. The questions in the Green Paper deal with issues of executive remuneration, diversity, risk management, shareholder cooperation and minority-shareholder protection. A feedback statement summarising the results was published in January 2012, and a non-legislative resolution was adopted by the European Parliament in March 2012, which, among other things, welcomed the European Commission’s proposed revision of the EU corporate governance framework initiated by the Green Paper of April 2011.

Also, in March 2012, the European Commission published a consultation paper on gender imbalance in corporate boards in the EU, which resulted in the publication of a proposal for a directive on improving gender balance among corporate boards of listed companies in November 2012. In November 2013, the European Parliament adopted the directive (with amendments), which, among other things, sets an objective for listed companies to increase non-executive directors of the under-represented gender (usually women) to 40 per cent by 1 January 2020 (see question 23).

In December 2012 the European Commission published an additional action plan on European company law and corporate governance, which included proposals such as:

• amending the Accounting Directive to increase disclosure of company board diversity policies and non-financial risks;

• creating an initiative to improve corporate governance reports, focusing specifically on the quality of explanations to be provided by companies departing from the corporate governance code of their jurisdiction;

• new legislation to improve visibility of listed company shareholdings;

• creating new initiatives, for example, by amending the Shareholder Rights Directive to improve disclosure of voting and engagement policies and voting record by institutional investors; transparency on remuneration policies and grant shareholders a vote on remuneration policy and the remuneration report; shareholder control of related-party transactions; and the transparency and conflict of interest frameworks applicable to proxy advisers; and

• increasing legal certainty on shareholder cooperation concerning concert party issues.

The European Commission has started to implement these proposals:

• in April 2014, it proposed a directive to amend the Shareholder Rights Directive (2007/36), with the aim of further encouraging shareholder engagement and corporate transparency. The proposed legislation is yet to be properly ratified;

• in April 2014, it adopted a draft recommendation on the quality of corporate governance reporting; and

• in December 2014, it implemented Directive (2014/95) on disclosure of non-financial and diversity information (amending the Accounting Directive); it had to be transposed by member states into national legislation by 6 December 2016. This requires certain large companies to disclose relevant environmental and social information in the management report, and was implemented in the United Kingdom by the new DTR 7.2.8A (see question 23).

The United Kingdom voted to leave the European Union on 24 June 2016 and triggered the negotiation process for withdrawal on 29 March 2017. It is too early to speculate on the potential consequences for corporate governance in the United Kingdom but with effect from 29 March 2019, the United Kingdom will cease to be a member of the European Union and will cease to be bound by European legislation, except to the extent that European legislation has been incorporated into domestic legislation and not repealed.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Until 1 April 2013, the FSA was responsible for regulating the UK’s financial services industry and was also the competent authority for the purposes of FSMA 2000 part IV, which relates to the listing regime (although it was referred to as the UKLA in this capacity). The UKLA was responsible for, among other things, maintaining the Official List and administering the LPDT Rules. However, as a response to the perceived failings of this regulatory regime in preventing the financial crisis, the government enacted The Financial Services Act 2012, abolishing the FSA and replacing it with a new UK financial regulation regime consisting of three separate entities: the Financial Conduct Authority, the Financial Policy Committee and the Prudential Regulation Authority. The Financial Services Act 2012 received Royal Assent on 19 December 2012 and the majority of its provisions came into force on 1 April 2013. Pursuant to the legislation:

• the Financial Policy Committee is a macro-prudential authority within the Bank of England;

• the Prudential Regulation Authority (PRA) is a micro-prudential regulator with responsibility for ensuring effective prudential regulation of banks, insurers and designated investment firms; and

• the FCA is a conduct of business regulator and the micro-prudential regulator of firms not supervised by the PRA. The FCA also includes the UKLA function and is responsible for enforcing the market abuse regime. The FSMA, as amended by the Financial Services Act, continues to be the principal piece of financial services legislation in the United Kingdom.

The Takeover Panel is responsible for administering the Takeover Code (see question 1). It has various duties and powers conferred by CA 2006, Chapter 1 of Part 28 and by the Takeover Code itself. The Takeover Panel has the power to make rules allowing it to modify or dispense with certain Takeover Code provisions in particular cases (CA 2006, section 944(1)(d)). The Takeover Panel therefore has a degree of freedom to decide how to apply the Takeover Code, notwithstanding that this code now has statutory force.

Other entities that play a significant role in corporate governance include the FRC (which is responsible for administering the Code) and various bodies representing institutional investors and other parties with an interest in the operation of UK-listed companies, including the PLSA, IA, ICSA and PIRC (see question 1).

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Shareholders can appoint directors to the board by way of an ordinary resolution (that is, a resolution that requires a simple majority of shareholders to vote in favour of it) passed at a general meeting. If more than one director is to be appointed, separate resolutions must usually be passed in respect of each appointment, unless a resolution permitting a single resolution is passed (CA 2006, section 160(1)). If a company’s articles of association provide that the board may appoint a director, such an appointment must usually be approved by an ordinary resolution at the company’s next annual general meeting (AGM) (the Code, provision B.7.1). In addition, directors of FTSE 350 companies are expected to be put up for annual re-election by shareholders (the Code, provision B.7.1). This latter requirement is likely to focus directors on the concerns of the company’s shareholders, though as with all provisions of the Code, companies do not strictly have to comply with this requirement as long as they explain the reasoning behind any decision not to comply.

Shareholders can also remove directors by way of an ordinary resolution under CA 2006, section 168(1), notwithstanding any provision to the contrary in any agreement between the company and the director. Special notice (notice given at least 28 days before the general meeting of the company at which the resolution will be considered) of a proposed resolution to remove a director must be given to the company by the shareholders proposing that resolution (CA 2006, sections 168(2) and 312(1)). The board must then decide whether to place the resolution on the agenda of the company’s next general meeting. If the resolution is placed on the agenda, the company must notify its shareholders of this in the same manner and at the same time as it gives them notice of the general meeting (CA 2006, section 312(2)). If this is not practicable, the company must notify its shareholders of the resolution at least 14 days before the general meeting through an advertisement in a newspaper with appropriate circulation or in any other manner allowed by its articles of association (CA 2006, section 312(3)).

The company must notify a director of any proposed resolution to remove him or her (CA 2006, section 169(1)). Any written representations made by the director in respect of his or her proposed removal should, at the request of that director, be circulated to shareholders or, failing this, be read out at the general meeting at which the resolution is to be considered (CA 2006, sections 169(3) and (4)). The director, whether or not he or she is a shareholder of the company, also has the right to be heard on the resolution at the general meeting (CA 2006, section 169(2)). The director may be entitled to compensation if his or her removal from office pursuant to CA 2006, section 168(1) amounts to a breach of the terms of his or her service contract (CA 2006, section 168(5)(a)).

Many listed companies require their directors to retire and present themselves for re-election not less than every three years in accordance with provision B.7.1 of the Code, and many companies have included this requirement in their articles of association. Companies are also able to comply with the annual re-election requirement without making this compulsory under their articles of association. There is an additional dual voting requirement for electing independent directors where a listed company has a controlling shareholder. Indeed, under the Listing Rules the election of independent directors must be approved by a vote of all shareholders, as well as a separate vote of the independent (ie, non-controlling) shareholders only (LR9.2.2ER). However, if either vote is defeated, the company may propose a single further vote of all shareholders to elect the proposed independent directors after waiting for at least 90 days (LR9.2.2FR). In such circumstances, a separate vote of independent shareholders is not required. The effect is to impose a 90-day ‘cooling off’ period to allow shareholders to engage in discussions to try to reach a solution acceptable to both the controlling and independent shareholders. However, if the controlling shareholder is not minded to accept a compromise candidate, it will be able to use its voting power to support the election of its chosen independent director.

Shareholders have the right to requisition meetings of the company to deal with matters that they wish to be considered and have historically used this power to require resolutions to be put for the purpose of removing or appointing directors (see question 7 for further information on shareholders’ power to requisition meetings). Shareholders may also compel the board to pursue a particular course of action by passing a special resolution (that is, a resolution requiring at least three-quarters of shareholders to vote in favour of it), which either alters or overrides the company’s articles of association (CA 2006, section 21(1)).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Shareholder approval is required in respect of many matters. Such matters include the following.

Alterations to the company’s articles of association

A company’s articles of association may only be amended by way of a special resolution passed by its shareholders (CA 2006, section 21(1)).

Change of name

In order for a company to change its name, it is necessary for the shareholders to pass a special resolution (CA 2006, section 77(1)(a)). This is subject to the company’s articles of association allowing the company to change its name by other means (CA 2006, section 77(1)(b)). Many companies’ articles of association therefore permit the board to change the name of the company, although some shareholder groups do not approve of the board having such power.

Re-registration of a public company as private limited company

In order for a public company to re-register as a private company, the shareholders must pass a special resolution to that effect (CA 2006, section 97(1)). This is subject to certain other conditions being satisfied.

Takeovers

A company that is subject to the Takeover Code may only be acquired by another company if shareholders holding at least 50 per cent of the voting rights in the target company agree to sell their shares to the offeror, although in exceptional circumstances the Takeover Panel may be willing to waive this requirement subject to prior consultation and appropriate safeguards (Takeover Code Rule 10). In certain cases, shareholders holding more than 50 per cent of the voting rights in the company may need to consent to the takeover (for instance, a condition that shareholders holding 90 per cent of the voting rights in the company must consent to the takeover is often imposed, in order to allow the offeror to take advantage of certain provisions relating to the acquisition of minority shareholders’ interests) (see question 13).

Class 1 transactions

The Listing Rules require companies with premium listings to classify certain transactions by comparing the size of the proposed transaction with the size of the company. This classification requires specific tests (relating to the gross assets, profits, the consideration payable and gross capital of the company) to be applied to the proposed transaction, which result in a percentage ratio. The purpose of this classification is to ensure that shareholders are informed of certain transactions entered into by the company, and to enable shareholders to vote on larger proposed transactions (LR10.1.2G). If any of the tests produces a ratio of 25 per cent or more, the transaction will be a class 1 transaction for the purposes of the LRs and shareholder approval must therefore be obtained in a general meeting before the transaction can proceed (LR10.5.1R and annex 1 to LR10). Any agreement giving effect to a class 1 transaction should be conditional on shareholder approval being obtained (LR10.5.1R(3)).

Related-party transactions

A company with a premium listing may only enter into a transaction with certain related parties if authorised to do so by its shareholders (LR11) (see question 36). Related parties include the company’s directors and substantial shareholders (defined as those controlling more than 10 per cent of the voting rights of the company, disregarding those voting rights held for a period of five trading days or less, during which the voting rights are not exercised and no attempt is made to exert influence on the management (see question 36)). The related party and its associates must not vote on the resolution to authorise the proposed transaction (LR11.1.7R(4)). The object of these safeguards is to prevent a related party from taking advantage of its position, and also to prevent any perception to that effect (LR11.1.2G(2)).

Allotment of shares

A director must not allot shares, nor grant rights to subscribe for or to convert any security into shares, unless authorised to do so by the company’s articles of association or by an ordinary resolution passed by its shareholders (subject to certain exceptions) (CA 2006, sections 549(1) and 551(1)). Any such resolution must state the maximum amount of shares that may be allotted under it and specify the date on which it will expire, which must not be more than five years from the date on which the resolution was passed (CA 2006, section 551(3)). Shareholders may renew, revoke or vary this authorisation by a further resolution (CA 2006, section 551(4)). Such a renewing resolution must state the maximum amount of shares that may be allotted under the authorisation, or the amount remaining to be allotted under it, and specify the date on which the renewed authorisation will expire (CA 2006, section 551(5)). If a director fails to comply with these provisions they may be guilty of an offence and liable to a fine (CA 2006, section 549(5)). It is also necessary for a copy of the resolution to be forwarded to the Registrar of Companies House within 15 days after it is passed, and failure to do this will also result in the company and its officers committing an offence (CA 2006, sections 551(9) and 30).

Disapplication of pre-emption rights

A company’s shareholders may, by way of special resolution, authorise a director who is generally authorised to allot shares under CA 2006, section 551 to allot such shares as if their rights of pre-emption (that is, rights of first refusal of any freshly issued shares in the company) under CA 2006, section 561 did not exist (CA 2006, section 570(1)). Shareholders may also resolve by way of special resolution that CA 2006, section 561 may be disapplied only in respect of a specified allotment of shares, or applies to such allotment with such modifications as may be specified in the resolution (although such a resolution may only be passed if recommended by a director in accordance with CA 2006, sections 571(5) to (7)) (CA 2006, section 571(1)) (see question 11).

Variation of class rights

If a company’s articles of association do not contain any provisions as to how the rights attaching to a particular class of shares may be varied, then those rights may only be varied if the written consent of the holders of at least three-quarters in nominal value of such shares is obtained, or a special resolution approving such variation is passed at a separate general meeting of the holders of such shares (CA 2006, sections 630(2) and (4)).

Reduction of share capital

A public company that wishes to reduce its share capital may only do so by way of a special resolution passed by its shareholders that is confirmed by the court (CA 2006, section 641(1)(b)).

Alteration of share capital

A company may sub-divide, consolidate and redenominate its shares, or reconvert its shares into stock only if authorised to do so by a shareholder resolution, subject to certain rules and exceptions (CA 2006, sections 617 to 628). A company may purchase its own shares, provided that after such purchase there are still members who hold shares other than redeemable shares (CA 2006, section 690 (1) and (2)).

A public company may purchase its own shares either ‘on-market’ (that is, on a recognised investment exchange) or ‘off-market’ (CA 2006, section 693) by way of an ordinary shareholder resolution (CA 2006, sections 701(1) and 694(2) respectively). It should be noted that private companies are able to purchase their own shares out of capital in certain circumstances, whereas public companies are not (CA 2006, sections 692 (1) and 709 to 722).

Ratification of directors’ conduct

Shareholders may ratify conduct by a director that would otherwise amount to negligence, default or breach of duty or trust by way of ordinary resolution (unless the company’s articles of association require a higher majority of shareholders to approve the resolution) (CA 2006, section 239(1) and (2)). The resolution must be passed without including any votes attached to shares held by the director whose conduct is being ratified or by any person connected with him or her, as defined in CA 2006, section 252 (CA 2006, section 239(4)) (see question 32 for further information on the ratification of directors’ conduct).

Directors’ service contracts

Shareholder approval is required for any director’s service contract, which is, or may be, for a period in excess of two years (CA 2006, sections 188(1) and (2)) (see question 28).

Transactions with directors

A company may not enter into substantial property transactions with its directors or their connected persons (as defined in CA 2006, section 252), nor may it make loans or quasi-loans to its directors or their connected persons, nor enter into credit transactions with its directors or their connected persons, unless authorised to do so by way of an ordinary resolution of its shareholders, subject to certain rules and exceptions (CA 2006, sections 190 to 214) (see question 28).

Directors’ remuneration report and policy

A quoted company with a financial year ending before 30 September 2013 was required to give its shareholders the opportunity to pass an ordinary resolution to approve its directors’ remuneration report at the general meeting of the company before which its annual accounts for the year were to be laid (CA 2006, section 439(1) and (4)). The vote was advisory only and the directors’ remuneration was not conditional upon such a resolution being passed (CA 2006, section 439(5)). For quoted companies with financial years ending on or after 30 September 2013, the directors’ remuneration reports are now required to be prepared and put to the shareholders in two distinct parts:

• the annual report on remuneration, which sets out remuneration payments made to directors in the year under review and a statement describing how the company intends to implement the approved remuneration policy in the next financial year. This report is required annually and is subject to an advisory vote; and

• the directors’ remuneration policy setting out the company’s policy on remuneration of directors. This is subject to a binding shareholder vote at least every three years (CA 2006, section 439A(1)). Once the policy is approved, the company is not permitted to make remuneration payments to a person who is (or is to be or has been) a director unless the payment is consistent with the approved policy (CA 2006, section 226B). Any payments that are inconsistent with the remuneration policy must be otherwise approved by shareholders (CA 2006, section 226B) (see question 37).

Payment to a director for loss of office

If a company wishes to make a payment to a director or past director to compensate him or her for loss of office, for example owing to retirement, then the shareholders must authorise such a payment by way of an ordinary resolution (CA 2006, sections 215 and 217). This is subject to certain other requirements.

For quoted companies, the new framework on directors’ remuneration requires any loss of office payments to be consistent with the approved remuneration policy (described above) or separately approved by a shareholder resolution (CA 2006, section 226C).

Appointment of auditors

The directors of a newly incorporated company, or of a company in respect of which the role of auditor has become vacant, will appoint an auditor before the annual general meeting at which the company’s accounts for the relevant financial year are considered (CA 2006, section 489(1) to (3)). A company’s articles of association may impose restrictions on its ability to act without first obtaining shareholder approval.

The company’s shareholders may appoint an auditor at the ‘accounts meeting’ (usually the AGM), if the company should have appointed an auditor but failed to do so or where the directors had the power to appoint an auditor under CA 2006, section 489(1) to (3) but failed to do so.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

UK listed companies may issue classes of shares with different voting rights if their articles of association permit such an issue, but the UKLA will not grant such companies a listing (although it will admit companies with non-voting preference shares to standard listing but not premium listing). A few companies that have shares with different voting rights and were listed many years ago still exist but are disappearing. The general rule, therefore, is ‘one share, one vote’. The UK investment community is particularly averse to structures that deliberately block takeover bids (‘poison pills’). An issue of disproportionate voting rights is one means of challenging a takeover bid, and the UKLA and the Takeover Panel would object to such a structure.

The FCA consulted on (in its consultation paper CP12/25) and decided to proceed with (as expressed in CP13/12, its feedback to CP12/25) a new listing principle requiring all equity shares of a class admitted with a premium listing to carry an equal number of votes, as implemented in May 2014 under a revised LR7.2.1.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

All ordinary shareholders of a company have a right to receive notice of and to attend and vote at its general meetings. An AGM of a public company that is not a traded company must be called by notice of at least 21 days, while any other company meeting must be called by notice of at least 14 days, unless the company’s articles of association require a longer notice period than this (CA 2006, section 307(A1)(a), (2) and (3)). A meeting of a public company that is not an AGM may be called by shorter notice than that otherwise required if its shareholders agree to this (CA 2006, section 307(4) to (7)). These provisions also apply to a traded company that is an opted-in company (as defined by CA 2006, section 971(1)) in certain circumstances set out in CA 2006, section 307(A1)(b).

CA 2006, section 307A provides that the default notice period for general meetings of traded companies (which includes companies that trade on the LSE) may be reduced from 21 days to 14 days provided that certain conditions are met. However, the notice period for an AGM of a traded company may not be reduced in this way (CA 2006, section 307A(2)). The company’s articles of association may provide for a longer notice period (CA 2006, section 307A(6)).

The Code recommends that companies to which it applies give at least 20 working days’ notice of an AGM and 14 working days’ notice of any other general meeting (Code, provision E.2.4).

A shareholder may appoint a proxy to exercise his or her rights to attend, speak and vote at meetings of the company on his or her behalf (CA 2006, section 324(1)). A shareholder may appoint more than one proxy, although each proxy must exercise their powers in respect of a different share, or a different £10 or multiple of £10 of stock held by that shareholder (CA 2006, section 324(2)). However, a company’s articles of association may permit shareholders to appoint more proxies than would be possible under CA 2006, section 324(2).

In relation to a meeting of a traded company, the appointment of a proxy must be notified to the company in writing by the relevant shareholder (CA 2006, section 327(A1)(a)). The company may also require certain evidence to be provided in respect of the appointment of the proxy (CA 2006, section 327(A1)(b)). Shareholders must notify the company of any proxy appointments before any cut-off point set by the company. However, the company may not make this cut-off point earlier than: in the case of a meeting or adjourned meeting, 48 hours before the relevant meeting; and in the case of a poll taken more than 48 hours after it was demanded, 24 hours before the time appointed for the taking of the poll.

CA 2006 has enhanced the rights enjoyed by proxies under the Companies Act 1985 as follows:

• proxies now have a right to speak, rather than to simply attend and vote, at general meetings of the company (CA 2006, section 324(1));

• proxies now have an automatic right to one vote on a show of hands, rather than only having an automatic right to vote on a poll (CA 2006, section 285(1));

• on a vote on a show of hands, a proxy will have one vote for and one vote against a resolution if they have been appointed by more than one shareholder and have been instructed by one or more of those shareholders to vote for a resolution and by one or more of those shareholders to vote against it (CA 2006, section 285(2));

• if a shareholder appoints multiple proxies, each will have one vote on a show of hands (CA 2006, sections 285(1) and 324(2)); and

• on a poll, all or any of a shareholder’s voting rights may be exercised by one or more proxies (CA 2006, section 285(3)).

Sections 285(1) and (2) are subject to any provisions of the company’s articles (CA 2006, section 285(5)).

Shareholders that are companies have the right to appoint one or more individuals to act as their corporate representatives at company meetings as an alternative to appointing proxies (CA 2006, section 323(1)). It is not necessary to notify the company of the appointment of a corporate representative, although evidence of the corporate representative’s authority will be required when voting at a general meeting. Corporate representatives are able to exercise all the powers that the corporate shareholder could exercise if it were an individual member of the company and may therefore: speak at a general meeting; vote on both a poll and on a show of hands; and appoint a proxy if permitted to do so by the corporate shareholder (CA 2006, section 323(2)).

If two or more corporate representatives appointed by the same corporate shareholder purport to exercise that shareholder’s powers in relation to the same shares, in conflicting ways, then that power will be treated as not having been exercised (CA 2006, section 323(4)(b)).

On 2 February 2010, the PIRC published best-practice principles for proxy voting and voting advisory organisations to encourage such organisations to be more open and accountable. The latest version of the advice was published in March 2014.

Shareholders of a private company can also pass written resolutions that would have the effect of resolutions passed by the company in a general meeting (CA 2006, section 288), except for resolutions to remove either a director or auditor before the expiry of their term, which would require a general meeting to be held. The resolutions can be proposed by either the directors or the shareholders. It is not, however, possible for shareholders of a public company to pass a resolution without a meeting. A resolution of the shareholders of a public company must be passed at a meeting of the shareholders (CA 2006, section 281(2)).

Subject to any restrictions found in a company’s articles, there is no statutory prohibition on holding electronic or ‘virtual’ meetings by, for example, teleconference. A company holding such a meeting need only ensure that persons who are not present together at the same place may by electronic means attend and speak and vote at it (CA 2006, section 360A(1)). In the case of traded companies, the use of electronic means to enable shareholders to participate in meetings can only be subject to such restrictions and requirements as are necessary to ensure the identification of the participants of the meeting and the security of the electronic communication. Any such restrictions and requirements must be proportionate to the achievement of those objectives (CA 2006, section 360A(2)).

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Shareholders holding at least 5 per cent of the voting rights of a company may require its directors to call a general meeting (CA 2006, sections 303(1) and (2)(a)). Such a request for a general meeting to be called must state the general nature of the business to be dealt with at the general meeting and may include the text of a resolution that the shareholders requesting the general meeting wish to be moved at that meeting (CA 2006, section 303(4)). However, the company’s directors may not be required to move the requested resolution at the general meeting if it would be ineffective or if it is defamatory, frivolous or vexatious (CA 2006, section 303(5)). The company’s directors must call a meeting requested by its shareholders under CA 2006, section 303 within 21 days from the date on which they became subject to the requirement to call the meeting and the meeting must be held not more than 28 days after the date of the notice convening the meeting (CA 2006, section 304(1)). If the request by the company’s shareholders for a meeting to be convened included the text of a resolution, then the notice of the meeting must include notice of the resolution (CA 2006, section 304(2)).

If a company’s directors fail to call a meeting requested by its shareholders under CA 2006, section 303 in accordance with the provisions of CA 2006, section 304, then the members who requested the meeting, or any of them holding more than half of the total voting rights of all of them, may themselves call a general meeting (CA 2006, section 305(1)). This meeting must be called for a date no later than three months after the date on which the company’s directors became subject to the requirement to call a general meeting (CA 2006, section 305(3)). If the request to the company’s directors to call a general meeting included the text of a resolution intended to be moved at that meeting, then notice of this resolution must be included in the notice of the meeting to be called by the shareholders themselves (CA 2006, section 305(2)). This resolution may then be dealt with at such a meeting (CA 2006, section 305(5)). The shareholders calling such a meeting may recover from the company any expenses incurred owing to the directors’ failure to call the meeting (CA 2006, section 305(6)). These expenses shall be retained by the company out of any sums due or to become due from the company to the directors who were in default (CA 2006, section 305(7)).

Further, a company’s shareholders and directors may request the court to call a general meeting if it is impracticable for one to be held otherwise (CA 2006, sections 306(1) and (2)).

The rules relating to public companies and traded companies are somewhat different. Where a public company is concerned, shareholders may require it to give notice of a resolution that is intended to be moved at the next AGM to members of the company entitled to receive notice of that AGM (CA 2006, section 338(1)). The company must give such notice if it receives requests to do so from shareholders holding at least 5 per cent of the total voting rights of all members who have a right to vote on the resolution at the AGM, or from at least 100 members who have a right to vote on the resolution at the AGM and who hold shares on which an average sum of not less than £100 per shareholder has been paid up (CA 2006, section 338(3)). The request must identify the resolution of which notice is to be given, it must be authenticated by the person or persons making the request and it must be received by the company not later than six weeks before the AGM to which the request relates, or if later, the time at which notice is given of that meeting (CA 2006, section 338(4)(b) to (d)). However, the company need not circulate the resolution if it would be ineffective, or if it is defamatory, frivolous or vexatious (CA 2006, section 338(2)).

The company will not be required to comply with a request from shareholders to circulate such a resolution if it does not receive a sum reasonably sufficient to meet the cost of doing so at least six weeks before the AGM, or if later, the time at which notice is given of that meeting (CA 2006, section 340(2)(b)). The shareholders requesting circulation of the resolution will be required to meet these costs unless the company provides otherwise, or requests sufficient to require the company to circulate the resolution are received before the end of the financial year preceding the meeting (CA 2006, section 340(1) and (2)(a)).

Shareholders may require a company to circulate a statement of not more than 1,000 words to shareholders entitled to receive notice of a general meeting in respect of any business to be dealt with at that meeting, including a matter referred to in a resolution to be dealt with at that meeting (CA 2006, section 314(1)). The company must circulate such a statement if it receives requests to do so from shareholders holding at least 5 per cent of the total voting rights of all shareholders who have a relevant right to vote (that is, who have a right to vote on any resolution to which the statement refers or, in respect of any other statement, a right to vote at the meeting to which the request relates), or from no fewer than 100 members with a relevant right to vote and holding shares on which an average sum per shareholder of not less than £100 has been paid up (CA 2006, section 314(2) and (3)). The shareholders’ request to circulate a statement must identify the statement to be circulated, it must be authenticated by the person or persons making it and it must be received by the company at least one week before the meeting to which it relates (CA 2006, section 314(4)(b) to (d)).

The public company will not be required to comply with a request from shareholders to circulate a statement if it does not receive a sum reasonably sufficient to meet the cost of doing so at least one week before the company meeting (CA 2006, section 316(2)(b)). The shareholders requesting circulation of a statement will be required to meet these costs unless the company provides otherwise, or the meeting to which the request relates is an AGM and requests sufficient to require the company to circulate the statement are received before the end of the financial year preceding the meeting (CA 2006, section 316(1) and (2)(a)).

Failure by the public company’s directors to circulate a statement, if required to do so by CA 2006, section 314, in the same manner as the notice of the meeting and at the same time as, or as soon as reasonably practicable after, it gives notice of the meeting, will constitute an offence (CA 2006, section 315(1) and (3)). However, a company will not be required to circulate a shareholders’ statement if it persuades a court that the rights conferred on its shareholders by CA 2006, sections 314 and 315 are being abused (CA 2006, section 317(1)).

Where a traded company is concerned, shareholders may request a traded company to include in the business to be dealt with at an AGM any other business that may properly be dealt with at that meeting other than a proposed resolution (CA 2006, section 338A(1)). The company must include such a matter once it has received requests to do so from shareholders holding at least 5 per cent of the total voting rights of all shareholders who have a right to vote at the meeting, or from at least 100 members who have a right to vote at the meeting and hold shares in the company on which there has been paid up an average sum per member of at least £100 (CA 2006, section 338A(3)). Such a request must identify the matter to be included in the business of the meeting, as well as being accompanied by a statement setting out the grounds for the request being authenticated by the person or persons requesting it (CA 2006, section 338A(4)(b) to (d)). It must be received by the company at least six weeks before the meeting, or if later, the time at which notice is given of the meeting (CA 2006, section 338A(5)). However, a company need not include such business in the business of the company’s AGM if it is defamatory, frivolous or vexatious (CA 2006, section 338A(2)).

The traded company will not be required to comply with a request from shareholders to include the relevant business in the business to be dealt with at the company’s AGM if it does not receive a sum reasonably sufficient to meet the cost of doing so at least six weeks before the AGM to which the request relates, or if later, the time at which notice is given of that meeting (CA 2006, section 340B(2)(b)). The shareholders requesting the inclusion of such business in the business of the AGM will be required to meet these costs unless the company provides otherwise, or the meeting to which the request relates is an AGM and requests sufficient to require the company to include the business are received before the end of the financial year preceding the meeting (CA 2006, section 340B(1) and (2)(a)).

Failure by the traded company’s directors to give notice of any such business to each shareholder entitled to receive notice of the AGM, in the same manner as the notice of the AGM and at the same time as, or as soon as reasonably practicable after, it gives notice of the AGM, will constitute an offence (CA 2006, section 340A(1) and (3)). The company must also publish notice of such business on the same website as that on which the company publishes certain information required by CA 2006, section 311A (CA 2006, section 340A(1)(b)).

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

If the rights of non-controlling shareholders are unfairly prejudiced by controlling shareholders voting in accordance with their own self-interest, the non-controlling shareholders may petition the court for a remedy (CA 2006, sections 994 to 999).

Non-controlling shareholders may also bring a claim against controlling shareholders on behalf of the company if an act of the controlling shareholders amounts to a fraud on the non-controlling shareholders. This is an exception to the rule established by the case of Foss v Harbottle (1843) 2 Hare 461, in which it was held that the proper claimant in an action for a wrong done to a company is the company itself.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders in a company limited by shares are generally not liable for its debts beyond the amount paid up (or to be paid up) on the shares held by them. However, there are some exceptions to this principle, including that where shareholders know or have reasonable grounds for believing an unlawful distribution has been made to them, they are liable to repay it to the company (CA 2006, section 847(1) and (2)).

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Article 11 of the EU Directive on Takeover Bids (2004/25) (Takeover Directive) prevents a company from using certain measures, including restrictions on the transfer of shares and restrictions on voting rights, to defend itself from a takeover bid. The Takeover Directive provides that once a bid for a company is made public, the offeror will be able to override or ‘breakthrough’ such defensive measures. The Takeover Directive allows member states to opt out of the provisions of article 11, with the effect that companies registered within that member state’s territories do not have to apply article 11. However, member states that take this route must give companies the option to opt back in (Takeover Directive, article 12). The UK government has opted out of article 11 but provisions allowing UK traded companies to opt back in by way of special resolution (and to opt back out again by way of special resolution) are set out at CA 2006, sections 966 to 973. The effect of opting in for a UK company is that any pre-bid defensive measures that have been put in place will be invalid once the bid is made public (CA 2006, section 968(1) and (2)).

Companies should also ensure that any anti-takeover devices that they deploy do not breach the following provisions of the Takeover Code and CA 2006:

• the board of a target company must afford the shareholders sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the shareholders, the board must give its views on the effects of implementation of the bid on employment, conditions of employment and of the company’s places of business (General Principle 2 of the Takeover Code);

• the board of a target company must act in the interests of the company as a whole and must not deny the holders of its securities the opportunity to decide on the merits of the bid (General Principle 3 of the Takeover Code);

• the board of a target company must not, without shareholder approval, engage in any ‘frustrating action’ as set out in rule 21.1 of the Takeover Code;

• each document or advertisement published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy and the information given must be adequately and fairly presented (rule 19.1 of the Takeover Code);

• parties to an offer or potential offer (and their advisers) must not make statements that, while not factually inaccurate, mislead shareholders and create uncertainty in the market (rule 19.3 of the Takeover Code) (directors should also be aware of the common law prohibitions against negligent misstatement and the prohibitions against misleading statements contained in the Financial Services Act 2012, sections 89 to 91);

• a target company cannot withhold information about itself from any offeror who requests such information where that information has already been given to any other offeror or potential offeror (rule 21.3 of the Takeover Code);

• a director must act in accordance with the company’s constitution and only exercise his or her powers for the purpose for which they are conferred (CA 2006, section 171); and

• a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (CA 2006, section 172(1)).

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The board of directors may generally only issue shares without prior shareholder approval if permitted to do so by the company’s articles of association or by resolution of the company (CA 2006, section 551(1)). Any such provision contained within a company’s articles of association must be renewed at least every five years (CA 2006, section 551(3)(b)(i)).

The board of directors may also allot new shares without shareholder approval if those shares:

• relate to an employee share scheme (CA 2006, section 549(2)(a));

• are allotted pursuant to a right to subscribe for, or to convert any security into, shares in the company (CA 2006, section 549(3)); or

• are allotted after the directors’ authority to allot has expired but are allotted pursuant to an authorisation or agreement entered into before that authority expired, provided that the authorisation allowed the company to enter into agreements that may require shares to be allotted after it had expired (CA 2006, section 551(7)).

The board of directors does not require authorisation, pursuant to CA 2006, section 551, to sell or transfer treasury shares (CA 2006, section 727), as this will not constitute an allotment of shares.

The board of directors generally must not issue new shares unless it has given the company’s existing shareholders an opportunity to exercise their rights of pre-emption (that is, their right of first refusal of any freshly issued shares in the company) in relation to these newly issued shares (CA 2006, section 561(1)). However, this right of pre-emption does not apply to: shares that relate to an employees’ share scheme (CA 2006, section 566); subscriber shares (CA 2006, section 577); bonus shares (CA 2006, section 564); or an allotment of shares or securities if these are, or are to be, wholly or partly paid up otherwise than in cash (CA 2006, section 565). Existing shareholders must also be afforded the opportunity to exercise their pre-emption rights in relation to the sale or transfer of treasury shares, in accordance with CA 2006, section 561 (CA 2006, section 560(3)).

If the board of directors has a general authority to allot shares pursuant to CA 2006, section 551, then they may be empowered by the company’s articles of association, or by a special resolution passed by the company’s shareholders, to allot shares under that authority as if the pre-emption rights set out under CA 2006, section 561 did not apply (CA 2006, section 570(1)). These pre-emption rights may also be disapplied in relation to a specified allotment of such shares only, although this requires a special resolution to be passed (CA 2006, section 571(1)). It is also possible for directors to sell treasury shares free from pre-emption rights, provided that the directors are authorised to do so by the company’s articles of association or by special resolution (CA 2006, section 573(1) and (2)). Where treasury shares are being sold and a disapplication of pre-emption rights is being relied upon, that disapplication should expressly allow directors to sell treasury shares.

LR9.3.11R also requires that when a company with a premium listing issues equity securities for cash, or sells treasury shares that are equity securities for cash, these equity securities must first be offered to holders of that class of equity shares and holders of other equity shares who are entitled to be offered them. However, LR9.3.11R does not apply:

• to issues of shares in respect of which pre-emption rights have been disapplied under CA 2006, section 570 or 571;

• in certain circumstances relating to a rights issue or open offer;

• to a sale of treasury shares for cash by a listed company to an employee share scheme;

• to an overseas company with a premium listing that has obtained the consent of its shareholders, subject to certain conditions being met; or

• to an open-ended investment company (LR9.3.12R).

Institutional investors should have regard to guidance published by the IA and the Pre-emption Group when deciding whether to vote in favour of resolutions to grant directors the authority to allot shares and to disapply pre-emption rights (see question 1).

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

It is a cardinal principle of the Listing Rules that fully paid shares in listed companies must be freely transferable (LR2.2.4R(1)). Shares must be fully paid up and free from any restriction on the right of transfer (except for any restriction imposed for failure to comply with a notice given under CA 2006, section 793) if they are to be listed (LR2.2.4R(2)).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

It is not generally permissible for a public company to require its own shareholders to sell their shares back to the company. Following a takeover offer, an offeror may compulsorily acquire the shares of a target company that are held by minority shareholders if it acquires, or unconditionally contracts to acquire, 90 per cent of the shares in the company to which the offer relates and 90 per cent of the voting rights carried by those shares (known as ‘the squeeze-out’ procedure) (CA 2006, section 979(1) and (2)). Minority shareholders whose shares are acquired under CA 2006, section 979 must be offered the same consideration as was offered under the terms of the original offer, although special provisions apply if the original form of consideration offered is no longer available (CA 2006, section 981(1), (2) and (5)). The compulsory acquisition of the minority shareholders’ shares will become mandatory once the offeror has given notice of his or her intention to acquire these shares in accordance with CA 2006, section 979(2) (CA 2006, section 981(2)).

A minority shareholder who receives notice that their shares are to be acquired pursuant to CA 2006, section 979 may apply to the court in respect of this acquisition within six weeks from the date on which the notice was given (CA 2006, section 986(1) and (2)). The court may order that the offeror is not entitled and bound to acquire the shares to which the notice relates, or that the terms on which the shares are to be acquired shall be such as the court thinks fit (CA 2006, section 986(1)). However, the court may not require consideration of a higher value than that specified in the terms of the offer to be given for the shares to which the application relates unless the holder of the shares shows that this value would be unfair, nor may it require consideration of a lower value than the offer value to be given for the shares (CA 2006, section 986(4)). A party who brings an application before the court in respect of CA 2006, section 979 must comply with certain notice requirements (CA 2006, section 986 (6) to (10)).

CA 2006, section 983 gives the minority shareholders of a target company the right to have their shares compulsorily acquired by an offeror if that offeror has acquired or unconditionally contracted to acquire some (but not all) of the shares to which the offer relates and those shares amount to not less than 90 per cent in value of all the voting rights in the company (or would do but for certain circumstances) and carry not less than 90 per cent of the voting rights in the company (or would do but for certain circumstances) (CA 2006, section 983(1) and (2)) (known as ‘the sell-out procedure’). CA 2006, section 983 also gives minority shareholders who hold non-voting shares and minority shareholders who hold shares of a certain class the right to have their shares compulsorily acquired in certain circumstances by an offeror (CA 2006, section 983(3) and (4)).

The offeror must acquire these shares on the terms of the offer that it has made for the target company, or on such other terms as may be agreed (CA 2006, section 985(1) and (2)). Special provisions apply if the original form of consideration offered is no longer available (CA 2006, section 985(5)).

Both a minority shareholder whose shares are acquired pursuant to CA 2006, section 983 and the offeror required to purchase such shares in accordance with this section can apply to the court for an order that the terms on which the offeror is entitled and bound to acquire the shares be such as the court thinks fit (CA 2006, section 986(3)). The restrictions set out in CA 2006, section 986(4) apply to any order that the court may make in respect of the acquisition of these shares (see above). A party who brings an application in respect of CA 2006, section 983 must comply with certain notice requirements (CA 2006, section 986(6) to (10)).

14 Dissenters’ rights

Do shareholders have appraisal rights?

A dissenting shareholder whose shares are acquired pursuant to CA 2006, section 979 or 983 may ask the court to make an order in respect of this acquisition under CA 2006, section 986(1) or 986(3) respectively. On such an application, the court may require consideration of a higher value to be given for the dissenting shareholders’ shares than that specified in the terms of the offer if the dissenting shareholder can show that the offer value would be unfair (CA 2006, section 986(4)(a)) (see question 13).

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The board structure for UK-listed companies is best categorised as one-tier. UK companies do not have separate executive boards and supervisory boards. Instead, both executive directors and non-executive directors (who exercise a supervisory function) act as one board. This places greater emphasis on the composition of the board and the balance of independent and non-independent directors. The Code specifically addresses the issue of board composition, and bodies such as the PLSA have issued influential guidance on this topic (see questions 1 and 23).

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board must discharge its statutory duties under CA 2006, sections 171 to 177 (see question 1). In addition, the board has a number of legal responsibilities, including:

• keeping the company’s statutory books up to date;

• filing certain documents with Companies House, such as the company’s annual return;

• preparing the company’s accounts and reports (including a directors’ report and a directors’ remuneration report for each financial year);

• ensuring that the company complies with its statutory obligations under, among other things, CA 2006, FSMA 2000, health and safety legislation, environmental legislation and competition legislation;

• ensuring that the company complies with its obligations under the LPDT Rules, particularly the disclosure requirements and continuing obligations contained within those rules;

• monitoring the company’s compliance with the Code and reporting on its performance in this regard in accordance with LR9.8.6R(5) and (6);

• ensuring that the company complies with the Takeover Code if it becomes subject to takeover discussions; and

• ensuring that the provisions of the Insolvency Act 1986 are complied with if the company falls into financial difficulty.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board represents and owes its legal duties to the company (ie, to its shareholders as a whole) rather than to any individual shareholder or group of shareholders (CA 2006, section 170(1)). However, when discharging his or her duty to promote the success of the company, a director must have regard to the interests of stakeholders in the company including its employees, suppliers and customers and the local community and environment, as well as considering the need to act fairly as between members of the company (CA 2006, section 172). The idea that the directors must consider not simply the interests of its members is known as ‘enlightened shareholder value’, and it has been enshrined in statute through CA 2006.

The directors of a company that is in financial difficulty will be obliged to act in the best interests of its creditors, rather than in the interests of the company itself (CA 2006, section 172(3)).

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Shareholders may bring a derivative claim (ie, an action brought by a shareholder on behalf of the company and in respect of a cause of action vested in the company) (CA 2006, section 260(1)). The cause of action must arise from an actual or proposed act or omission involving negligence, default or breach of duty or trust by a director of the company (CA 2006, section 260(3)). The cause of action may be against the director or another person or both (eg, a third party who has knowingly benefited from a director’s negligence, default or breach of duty, etc) (CA 2006, section 260(3)).

The person bringing the claim must be a member of the company but need not have been a member at the time that the cause of action arose (CA 2006, sections 260(1) and (4)). Concerns have arisen that this may lead to activists acquiring shares in certain companies in order to obtain the right to bring a derivative claim against that company and thus disrupt its activities (for example, animal rights activists may consider buying shares in a company involved in vivisection). However, the requirement for shareholders seeking to bring a derivative claim to establish a prima facie case for that claim should be sufficient to prevent the rights granted by CA 2006, section 260 from being abused in this way (see below).

A shareholder seeking to bring a derivative claim under CA 2006, section 260 must obtain the court’s permission to continue that claim (CA 2006, section 261(1)). To obtain such permission, the shareholder must convince the court that it has a prima facie case against the director (or other relevant person) (CA 2006, section 261(2)).

A shareholder may also apply to the court to continue as a derivative claim a claim that has been brought by the company, the cause of action for which could be pursued as a derivative claim under CA 2006, Chapter 1 of Part 11 (CA 2006, section 262(1)). The shareholder may apply to the court to continue such a claim as a derivative claim on the ground that:

• the manner in which the company commenced or continued the claim amounts to an abuse of the process of the court;

• the company has failed to prosecute the claim diligently; and

• it is appropriate for the member to continue the claim as a derivative claim (CA 2006, section 262(2)).

As with claims brought under CA 2006, section 260, the shareholder must convince the court that it has a prima facie case before they will be permitted to continue the claim (CA 2006, section 262(3)).

If a shareholder seeking to bring a derivative claim or seeking to continue a claim as a derivative claim, under CA 2006, sections 261 or 262 respectively, fails to make a prima facie case for their claim, the court must dismiss their application for permission to continue such a claim and make any consequential order it considers appropriate (CA 2006, sections 261(2) and 262(3)). If the court does not dismiss their application on this ground, then it may:

• seek evidence in respect of the claim from the company;

• give permission to continue the claim on such terms as it thinks fit;

• refuse permission and dismiss the application; or

• adjourn the proceedings on the application and give such directions as it thinks fit (CA 2006, sections 261(3) and (4) and 262(4) and (5)).

CA 2006, section 263 sets out the factors that the court must have regard to when deciding whether to grant permission to bring a derivative claim under CA 2006, sections 261 or 262. In particular, the court must dismiss such a claim if it is satisfied that: a person acting in accordance with the general duty to promote the success of the company under CA 2006, section 172 would not seek to continue the claim (CA 2006, section 263(2)(a)); or an act or omission giving rise to the cause of action has been authorised or ratified by the company (either before or after that act or omission occurred) (CA 2006, section 263(2)(b) and (c)). Additional factors that the court must take into account when considering whether to grant permission to bring a derivative claim under CA 2006, sections 261 or 262 are set out at CA 2006, section 263(3). Notably the member bringing the derivative claim must be acting in good faith (CA 2006, section 263(3)(a)). When deciding whether to grant permission, the court must have particular regard to the views of members who have no personal interest in the matter (CA 2006, section 263(4)).

A shareholder may also apply for permission to continue a derivative claim that has been brought or continued by another shareholder of the company if: the manner in which the proceedings have been commenced or continued by the shareholder amounts to an abuse of the process of the court; the shareholder has failed to prosecute the claim diligently; and it is appropriate for the applicant shareholder to continue the claim as a derivative claim (CA 2006, sections 264(1) and (2)). Once again, the shareholder seeking to continue the derivative claim must establish a prima facie case (CA 2006, section 264(3)). If the court is satisfied that the claim should not be dismissed on this ground then it may give the same directions under CA 2006, section 264(4) and (5) as those mentioned above in relation to CA 2006, sections 261(3) and (4) and 262(4) and (5).

It should be noted that, where the cause of action for a derivative claim arose before 1 October 2007, the court may allow an application made under CA 2006, sections 260 to 264 to proceed if it would have been allowed to proceed as a derivative claim under the common law rules that applied before that date.

If any proceedings for negligence, default, breach of duty or breach of trust are brought against a director, the court can relieve that director either wholly or partly of his or her liability to the company if it finds that he or she acted honestly and reasonably and that, having regard to all the circumstances, he or she ought fairly to be excused (CA 2006, section 1157).

If a shareholder has suffered unfair prejudice, the shareholder is able to petition the court in accordance with CA 2006, section 994. However, a shareholder who sues under the unfair prejudice provision is claiming in his or her own capacity, whereas a shareholder who claims under the derivative action provisions claims on the company’s behalf.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Company directors must exercise reasonable care, skill and diligence, that is, the level of care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by that director in relation to the company, and the general knowledge, skill and experience that the director has (CA 2006, section 174(1) and (2)).

The first limb of this test of the level of care and skill required from a director is objective and sets a minimum standard of behaviour that all directors must meet. The second limb is subjective and requires directors with superior knowledge, skills and experience to meet a higher standard of care and skill than would be expected under the first limb (for example, a director with an accountancy qualification may be expected to demonstrate a higher standard of skill and care in certain circumstances than would be expected of a director who did not have such a qualification).

20 Board member duties

To what extent do the duties of individual members of the board differ?

The statutory duties set out at CA 2006, sections 171 to 177 are owed to the company by all of its directors (CA 2006, section 170(1)). A ‘director’ is defined as including any person occupying the position of director, by whatever name called: this includes executive directors, non-executive directors and its de facto directors (CA 2006, section 250). These statutory duties currently only apply to shadow directors where, and to the extent that, they were held to so apply at common law (CA 2006, section 170(5)). However, the Small Business, Enterprise and Employment Act 2015 amended the CA 2006 from May 2015, such that the general duties apply to shadow directors to the extent that they are capable of applying.

A more skilled and experienced director may be required to demonstrate a higher level of care and skill than a less skilled and experienced director, in accordance with the subjective test of the level and care of skill owed by a director set out at CA 2006, section 174(2)(b) (see question 19).

ICSA guidance published in January 2013 suggests that it is not reasonable for non-executive directors to be expected to have the same knowledge and experience of a company’s affairs as executive directors. However, under the objective test in CA 2006, section 174(2)(a) when determining whether a non-executive director has breached his or her duty to exercise reasonable care, skill and diligence, a court would consider the steps a reasonably diligent non-executive director in the same position would have taken to familiarise themselves with the company’s business and operations.

See question 22 for further information on how the roles of executive and non-executive directors differ.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

In practice, a company’s board will delegate responsibility for the day-to-day operations of the company to its management. In July 2013, the ICSA issued updated guidance on matters that should be reserved for the board, rather than delegated to executive management. These matters include strategy and management, structure and capital and financial and reporting controls. Further, the Code requires the board to publish a formal schedule of matters specifically reserved for its decision and to include in its annual report a high-level statement of which types of decisions are to be taken by the board and which are to be delegated to management (Code provision A.1.1). Companies should comply with this provision although, as mentioned in question 1, a listed company does not strictly have to comply with any provision of the Code, but it will need to explain its rationale for non-compliance.

In addition, the board will delegate responsibility for certain matters to its audit, remuneration and nomination committees (see question 25). A company may also have additional committees to which the board delegates responsibility for matters such as risk, health and safety, corporate social responsibility and share plans. Some of these committees may be formally constituted by the board while others may be management committees. The FRC has suggested in its Guidance on Board Effectiveness that boards can minimise the risk of poor decisions by investing time in the design of their decision-making policies and processes, including the contribution of committees (Guidance on Board Effectiveness, paragraph 3.1).

Many companies’ boards appoint an executive committee, which typically comprises the executive directors and the most senior members of the management team. The executive committee will usually be formally appointed by the board as the chief executive’s forum for major operational decisions. An ICSA guidance note published in July 2013 suggests that the executive committee should report back to the board and have written terms of reference and delegated authorities, which are agreed by the board in advance as a matter of good practice.

Many companies’ articles of association also include provisions allowing directors to appoint alternate directors to act for them in their absence.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The Code recommends that a company’s board should include an appropriate balance of executive and non-executive directors (and in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision-making process (Code, supporting principle B.1). It also recommends that for companies listed in the FTSE 350, at least half of the board, excluding the chairman, should be made up of independent non-executive directors (Code, provision B.1.2). Criteria for assessing the independence of a non-executive director are set out at provision B.1.1 of the Code. These provisions should be complied with, or an explanation should be given for non-compliance (see question 1). The PLSA also publishes guidance on this matter in its ‘Corporate Governance Policy and Voting Guidelines’, most recently published in January 2018, and it helps institutional investors in determining whether a director is indeed independent (see question 1). The PLSA suggests that voting sanctions could be warranted in the event that the appointment of a non-independent non-executive director compromises the composition of key committees or the board itself. Additionally, provision 15 of the proposed revised Code, published by the FRC in December 2017, strengthens non-executive independence requiring the chairman to meet the independence requirements throughout his or her tenure, not only on his or her appointment.

CA 2006 does not distinguish between the duties owed to a company by its executive directors and its non-executive directors (see question 20). However, executive directors owe special duties arising out of their contracts of employment over and above these statutory obligations. These contractual obligations are generally different to the supervisory responsibilities discharged by non-executive directors. Executive directors, for example, are responsible for the day-to-day running of the company, while the role of the non-executive director is to challenge, review and monitor the performance of the board. The FRC’s Guidance on Board Effectiveness (paragraph 1.17) states that constructive challenge from non-executive directors is an essential aspect of good corporate governance, and it should be welcomed by the executive directors.

The standard of skill and care owed to the company by its directors and its non-executive directors is also likely to be different owing to the subjective test of the level of skill and care owed by a director to their company that is set out at CA 2006, section 174(2)(b) (see question 19). As non-executive directors are less involved with the day-to-day management of the company, they may not be expected to demonstrate a standard of skill and care that is as high as the standard of executive management (see question 20). It is accepted that non-executive directors are likely to devote significantly less time to a company’s affairs than an executive director and that the detailed knowledge and experience of a company’s affairs that could reasonably be expected of a non-executive director will generally be less than for an executive director. However, if a non-executive director serves on a board committee, they will be expected to exercise greater skill and care in relation to matters within the remit of that committee than would directors who are not members of the relevant committee.

The Code advises that the board should appoint one of the independent non-executive directors as senior independent director. The role includes leading a meeting of the non-executive directors to appraise the chairman’s performance (without the chairman being present) at least annually and on such other occasions as deemed appropriate. The senior independent director should also hold meetings with the non-executive directors without the executives present. The senior independent director should also be available to shareholders if they have concerns that contact with the company through the normal channels of chairman, chief executive officer or other executive directors has failed to resolve or for which such contact is inappropriate (Code, provisions A.4.1 and A.4.2).

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

It is a company law requirement that public companies have at least two directors (CA 2006, section 154 (2)). At least one of these directors must be a natural person (CA 2006, section 155(1)), though in practice listed companies will have considerably more. Note that this requirement will be superseded if section 87 of the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) comes into force. This will repeal CA 2006, section 155 and replace it with a new provision prohibiting the appointment of corporate directors and requiring all company directors to be natural persons. Although the Secretary of State will have the power to provide for exceptions and a transition period of a year will apply for companies with corporate directors already in place, an appointment made in contravention of this section will be void and it will be an offence to breach the prohibition. There is no set implementation date for this section of the SBEEA 2015 (having initially been planned for October 2016), and there has been no indication from the government as to when this will come into force.

Subject to certain exceptions, a person may not become a director of a company unless he or she has attained the age of 16 years (CA 2006, section 157(1)), although an appointment can be made before the individual reaches 16 years provided that the appointment does not take effect until that time (CA 2006, section 157(2)).

In certain circumstances, the courts of England and Wales may make a disqualification order against a person, to the effect that for a defined period that person must not be a director of a company (Company Directors Disqualification Act 1986, section 1(1)(a)). A court may make such an order for a number of reasons, such as the person being convicted of certain offences or being persistently in default in relation to companies legislation.

Except for the CA 2006 requirement stated above, and subject to the comments made below, there is no specified minimum or maximum number of seats on the board, although the size of the board may be determined by the company’s articles.

The Code specifically addresses the issue of board composition.

• Main principle B.1 of the Code states that the board (and its committees) should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. As this is a main principle of the Code, it will be necessary for listed companies to include a statement in their annual financial report that discloses how the board has applied this principle. Listed companies incorporated in the UK must make this disclosure in order to comply with LR9.8.6R(5), and companies incorporated overseas must disclose in order to comply with LR9.8.7R. The preface to the Code also encourages company chairmen to report personally in their annual statements how the principles contained in sections A and B of the Code have been applied, though this is not a requirement.

• The Code specifies that the board should be of sufficient size that the requirements of the business be met and changes to board composition can be managed without disruption, but the board should not be so large as to be unwieldy (Code, supporting principle B.1).

• When appointing new directors to the board, it is necessary to consider supporting principle B.2 of the Code. This stipulates that the criteria for appointing new directors should be objective, and with due regard for diversity, including gender. Principle B.2.4 of the Code requires a separate section of the annual report to describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives. The FRC published guidance to accompany the new Code in May 2010 and this emphasises that the appointment of new directors should be based on merit.

• The board should also include an appropriate combination of executive and non-executive directors (and in particular independent non-executive directors) in order to prevent an individual or small group of directors from dominating the decision-making of the company (Code, supporting principle B.1) (see question 22).

The FRC’s Guidance on Board Effectiveness, although not prescriptive, is intended to assist companies in applying the Code. The Guidance on Board Effectiveness (paragraph 1.3) explains that diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors and countering a tendency for ‘group think’. Although the Code itself does not define ‘diversity’, the Guidance on Board Effectiveness (paragraph 4.3) specifically comments that diversity of psychological type, background and gender is important. In terms of knowledge and experience, directors must possess the right skill set to enable them to run the company and to ensure that they can make a positive contribution to the company (Guidance on Board Effectiveness, paragraph 4.1).

The nomination committee, usually led by the chairman, should be responsible for board recruitment of companies with a premium listing of equity securities. This should be a continuous and proactive process and should take into account the company’s agreed strategic priorities (Guidance on Board Effectiveness, paragraph 4.2). The shareholders will still need to approve any appointment of a director (see question 3). If a company’s articles of association provide that the board may appoint a director, for example, to fill a vacancy, such an appointment must usually be approved by an ordinary resolution at the company’s next AGM (Code, provision B.7.1).

Institutional investors have also considered the topic of board composition. As mentioned in question 1, the guidelines set out by entities such as the IA and the PLSA are not enshrined in statute but it remains ill-advised to ignore their suggestions. In particular, the PLSA has produced its corporate governance policy and voting guidelines. In the context of section B.2 of the Code, the PLSA expects to see proper disclosure of the steps being taken towards bringing diversity to the boardroom. Where disclosure is poor, or where there is a lack of board succession planning, or there is a lack of due consideration of diversity and the balance of skills on the board, the PLSA suggests that investors may wish to abstain, or even vote against the re-election of the chairman of the nomination committee (who is responsible for appointments to the board and succession). Where there is no statement on a company’s diversity policy and its application at all, the PLSA advises that shareholders may wish to vote against the election of a director. The PLSA has also encouraged companies to state more fully the skills and experience that a director brings to his or her role, including a statement of other current appointments that might affect his or her ability to contribute to the work of the board.

The ABI published its second Report on Board Effectiveness in December 2012. It emphasises that diversity of perspective should be a key objective when appointing board members, and that companies should disclose the steps they are taking to promote a diversity of perspective in their boardroom, as well as the challenges they face in seeking out relevant skills and experience. In addition, the chairman should widen the search for non-executive directors, broadening traditional talent pools, when making board appointments. The ABI report also focuses on succession planning. The biggest improvements that need to be made here are in relation to disclosure and companies are encouraged to provide meaningful disclosures on their succession plans. In contrast to the 2011 Report on Board Effectiveness, the 2012 report does not specify that the diversity of perspective and succession planning disclosures should be contained in the annual report, however, such a disclosure would continue to satisfy the requirements.

When the Code is interpreted together with the Guidance on Board Effectiveness and the Report on Board Effectiveness, it is apparent that, practically speaking, companies listed in the United Kingdom must give due consideration to attaining the appropriate balance of skills, experience, independence, knowledge and diversity. Although strictly speaking a company can decide how well it applies the main principles of the Code, it will have to make a statement in its annual financial report as to the application of the main principles and ‘comply or explain’ in relation to the provisions, and it is unlikely that shareholders will allow poor application to persist, in the absence of alternative justification.

Monitoring gender representation and diversity on boards has become a particular focus in recent years. As advised by the Davies Report (February 2011) ‘Women on Boards’, the FRC has consulted on the issue of gender diversity at an executive level. Lord Davies had recommended that FTSE 350 boards should aim for a minimum of 25 per cent female representation by 2015. In May 2011, the FRC published a consultation document, concerned with whether further steps were required to reach the goal of more diverse boards, what, if any, these changes should be and when they should be introduced. In March 2015 Lord Davies released his fourth annual progress report on this matter, reporting on the progress that FTSE 350 companies have made towards reaching the 2015 targets. The report states that progress had been positive, with women accounting for 23.5 per cent of FTSE 100 and 18 per cent of FTSE 250 board directors at that time.

Lord Davies’ final report was published on 29 October 2015. It noted that there were no male-only boards in the FTSE 100 and that women held 26.1 per cent of board positions in those companies, and that in FTSE 250 companies, women held 19.6 per cent of board positions and there were 15 male-only boards. It also made five recommendations, including that the voluntary, business-led approach to improving the number of women in board positions be continued until 2020 and targeting 33 per cent female board representation in FTSE 350 companies in the same time frame.

This voluntary target has been reiterated in the latest report on board diversity, the Hampton-Alexander Review, published on 8 November 2016. The Review highlights increases in female board representation for the FTSE 100 and 250, to 26.6 per cent and 21.1 per cent respectively – an overall increase to 23 per cent for the FTSE 350, up from 21.9 per cent in the previous year. Further recommendations include, for example, the suggestion that FTSE 350 companies should voluntarily publish details of the number of women on the executive committee in their annual reports or on websites.

Gender diversity on boards has also become an area of legislative change. In October 2013, the Companies Act (Strategic Report and Directors’ Report) Regulations 2013 was implemented for companies with financial years ending on or after 30 September 2013. The regulations contain a requirement for listed companies to make three separate disclosures on the proportion of women and men who are, respectively, directors, senior managers and employees of the company (CA 2006, section 414C(8) and (9)).

In November 2012 the European Commission announced that it was ‘taking action to break the glass ceiling that continues to bar female talent from top positions’, and published proposals for a directive aimed at achieving gender balance on the boards of European companies. The proposed directive sets an objective for listed companies to increase non-executive directors of the under-represented sex (usually women) to 40 per cent by 1 January 2020. Listed companies will also be required to publish information annually on the gender composition of their boards. The quotas are not described in the directive as being mandatory; however, companies would have to provide reasons for not meeting the quotas. As the directive is currently drafted, member states may provide that not meeting the 40 per cent quota in respect of non-executive directors can be justified if a listed company can show that members of the under-represented gender hold at least one-third of all director positions, irrespective of whether they are executive or non-executive directors. On 20 November 2013, the European Parliament adopted the European Commission proposal, with amendments. However, it was announced in December 2014 that the Council was unable to reach a general approach on this directive, so this still remains in the legislative pipeline.

In the meantime, new DTR 7.2.8A has been introduced to implement EU Directive (2014/95) on disclosure of non-financial and diversity information, applicable to large issuers for financial years commencing on or after 1 January 2017. Affected companies’ corporate governance statements must now include an additional description of the diversity policy applied to their administrative, management and supervisory bodies, and how it has been implemented. If no diversity policy is applied, then the statement must contain an explanation as to why this is the case.

The PLSA has acknowledged the recent emphasis on gender diversity and now expects boards to set out an explicit policy for achieving a greater degree of diversity than has been the practice in the past. Boards should also track the implementation of this policy, including explaining any measurable objectives that they have set for implementing the policy and the progress they have achieved on these objectives. Similarly, the ABI Report on Board Effectiveness recommends that companies should develop and disclose the initiatives they have in place to develop women in their organisation as well as disclosing the proportion of women not only on their board, but also in senior management and in the whole organisation.

Furthermore, the Equality and Human Rights Commission published in March 2016 its ‘Six Step Guide to Good Practice’ on how to improve board diversity. This is a guide for companies and executive search firms to improve the diversity of company boards within the frameworks set out by the Equality Act 2010 and the Financial Reporting. The six steps are as follows.

Making an appointment:

• Define the selection criteria in terms of measurable skills, experience, knowledge and personal qualities.

• Reach the widest possible candidate pool by using a range of recruitment methods and positive action.

• Provide a clear brief, including diversity targets, to your executive search firm.

• Assess candidates against the role specification in a consistent way throughout the process.

Ongoing action to improve diversity:

• Establish clear board accountability for diversity.

• Widen diversity in your senior leadership talent pool to ensure future diversity in succession planning.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Code states that the positions of chairman and chief executive officer (CEO) should not be occupied by the same person, to ensure that no one individual has unfettered decision-making powers (Code, provision A.2.1). Most UK-listed companies separate the roles of chairman and CEO.

Any decision to combine the roles of chairman and CEO in one person must be publicly justified in accordance with the ‘comply or explain’ principle of the Code (LR9.8.6R(6) and LR9.8.7R). Major shareholders should be consulted in advance of the appointment and the reasons for the failure to separate the two roles should be set out at the time of the appointment and in the company’s next annual report (Code, provision A.3.1).

The Code recommends that the division of responsibility between the chairman and CEO should be clearly established, set out in writing and agreed by the board (Code, provision A.2.1). The Code further provides that the chairman should meet the independence criteria set out at provision B.1.1 (Code, provision A.3.1).

Guidance published by the PLSA has reiterated that the division of the roles of chairman and CEO is a cornerstone of good governance in the United Kingdom, a position supported by the PIRC in its Shareholder Voting Guidelines 2018, which state that it will oppose the re-election of a CEO holding the position of chairman except in exceptional circumstances. The PLSA guidance also suggests that the succession of the CEO to chairman would only be acceptable on rare occasions, and that the contravention of this tenet for a period of over one year may require shareholder action.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

A company’s directors may delegate certain powers and responsibilities to board committees if permitted to do so by its articles of association.

The Code provides that a listed company should establish the following committees, the chairmen and members of which should be identified in the annual report:

• a nomination committee comprising a majority of independent non-executive directors to recommend new appointments and reappointments to the board and senior executive office. Its aim is to promote objectivity in the appointment of directors and to ensure that a company’s board is balanced and is not dominated by a particular individual or group of individuals (Code, provision B.2 and supporting principle B.1);

• a remuneration committee made up entirely of independent non-executive directors. FTSE 350 companies should have at least three members on the committee, and companies below the FTSE 350 should have at least two members. It should make recommendations to the board on executive remuneration and determine specific remuneration packages for each of the executive directors and the chairman, including pension rights and compensation payments. The remuneration committee will also monitor the level and structure of remuneration for senior management. Establishing a remuneration committee helps to ensure that executive directors play no part in determining their own remuneration (Code, provision D.2). The proposed revised Code, published in December 2017, includes greater responsibility for the remuneration committee to set remuneration for both directors and senior management as well as overseeing remuneration and workforce policies and practices, taking these into account when setting the policy for director remuneration (see question 28); and

• an audit committee consisting entirely of independent non-executive directors. FTSE 350 companies should have at least three members on the committee, and companies below the FTSE 350 should have at least two members. It should select accounting policies, review draft accounts and maintain an appropriate relationship with the company’s auditors (Code, provision C.3). On 16 November 2009, the FRC published ‘Challenges for Audit Committees Arising from Current Economic Conditions’, which sets out additional issues that audit committees should take into account in view of the global financial crisis when preparing corporate reports. In September 2012, the FRC published a new version of its Guidance on Audit Committees, which is intended to assist listed companies in implementing the relevant provisions of the Code, although the Guidance itself is non-binding. The Guidance was updated in April 2016 and again in April 2017. Changes in the 2017 guidance included recommending that one member of the remuneration committee, and where relevant the risk committee, should also sit on the committee and a recommendation that all members of the audit committee be independent, non-executive directors. The requirement for a UK-listed company to establish an audit committee is also enshrined in law by DTR7.1, which provides that such a committee should have at least one independent member and a member that has competence in accounting or auditing, or both (DTR7.1.1R). There is a degree of overlap here with provision C.3.1 of the Code, which states that at least one member of the committee should have recent and relevant financial experience.

The Competition and Markets Authority also published its order relating to statutory audit services for large companies (the CMA Order) on 26 September 2014. The CMA Order, among other things, requires the terms of the statutory audit services for a FTSE 350 company to be negotiated and agreed by the audit committee only.

In addition, the FRC’s Guidance on Board Effectiveness states that, notwithstanding a board’s delegation of decision-making to committees in relation to audit, risk and remuneration, the board retains responsibility for, and makes the final decisions on, all these areas (Guidance on Board Effectiveness, paragraph 6.1).

In June 2013, the ICSA published guidance on the terms of reference for the nomination, remuneration, audit and risk committees of a company seeking to comply fully with the provisions of the Code, following the latter’s publication in September 2012. The guidance note on terms of reference for the audit committee was updated in March 2017 to reflect revisions to the Code made in April 2016 and the FRC’s latest Guidance on Audit Committees (see above).

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The Code provides that the board should meet regularly enough to discharge its duties effectively (Code, provision A.1.1). However, this will be subject to the company’s articles, which may specify a minimum number of board meetings that must be held per year. The Code does provide that a company should set out in its annual report the number of meetings of the board and its committees that took place, as well as the level of individual attendance by directors (Code, provision A.1.2).

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Annex I of Appendix 3 to the PRs requires an issuer of securities to include details of certain aspects of its board practices in any prospectus that it publishes, including information about its audit and remuneration committees and a summary of the terms of reference of these committees (PR Appendix 3, Annex I, item 16.3).

Schedule B to the Code sets out various details relating to a board’s practices that should be disclosed in its annual report, including the following:

• a statement of how the board operates, including a high-level statement of which types of decisions are to be taken by the board and which are to be delegated to management (Code, provision A.1.1);

• the number of board and committee meetings that have occurred each year and individual attendance by directors at such meetings (Code, provision A.1.2);

• the work of the nomination committee and the process it has used in relation to board appointments (Code, provision B.2.4);

• how performance evaluation of the board, its committees and its individual directors has been conducted (Code, provision B.6.1);

• an explanation from the directors of their responsibility for preparing the company’s accounts (Code, provision C.1.1);

• an explanation from the directors of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company (Code, provision C.1.2);

• the work of the audit committee in discharging its responsibilities (Code, provision C.3.3);

• the work of the remuneration committee as required under the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013 (Code, provision D.1.2); and

• the steps that the board has taken to ensure that the members of the board, and in particular the non-executive directors, develop an understanding of the views of major shareholders (Code, provision E.1.2).

A listed company needs to disclose these practices in order to comply with the Code.

The Code also recommends that the terms and conditions of appointment of non-executive directors should be made available for inspection (Code, provision B.3.2), as should the terms of reference of the nomination, remuneration and audit committees (Code, provisions B.2.1, D.2.1 and C.3.3).

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The remuneration of a director of a private company is set by the board. In a listed company, its remuneration committee will be tasked with determining the remuneration of its directors. It is a provision of the Code that FTSE 350 companies should establish a remuneration committee of at least three independent non-executive directors and companies below the FTSE 350 should establish committees of at least two such directors (Code, provision D.2.1). The remuneration committee should have delegated responsibility for setting remuneration of all executive directors and the chairman, including pension rights and any compensation payments (Code, provision D.2.2). The remuneration committee should take care to recognise and manage conflicts of interest when consulting the chief executive in relation to their proposals relating to the remuneration of other directors (Code, supporting principle D.2). The remuneration of non-executive directors should be determined by the board itself, subject to the shareholders reserving this responsibility through the company’s articles of association (Code, provision D.2.3).

It is a requirement that the directors of a quoted company prepare a directors’ remuneration report for each financial year of the company (CA 2006, section 420(1)). It is also a requirement for directors of quoted companies with a financial year ending on or after 30 September 2013 to prepare a remuneration policy to be set out in a separate part of the report, which must be approved by shareholders at least every three years (CA 2006, section 421(2A)). The shareholders of the company must be given the opportunity to approve the remuneration report (annually) and remuneration policy (at least every three years) by ordinary resolution (see questions 4 and 36). The requirements as to the form and content of the directors’ remuneration report and remuneration policy are outlined in Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

Legislative changes in relation to executive remuneration came into effect on 1 October 2013. The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 implemented new content requirements for directors’ remuneration reports, including the requirement for companies to publish in their remuneration report a single figure for total remuneration for each person that has held the office of director in that financial year. In addition, sections 79 to 82 of the Enterprise and Regulatory Reform Act 2013 (ERRA 2013) added the following requirements to CA 2006:

• an amendment to section 421 to allow for regulations to be published setting out the content requirements of a directors’ remuneration policy regarding future remuneration payments and payments for loss of office, which will be set out in a separate part of the directors’ remuneration report;

• the introduction of section 439A, which requires a binding ordinary shareholder resolution to approve the remuneration policy at least every three years; and

• the introduction of sections 226A to 226F, which restrict remuneration payments and payments for loss of office to directors to those specified within the approved remuneration policy. Section 226E is particularly noteworthy as it requires any directors who approve payments that contradict the approved remuneration policy to indemnify the company, jointly and severally, against any losses that arise from the payment (although relief is available to directors who can show that they acted honestly and reasonably).

Section D of the Code specifically addresses the issue of board remuneration. It contains the following two main principles on directors’ remuneration:

• executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied (Code, main principle D.1) (this was amended in the 2014 version of the Code from the previous requirement that the levels of remuneration be sufficient to attract, retain and motivate directors); and

• there should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration (Code, main principle D.2).

The proposed revised Code, published by the FRC in December 2017, contains a number of new and amended provisions relating to the remuneration of directors. Provision 32 would require the chairman of the remuneration committee to have served for at least 12 months on a remuneration committee. Provision 36 would require a vesting and holding period of at least five years (increased from three) for shares granted or other forms of long-term incentives. Longer periods than five years, including post-employment periods, may also be appropriate.

Pursuant to the Listing Rules, a listed company incorporated in the United Kingdom must include in its annual financial report a board report addressed to the shareholders containing details of the unexpired term of the director’s service contract of a director proposed for election or re-election at the forthcoming annual general meeting, and, if any director proposed for election or re-election does not have a director’s service contract, a statement to that effect (LR9.8.6R(7) and LR9.8.8R).

Executive remuneration has been the focus of various discussion papers and industry guidance in recent years. In February 2008, the ABI and the then NAPF published a joint statement on ‘Best Practice on Executive Contracts and Severance’, which contains guidance on matters including contract terms, notice periods, severance payments, pensions and arrangements for shareholder inspection of directors’ contracts and side letters relating to severance terms and pension arrangements.

The ABI also published guidance on directors’ remuneration in its Principles of Remuneration, updated and republished by the then IMA in October 2014. This guidance provides that remuneration committees should have regard to risk management when setting executive remuneration and also deals with matters including base pay, bonuses, pensions and performance criteria. This guidance focuses on five core principles: the role of shareholders, the role of the board and directors, the remuneration committee, remuneration policies and remuneration structures. The Principles of Remuneration also include initial guidance on the IMA’s approach to disclosures under the executive remuneration reporting regime introduced for listed companies in October 2013.

In November 2013 the then NAPF and HERMES EOS published a joint advisory paper on the Remuneration Principles (‘Remuneration Principles for Building and Reinforcing Long-Term Business Success’). This paper advocated aligning pay with the long-term success of the company and returns to shareholders, and ensuring that pay schemes were simple and understandable for investors and executives. In October 2016, the Investment Association published an open letter to the FTSE 350 on executive pay in which it called for pay ratios between the CEO and median employee and the CEO and the executive team to be disclosed. This CEO pay gap ratio reporting has been suggested by the government as an upcoming piece of secondary legislation, following the government’s corporate governance consultation responses published in August 2017 (see question 41).

A company must not enter into a director’s service contract containing a guaranteed term of employment that is, or may be, more than two years unless authorised to do so by a shareholder resolution passed during a general meeting of the company (CA 2006, sections 188(1) and (2)). Contravention of this requirement will result in the relevant provision being void and the service contract being deemed to contain a term entitling the company to terminate it at any time by giving reasonable notice (CA 2006, section 189). The Code provides that service contracts should be no more than 12 months in duration. If it is necessary to offer longer contract periods to new directors, these should reduce to 12 months or less after the initial period (Code, provision D.1.5).

CA 2006 provides that, subject to certain rules and exceptions, a company must not, unless authorised to do so by shareholder resolution:

• make loans or quasi-loans to directors or persons connected to a director, nor provide any guarantee or security in respect of a loan or quasi-loan made to a director or persons connected to a director (CA 2006, sections 197 to 200, 203 to 214 and 223 to 225);

• enter into a credit transaction as a creditor for the benefit of a director or persons connected with a director, nor provide any guarantee or security in connection with a credit transaction entered into by a director (CA 2006, sections 201 to 214 and 223 to 225);

• enter into substantial property transactions with directors or persons connected with directors (CA 2006, sections 190 to 196 and 223 to 225); nor

• make certain payments to a director in respect of a loss of office (CA 2006, sections 215 to 225, noting that, where the company is a quoted company, the restrictions in CA 2006, section 226C as described above would apply by virtue of CA 2006, section 215(5)).

If a company enters into a transaction with one of its directors or a person connected with such a director and in doing so exceeds any limitations placed on its powers by its articles of association or any shareholder resolutions then, subject to certain exceptions:

• the transaction is voidable at the instance of the company; and

• the director who is party to the transaction (or any person connected with the director and who is party to that transaction) and any director of the company who authorised the transaction will be liable to account to the company for any direct or indirect gain he or she has made from the transaction and to indemnify the company for any loss or damage that it may suffer as a result of the transaction (CA 2006, section 41).

Company directors must also declare the nature and extent of any interest that they have in proposed or existing transactions or arrangements with the company. However, they need not declare such an interest: if it cannot reasonably be regarded as likely to give rise to a conflict of interest; if, or to the extent that, the other directors are already aware of it; or if, or to the extent that, it concerns terms of his or her service contract that have been or are to be considered by a meeting or committee of the directors (CA 2006, sections 177 and 182).

Company directors should also have regard to their duty to avoid conflicts of interest when entering into transactions with the company (CA 2006, section 175). They should also ensure that such transactions do not put them in breach of their obligations not to abuse any inside information that they have about the company, particularly during a ‘close period’ (that is, the period surrounding the announcement of the company’s most recent results) (see also question 36).

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The remuneration of a company’s most senior management will normally be overseen by its remuneration committee (see question 25). The Code states that the remuneration committee should recommend and monitor the level and structure of remuneration for senior management (Code, provision D.2.2). Companies should also have regard to the IMA’s principles on executive remuneration when determining the remuneration of their most senior managers (see question 28).

Senior managers should also ensure that certain transactions with the company do not put them in breach of the requirements not to abuse any inside information that they have about the company, particularly during a close period, in respect of which, see question 36.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Companies are permitted to maintain directors’ and officers’ liability insurance (D&O liability insurance) by CA 2006, section 233, although they are not obliged to do so. D&O liability insurance protects directors and officers from financial liability for any claims made against them in respect of the performance of their duties to the company.

A typical D&O liability insurance policy will provide cover for directors, officers, managerial and supervisory employees and the company itself, to the extent that it has indemnified such persons (see question 31). D&O policies generally cover losses such as court costs and damages in respect of claims brought for the wrongful acts of the insured. However, certain types of claim will not be covered by a D&O liability insurance policy, such as those for fraud and dishonesty or property damage or personal injury.

Companies that maintain a D&O liability insurance policy will also be acting in accordance with the Code, which recommends that the company should arrange appropriate insurance cover in respect of legal actions against its directors (Code, provision A.1.3). The ICSA in its January 2013 guidance (ICSA guidance on liability of non-executive directors: care, skill and diligence) recommends that D&O liability insurance should include ‘run-off’ cover for a period after the director’s resignation. It suggests that six years might be considered an appropriate period.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

A company generally may not exempt a director from liability for any negligence, default, breach of duty or breach of trust in relation to the company, nor indemnify him or her in respect of such behaviour (CA 2006, sections 232(1) and (2)). However, a company may maintain insurance for a director in respect of such liability (see question 30) and provide directors with an indemnity in respect of such liability by way of a qualifying third-party indemnity provision (QTPIP) or a qualifying pension scheme indemnity provision (QPSIP) (CA 2006, section 232(2)).

A QTPIP indemnifies a director in respect of liability incurred to a third party (that is, a liability that is not incurred by the director to the company itself or to an associated company) (CA 2006, section 234(2)). However, a QTPIP must not indemnify a director in respect of fines imposed in criminal proceedings, regulatory penalties, the liabilities incurred in defending the director against criminal proceedings in which he or she is convicted, the liabilities incurred in defending civil proceedings brought by the company in which judgment is given against him or her or certain applications for relief in which the court refuses to grant him or her relief (CA 2006, section 234(3)).

A QPSIP indemnifies a director of a company that is a trustee of an occupational pension scheme against liability incurred in connection with the company’s activities as trustee of the scheme (CA 2006, section 235(2)). A QPSIP must not indemnify a director in respect of fines imposed in criminal proceedings, regulatory penalties or liability incurred by the director in defending criminal proceedings in which he or she is convicted (CA 2006, section 235(3)). The existence of either a QTPIP indemnity or a QPSIP indemnity must be disclosed in the directors’ report (CA 2006, section 236(1)).

A company may also provide directors with funds to pay for their expenses in defending any criminal or civil proceedings in connection with:

• any alleged negligence, default, breach of duty or breach of trust in relation to the company or an associated company; or

• making applications for relief under CA 2006, sections 661 and 1157 (CA 2006, sections 205(1) and (5)). Shareholder approval is not required (CA 2006, section 205(1)). These funds must be repaid if the director is convicted, receives an adverse judgment or is refused relief in respect of the proceedings (CA 2006, section 205(2)).

A company may also advance funds to a director to meet the costs of defending any regulatory investigation or action concerning him or her. Unlike loans made to a director to fund the costs of defending criminal and civil proceedings, loans made in respect of defending regulatory proceedings or action by a regulatory authority do not need to be repaid if judgment is given against the director. Shareholder approval is not required (CA 2006, section 206).

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Generally, any provision that purports to exempt a company director from liability that would otherwise attach to him or her in connection with negligence, default, breach of duty or breach of trust in relation to the company, is void (CA 2006, section 232(1)). As mentioned in questions 30 and 31, there are exceptions to this rule for the provision of insurance, QTPIP indemnification and QPSIP indemnification provisions (CA 2006, section 232(2)).

A company’s board may pre-authorise a director to enter into an arrangement that would otherwise amount to a conflict between the director’s interests and those of the company, provided that the board is explicitly permitted to authorise such a conflict by the company’s constitution (CA 2006, sections 175(4)(b) and (5)(b)). This authorisation will only be effective if:

• the meeting at which such authorisation is granted is capable of being quorate without the participation of the director to whom the authorisation relates; and

• the resolution granting this authorisation is passed without him or her voting on it (CA 2006, section 175(6)). If such authorisation is granted, the transaction will not be liable to be set aside by any common law rule that requires the company’s shareholders to consent to such an arrangement (CA 2006, section 180(1)(a)).

Directors will also not be liable for entering into an arrangement that could amount to a breach of their duties to avoid conflicts of interest and to not accept benefits from third parties under CA 2006, sections 175 and 176, if the company’s shareholders have approved that arrangement under CA 2006, chapter 4 of part 10 (which relates to transactions between a company and its directors requiring shareholder approval (see question 4)), or in respect of which that chapter provides that approval is not required (CA 2006, section 180(2)).

A company may also preclude the liability of a director for a breach of his or her duty to avoid conflicts of interest by including provisions in its articles of association under which a director may enter into certain arrangements that would otherwise amount to a breach of this duty (CA 2006, section 180(4)(b)). Further, the company may pre-authorise a breach of duty by a director in accordance with a relevant rule of law (for example, by the common law rule that a company may authorise a breach of duty if full and frank disclosure is made of all material facts (although, a company may not authorise an unlawful act)) (CA 2006, section 180(4)(a)).

Companies may also relieve their directors of liability for any negligence, default, breach of duty or breach of trust in relation to the company by ratifying such conduct after it has occurred, by way of a shareholder resolution (CA 2006, sections 239(1) and (2)). This resolution will only be effective if it passed without the director or any shareholder connected with him or her voting in favour of it (although, such persons are not prevented from counting in the quorum for the meeting) (CA 2006, section 239(4)). However, it is unlikely that shareholders will be permitted to ratify unlawful acts (CA 2006, section 239(7)).

33 Employees

What role do employees play in corporate governance?

Employees do not play a formal role in corporate governance; however, in practice, the most senior employees will be involved in the formulation of board practices and policies. A company’s directors must have regard to the interests of its employees when discharging their duty to promote the success of the company (CA 2006, section 172(1)(b)). A key part of the proposed revised Corporate Governance Code is increasing engagement between the board and employees. The revised code includes the following proposed changes relating to employee engagement:

• the board establishing a method of gathering the view of the workforce through a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director; and

• establishing a means for the workforce to raise concerns in confidence and anonymously.

A company’s auditor may also demand such information from the company’s employees as he or she requires to perform his or her duties as an auditor (CA 2006, section 499(1) and (2)).

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

One of the main principles of the Code addresses the effectiveness of the board and this is addressed specifically in Code provision B.6. The main principle sets out that the board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity (including gender), how the board works together as a unit and other factors relevant to its effectiveness.

The board should state in the annual report how performance evaluation of the board, its committees and individual directors has been conducted. Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. The external facilitator should be identified in the annual report and a statement made as to whether they have any other connection with the company. The non-executive directors, led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of the executive directors (Code, provisions B.6.1, B.6.2 and B.6.3). The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members to be appointed or seeking the resignation of directors (see question 1).

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The memorandum and articles of association of companies incorporated in England and Wales are publicly available from Companies House in Cardiff or London and can be accessed online without charge. Many companies also make their articles of association available on their websites.

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The principal information that companies must disclose is as follows (however, this list is not exhaustive).

From 3 July 2016, the UK’s market abuse provisions in FSMA 2000 were replaced by a new regime under the Market Abuse Regulation (596/2014/EU) (MAR) and the Market Abuse Regulation Instrument 2016. There are implications regarding, among other things, inside information, share dealings and market manipulation.

People with significant control register

Section 81 and Schedule 3 of the SBEEA 2015 added a new Part 21A into the CA 2006, pursuant to which companies were required from 6 April 2016 to identify and record the people with ‘significant control’ (PSC)over the company in a public register (PSC Register). Part 21A applies to all companies other than those to which chapter 5 of the DTRs applies. Limited liability partnerships and UK Societates Europaeae are not caught by the revised CA 2006 but must abide by the same requirements as they are carried across by the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016, which came into force on 30 June 2016. A PSC Register must be kept in addition to existing registers such as the register of directors and register of members. The PSC information must be filed with the central public register at Companies House.

A PSC is an individual who meets one or more of the following conditions in relation to a company:

• directly or indirectly holds more than 25 per cent of the shares;

• directly or indirectly holds more than 25 per cent of the voting rights;

• directly or indirectly holds the right to appoint or remove the majority of directors (this is defined as the directors holding the majority of voting rights);

• otherwise has the right to exercise, or actually exercises, significant influence or control over the company; or

• has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm (not being a legal person, such as a partnership), which itself satisfies one or more of the first four conditions.

If any of the conditions listed above is met by a trust or firm, statutory guidance assists in identifying who should be in the PSC Register.

Financial and operating results of the company

A listed company is required to make public an annual financial report containing its audited financial statements, a management report and responsibility statements by the persons within the company who are responsible for its accounts. The annual financial report must be made public at the latest four months after the end of each financial year, and it must remain publicly available for at least 10 years (DTR4.1.3R, DTR4.1.4R and DTR4.1.5R).

A listed company must also make public a half-yearly report containing a condensed set of financial statements, an interim management report and responsibility statements. The half-yearly financial report must cover the first six months of the financial year and should be published as soon as possible but no later than three months after the end of the period to which the report relates, and it must remain publicly available for at least 10 years (DTR4.2.2R and DTR4.2.3R). A company may be liable to compensate any person who has acquired securities and suffered loss as a result of any untrue or misleading statement in or omission from the company’s financial reports (section 90A FSMA 2000).

Share capital and voting rights

A person must notify the company of the percentage of the company’s voting rights held by him or her (including voting rights held through that person’s holding of financial instruments) if that percentage reaches, exceeds or falls below the following thresholds: 3, 4, 5, 6, 7, 8, 9, 10 per cent and each 1 per cent threshold thereafter up to 100 per cent (DTR5.1.2R). On receiving such a notification, a company must as soon as possible, and in any event by not later than the end of the trading day following receipt of the notification, make public all information contained in that notification (DTR5.8.12R(1)).

If a listed company acquires or disposes of its own shares, it must make public the percentage of voting rights attributable to those shares it holds as a result of the transaction as a whole where the percentage reaches, exceeds or falls below the threshold of 5 per cent or 10 per cent of the voting rights. This must be done as soon as possible, and in any event not later than four trading days after the acquisition or disposal of these shares (DTR5.5.1R). A listed company must also, at the end of each month during which an increase or decrease has occurred, make public the total number of voting rights and capital in respect of each class of issued shares and the total number of voting rights attaching to the shares that it holds in treasury (DTR5.6.1R). In addition, a listed company must also disclose the total number of voting rights as soon as possible (and no later than the end of the following business day) after an increase or decrease in the total number of voting rights following the completion of a transaction – unless the fluctuation in voting rights is deemed to be immaterial (DTR5.6.1AR). It is for the company to decide if an increase or decrease in the total number of voting rights is immaterial, but the FCA views a fluctuation of 1 per cent or more to be material both to the issuer and the public (DTR5.6.1BG).

Members of the board and key executives

A company must disclose certain information relating to its board and senior managers, including their names, addresses, functions, experience and expertise, previous directorships, criminal convictions and certain details of bankruptcies, receiverships or liquidations with which that person was associated (PR annex I of appendix 3, paragraph 14.1). A company must make similar disclosures when a new director is appointed (LR9.6.13R). A company must also notify a regulated information service (RIS) of any change to its board, including the appointment of a new director, the resignation, removal or retirement of an existing director or when there are important changes in the role, functions or responsibilities of a director (LR9.6.11R). A company must also notify an RIS of a current director’s new directorships in any other publicly quoted company and of certain changes in a current director’s circumstances (LR9.6.14R). Question 27 deals with the disclosure requirements of listed companies in relation to board practices under the Code.

Remuneration

The Directors’ Remuneration Report Regulations 2002 require quoted companies to publish a report on their directors’ remuneration, which must include specified information and be approved by the board of directors. These provisions are restated by CA 2006, sections 420 to 422.

For companies with financial years ending on or after 30 September 2013, the directors’ remuneration reports are now required to be prepared and put to the shareholders in two distinct parts: the annual report on remuneration, which sets out remuneration payments made to directors in the year under review and a statement describing how the company intends to implement the approved remuneration policy in the next financial year; and the directors’ remuneration policy setting out the company’s policy on remuneration of directors. Copies of the report, which forms part of the annual report and accounts, must be sent to the registrar of companies (CA 2006, section 441).

The company must give its shareholders the opportunity to approve the remuneration report, including the remuneration policy, by way of an ordinary resolution (CA 2006, sections 439 and 439A) (see questions 4, 28 and 37). The report on directors’ remuneration is subject to an advisory vote by shareholders on an annual basis; the remuneration policy is subject to a binding shareholder vote at least every three years and, once approved, sets the boundaries in which the company can remunerate its directors.

The annual report on remuneration must contain, inter alia, a single total figure of remuneration paid in the financial year being reported on for each person who served as a director at any time during that year, broken down to show salary, benefits and performance-related pay. The remuneration policy must contain, inter alia, description of each of the components of the remuneration package for directors, including the maximum amount payable under each component of remuneration, and details of performance measures (if applicable).

Inside information

MAR prescribes a regime for the disclosure and control of inside information (with further guidance contained in Chapter 2 of the DTRs). Inside information is defined as precise information, which has not been made public, relating, directly or indirectly, to the company, and which, if it were made public, would be likely to have a significant effect on the price of the company’s listed securities. Information is likely to have a ‘significant effect’ on price if it is information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions. The definition of ‘inside information’ is wider under MAR than the previous regime, capturing inside information relating to spot commodity contracts.

A listed company (and one whose securities are the subject of an application for admission to listing) must disclose publicly as soon as possible any inside information that directly concerns it (article 17(1) MAR). There is an exception to the general obligation of disclosure, whereby the company may delay the public disclosure of inside information so as not to prejudice its own legitimate interests, as long as the omission would not be likely to mislead the public and the company can ensure the confidentiality of the information (article 17(4)). Immediately upon delayed inside information being publicly disclosed, the company must inform the FCA that disclosure was delayed, and, if requested by the FCA, provide a written explanation of how the above conditions were satisfied in respect of the delay.

An issuer may also be able to delay immediate public disclosure of inside information where it is a financial institution and disclosure of the information (for example, that relating to a liquidity problem) entails a risk of undermining the financial stability of the issuer and of the financial system (article 17(5)).

Share dealing

Under article 19 MAR, which has replaced Chapter 3 of the DTRs and the Model Code, persons discharging managerial responsibilities (PDMRs) and any ‘persons closely associated’ with them must notify an issuer, and the FCA, of the occurrence of all transactions conducted on their own account relating to the shares or debt instruments of that issuer (or derivatives or other financial instruments linked thereto). This provision is only applicable once transactions of a value totalling at least €5,000 have been carried out in respect of that company’s shares within a calendar year. Notifications must be made promptly and no later than three business days after the date of the transaction, and should set out details relating to the transaction, including, inter alia, the name of the person concerned, the reason for the notification, and the price and volume of the transaction. The company must then ensure that the information notified to it is made public promptly and no later than three business days after the transaction (in practice, this would occur via a RIS).

Furthermore, a PDMR must not conduct any transactions relating to the financial instruments of the relevant issuer during a closed period of 30 calendar days before the issuer releases any interim financial report or year-end report required by national law or the rules of the relevant securities exchange. MAR does not, however, retain the Model Code’s requirement that PDMRs seek to prohibit their ‘connected persons’ from dealing in the issuer’s securities in close periods.

There are limited exemptions to the closed period rule. These include certain transactions relating to employee share schemes, transactions where the beneficial interest in the relevant security does not change, and where there are exceptional circumstances that require the immediate sale of shares. Certain exemptions that were available under the Model Code are not reproduced in MAR, however, such as those that permit certain dealings connected to a rights issue or a takeover or dealings under a trading plan where the PDMR has no influence or discretion.

Governance structure and policies

Companies with a premium listing are required to include a statement in their annual report setting out how they have applied the main principles of the Code (LR9.8.6R(5)) (see question 1). This statement must be made in a manner that would enable shareholders to evaluate how these main principles have been applied.

The annual report must also include a statement as to whether the premium listed company has complied throughout the accounting period with all relevant provisions set out in the Code and provide reasons for any non-compliance (LRs 9.8.6R(6) and 9.8.7R) (see question 1). The Code also requires a number of other disclosures, and these are outlined in question 27. The DTRs require listed companies to make a corporate governance statement in the directors’ report (DTR7.2.1R). This statement must outline which corporate governance code the company is subject to and whether it has complied with its provisions, or alternatively it must explain any reasoning for non-compliance (DTRs 7.2.2R and 7.2.3R). (See question 40 for updated information regarding necessary disclosures.) Companies with a premium listing should adhere to the Code (see question 1), and by applying the Code’s ‘comply or explain’ approach a company will also satisfy the DTRs (DTR7.2.4G). However, companies with a standard listing are not subject to the Code and DTR7.2.1R creates an additional disclosure requirement to ‘comply or explain’, albeit separate from the Code.

Audit committees or bodies carrying out equivalent functions

Companies with a premium listing or a standard listing must make a statement available to the public disclosing which body it has appointed to carry out the audit committee functions set out in DTR7.1.3R and how it is composed (DTR7.1.5R). This statement should include the names of the chairman and members of the audit committee and the qualifications of all members of the audit committee during the relevant period. It may be included in the corporate governance statement that the company is required to make under DTR7.2 (DTR7.1.6G).

If the company is a FTSE 350 company, a statement of compliance with the provisions of the CMA Order 2014 (article 7.1 CMA Order 2014), which applies to financial years beginning on or after 1 January 2015, is required.

Class announcements

The Listing Rules classify transactions by reference to a number of different percentage ratios that are set out in annex 1 to LR10 (the class tests) (see question 4). Under LR10 there are two classes of transactions: class 1 and class 2. The disclosure requirements for these two classes of transaction are currently defined as follows:

Class 1

A premium listed company must, in relation to a class 1 transaction (where any percentage ratio is 25 per cent or more), send an explanatory circular to the company’s shareholders requesting prior shareholder approval in a general meeting. Any agreement effecting the transaction should be conditional on obtaining that approval (LR10.5.1R). The company must notify an RIS in accordance with the provisions of LR10.4.1R (LR10.5.1R(1)). This notification should be made as soon as possible after the terms of the transaction have been agreed (LR10.4.1R).

A supplementary notification must be made to an RIS as soon as possible if there is a significant change affecting any matter in the announcement, or a significant matter arises that should have been mentioned if it had arisen at the time of preparation of the notification (LR10.4.2R). This supplementary notification must comply with the provisions of LR10.4.2R. LR10.5.4R, which came into force on 1 October 2012 (as amended in April 2013 to reflect the changes to the UK regulatory framework), also requires a supplementary circular to be sent to shareholders if, before the date of the general meeting to approve the transaction, a listed company becomes aware of a material change affecting the matter that required disclosure in the explanatory circular, or of a new matter that would have required disclosure in a circular. It should be noted that in certain circumstances, where the listed company is in severe financial difficulty and is making a class 1 disposal, the FCA may waive the requirement for an explanatory circular and shareholder consent if certain requirements are met (LR10.8).

Where this is a material change to the terms of the transaction (which the FCA generally considers to be an increase of 10 per cent or more in the consideration payable (LR10.5.3G)), the requirements of LR10.5.1R must be complied with again, separately (LR10.5.2R). The FCA amended LR10.5.2R, effective from 1 October 2012, so that it only applies to material changes occurring after shareholder approval has initially been obtained. This is intended to avoid overlap with LR10.5.4R.

Class 2

A premium listed company must, in relation to a class 2 transaction (where any percentage ratio is 5 per cent or more but each is less than 25 per cent), notify an RIS. This notification must be made as soon as possible after the terms of the transaction are agreed (LR10.4.1R). The information that must be included in the notification (which is the same information that must be included in a class 1 transaction notification) is set out in LR10.4.1R(2). A supplementary notification must also be made where a significant change or significant matter arises (LR10.4.2R).

Reverse takeover

Owing to concerns about reverse takeovers being used as a ‘back-door’ listing route, the requirements for reverse takeovers that were previously contained in LR10.6 were removed and replaced with requirements under a new LR5.6 as of 1 October 2012. These requirements are aimed at incorporating concepts from the UKLA Technical Note: Reverse Takeovers. LR5.6 has increased the scope of the acquisitions defined as reverse takeovers, and made the requirements of the reverse takeover regime more proportionate and less onerous. To facilitate these changes a broader definition of ‘reverse takeover’ has been inserted at LR5.6.4R. The existing exemption from the reverse takeover regime has also been restricted such that only a listed company acquiring a company that is listed in the same listing category will be exempt (LR5.6.2R). In addition, companies with standard listings now fall within the reverse takeovers regime (LR5.6.1R(2)).

In particular, the rules now require a company to contact the FCA as early as possible before announcing a reverse takeover, that has been agreed or is in contemplation, to discuss whether a suspension of listing is required (LR5.6.6R(1)). Where a leak of transaction details has occurred an issuer must contact the FCA to request a suspension as early as possible (LR5.6.6R(2)). In December 2012 the FSA published new guidance on when a suspension of listing would be necessary under new LR5.6.6R and LR5.6.7G (UKLA Technical Note: Reverse Takeovers). This guidance suggests that a reverse takeover would be in contemplation where an approach has been made to the target’s board, or an exclusivity period has been entered into with the target, or the issuer has been given access to begin due diligence. If the FCA is satisfied that there is sufficient publicly available information about the proposed transaction and the issuer, then a suspension will not be required (LR5.6.8G). LR5.6.10G to LR5.6.18R set out circumstances in which the FCA will generally be satisfied that a suspension is not required (LR5.6.9G); however, RIS announcements will be required from the issuer under LR5.6.10G, LR5.6.12G and LR5.6.15G.

An issuer with a premium listing must in relation to a reverse takeover comply with the requirements of class 1 requirements in LR10.5 for that transaction (preparation of a class 1 circular and shareholder approval) (LR5.6.3).

Related-party transactions

Related-party transactions are classified by the nature of the relationship between the parties to the transaction. Definitions of a ‘related party’ and of a ‘related-party transaction’ can be found under LR11.1.4R and LR11.1.5R respectively and include directors and substantial shareholders. A substantial shareholder means any person who holds or controls the exercise of 10 per cent or more of the voting rights in a company (LR11.1.4AR). The definition of ‘substantial shareholder’ includes a carve-out that allows the voting rights of shares to be disregarded when calculating this percentage if the shares are held for a period of five days or less, the voting rights are not exercised during this period, no attempt has been made directly or indirectly to influence the management and the shares are held in the ordinary course of business (LR11.1.4AR(2)). The definition of an ‘associate’ of a related party has been expanded to include partnerships in which a related party holds or controls a voting interest of 30 per cent or more in the partnership (LR appendix 1).

The FSA also published a consultation paper CP12/25 (Enhancing the Effectiveness of the Listing Regime and Feedback on CP12/2), which proposed additional requirements for premium-listed issuers with a ‘controlling shareholder’. A controlling shareholder is a shareholder who itself, or together with persons acting in concert with it, holds, either directly or indirectly, 30 per cent of the shares or voting power in the issuer or its parent, or both. Feedback to this consultation resulted in a further consultation, CP13/15 (Feedback on CP12/25: Enhancing the Effectiveness of the Listing Regime and Further Consultation), published in November 2013. CP13/15 confirmed that the FCA intends to proceed with the requirement that ‘relationship’ agreements be mandatory for all premium-listed companies with a ‘controlling shareholder’, and feedback to CP13/15 was published in May 2014, following which this requirement became effective subject to transitional provisions.

LR15.5.3G provides that closed-ended investment funds are also covered by the related party transaction provisions of LR11 and LR15.5.4R provides that an investment manager of a closed-ended investment fund is a related party for the purposes of LR11. However, closed-ended investment funds and the investment managers of such funds are exempt from the provisions of LR11.1.7R to LR11.1.11R in certain circumstances set out in LR15.5.5R. In the context of a related-party transaction, a premium listed company must notify an RIS of the transaction in accordance with the provisions of LR10.4.1R (notifications of class 2 transactions) and also provide the name of the related party and the details of the nature and extent of the related party’s interest in the transaction or arrangement (LR11.1.7R(1)). An explanatory circular, approved by the FCA and containing the information required by LR13.3 and LR13.6, should also be sent to shareholders (LR11.1.7R(2)). Under LR8.2.1R(7) a sponsor is required to provide the confirmation needed under LR13.6.1R(5). Shareholder approval is required before the transaction is entered into or, if obtaining shareholder approval is a condition of the transaction, prior to completion. The related party and its associates should not vote on any resolution to approve the transaction (LR11.1.7R(4)).

LR11.1.7AR has included the material change requirement referred to under ‘Class 1’ in LR11 so that shareholders are also protected for related party transactions. In addition, the exemptions from the requirements of related party transactions in LR11 annex 1R have been expanded to include loans to fund defence and regulatory investigations, as these operate in a similar way to indemnities and are permitted under CA 2006, section 206.

Gender pay gap reporting

In parallel with the increased focus on diversity at board level discussed in the response to question 23, there have been recent government efforts, via regulations enacted under section 78 of the Equality Act 2010, to improve transparency in respect of gender pay in both the private and public sectors. Under the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 (SI 2017/353), which came into force on 6 April 2017, private and voluntary sector employers with 250 or more employees must analyse their gender pay gap as at the ‘snapshot date’ of 5 April each year, and publish relevant pay information at any time within 12 months of that date, both on the employer’s website and a designated government website. The first report was therefore due to be published by 4 April 2018, and must include information detailing the difference between the average earnings of male and female employees, expressed as a percentage of male earnings.

To help employers adapt to the new regime, the Government Equalities Office and Acas (the Advisory, Conciliation and Arbitration Service) have published non-statutory guidance, entitled ‘Managing Gender Pay Reporting’. (See question 42 for more detail.)

Modern Slavery Act Transparency Statement

A further notable development has been the introduction of the Modern Slavery Act 2015. In accordance with section 54 of the Modern Slavery Act 2015, certain commercial organisations must disclose (including on their website) steps (or a lack thereof) taken to ensure that slavery and human trafficking are not taking place in their supply chains or any part of their business. This applies to organisations that carry on a business in the supply of goods or services in the United Kingdom and have a total annual turnover of not less than £36 million and applies to financial years ending on or after 31 March 2016. Relevant entities must publish the statement as soon as reasonably practical after the end of the financial year, with Home Office guidance recommending publication within six months of this date.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

A quoted company must give its shareholders the opportunity to approve its directors’ remuneration report once a year by way of an ordinary resolution at its annual general meeting and must notify its shareholders of its intention to move such a resolution at that meeting (CA 2006, sections 439(1) and (4)). The company must also notify its shareholders of its intention to move, as an ordinary resolution, a resolution approving the directors’ remuneration policy at least every three years (CA 2006, section 439A(1)) (see questions 4 and 28 for further detail). Many companies (notably, those with a December year-end) are owing to put remuneration policies to a binding ordinary shareholder resolution in accordance with section 439A CA 2006 in the 2017 AGM season, as this year marks the third anniversary since they were first required to do so in 2014.

Sections 227B and 227C CA 2006 prohibit a quoted company from making a remuneration payment or payment for loss of office unless the payment is consistent with the approved remuneration policy, or such payment is otherwise approved by the shareholders. Long-term incentive plans and employee share schemes for listed companies generally require separate shareholder approval (LR9.4.1R).

Failure to comply with the requirements of CA 2006, sections 439 or 439A means an offence is committed by every director in default (CA 2006, section 440(1)). Failure to put the resolutions to a vote at the meeting means an offence is committed by each existing director (CA 2006, section 440(2)). An offence under CA 2006, section 440 could lead to the company’s directors being subject to a fine not exceeding £1,000 (CA 2006, section 440(1), (2) and (4)). Shareholders holding 5 per cent or more of the share capital carrying voting rights may also requisition a vote on any matter under the general meetings requisition procedure under CA 2006, section 303.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

In practice, shareholders do on occasion suggest possible directors to boards and boards sometimes seek shareholder views on proposed directors. However, the only manner in which a shareholder can nominate a director without the recommendation of the board is by requiring the board to put a resolution on the agenda at the company’s annual general meeting or to convene an extraordinary general meeting to consider such a resolution (see questions 3 and 7).

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Traditionally, directors engaged with shareholders at the annual general meeting and delegated shareholder engagement to the company’s investor relations team. The increasing powers accorded to shareholders in relation to directors’ remuneration has led to increasing interaction between directors and shareholders outside AGM season. Most companies will have an investor relations team and will set up calls with investors that will be attended by directors or senior management.

Except as described in this chapter, shareholder engagement is a commercial matter for the relevant company; however, the government’s recent corporate governance consultation and the FRC’s proposed amendments to the Corporate Governance Code propose increasing the obligations for companies to engage with their shareholders more on matters such as executive remuneration (see question 1). In general, the largest shareholders expect regular updates on company performance and strategy as well as consultation on major changes to the business, such as large corporate transactions, analysis of the company’s response to major events that could have a serious impact on the business and meetings instigated by the shareholder to discuss particular issues. Smaller shareholders may make use of their membership of an investment organisation in order to gain access to information and analysis, which would otherwise only be available to larger shareholders. It is not uncommon for institutional shareholders to criticise a company’s approach in the media.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Environment reporting

Some companies are required to disclose information about their environmental impact owing to the duty to prepare a strategic report under section 414A of the Companies Act 2006 (the CA 2006). Non-quoted large companies (ie, not small companies under section 383 or medium companies under section 465 of the CA 2006) are required, as set out in section 414C(4)(b), to include in their strategic report a fair review of the company’s business including analysis, using key non-financial performance indicators, including information relating to environmental matters. ‘Key performance indicators’ is explained, in section 414C(5), as meaning factors by reference to which the development, performance or position of the company’s business can be measured effectively.

Quoted companies, whether medium or large, must include within their strategic report, as set out in section 414C(7)(b)(i) of the CA 2006, to the extent necessary for an understanding of the development, performance or position of the company’s business, information about environmental matters including the impact of the company’s business on the environment. The strategic report must also include information about any policies of the company in relation to those matters and the effectiveness of those policies.

A company that is a traded company, a banking company, an authorised insurance company, or carrying out insurance market activity must also include a non-financial information statement, including environmental matters, in its strategic report, under section 414CA CA 2006. This does not apply to companies that are small or medium, as defined by the CA 2006, or have no more than 500 employees.

The FRC has published guidelines on non-financial reporting to explain the difference between the requirements of section 414C and section 414CA CA 2006.

Additionally, Schedule 7 of Part 7 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (the Accounts and Reports Regulations) requires disclosures for large and medium-sized quoted companies concerning greenhouse gas emissions. This requires the directors to include in their report:

• the annual quantity of emissions in tonnes of carbon dioxide equivalent from activities for which the company is responsible including the combustion of fuel and the operation of any facility;

• the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting from the purchase of electricity, heat, steam or cooling by the company for its own use;

• the methodologies used to calculate the disclosed emissions information;

• at least one ratio that expresses the company’s annual emissions in relation to a quantifiable factor associated with the company’s activities; and

• the information as disclosed in the report in the preceding financial year.

The directors must only give the above emissions information to the extent that it is practical for the company to obtain the information in question but where it is not practical for the company to obtain some or all of that information, the report must state the information that is not included and explain why.

Social, community and human rights reporting

Quoted companies, whether medium or large under section 385 CA 2006, must include within their strategic report, as set out in section 414C(7)(b)(iii) CA 2006, to the extent necessary for an understanding of the development, performance or position of the company’s business, information about social, community and human rights issues. This must include information about any policies of the company in relation to those matters and the effectiveness of those policies.

Diversity reporting

A corporate governance statement must be included in the directors’ report for issuers whose transferable securities are admitted to trading and qualify as a company within the meaning of section 1(1) CA 2006.

DTR 7.2.8A requires this corporate governance statement to include a description of:

• the diversity policy applied to the issuer’s administrative, management and supervisory bodies with regard to aspects such as, for instance, age, gender or educational and professional backgrounds;

• the objectives of the diversity policy;

• how the diversity policy has been implemented; and

• the results in the reporting period.

If no diversity policy is applied by the issuer, the corporate governance statement must contain an explanation as to why this is the case. However, this diversity reporting requirement set out in DTR 7.2.8R does not apply to a company that qualifies as a small or medium company under DTR 1B.1.7R (which applies the same standards as sections 382 to 383 and 465 to 466 of the CA 2006 for determining if a company qualifies as a small or medium company).

Additionally, principle B.2.4 of the Corporate Governance Code requires a separate section of the annual report to describe the work of the nomination committee, including the board’s policy on diversity, including gender, objectives and the success of these objectives. This is discussed in further detail in question 23.

Schedule 7 of Part 3 of the Accounts and Reports Regulations require disclosure concerning the employment of disabled persons. This requirement applies to companies where the average number of persons employed by the company in each week during the financial year exceeds 250. The directors’ report must in that case contain a statement describing the company’s policy for giving full and fair consideration to applications for employment made by disabled persons having regard to their particular aptitudes and abilities, the continuation of employment of those employees who have become disabled and for the training, career developments and promotion of disabled employees of the company.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Companies are not currently required to disclose the pay ratio between the CEO’s annual total compensation and the annual total compensation of other workers.

However, the Paper (see question 1), published in August 2017, included a proposal to introduce mandatory CEO ‘pay ratio’ reporting. The government stated in the Paper that it intends to introduce secondary legislation to require quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce, along with a narrative explaining changes to that ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce. In the Paper, the government stated that further details will be set out in a draft statutory instrument later in 2017. This did not occur, but the Department for Business, Energy and Industrial Strategy has said that this will legislation will be drafted ‘before the summer recess’ in 2018.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Mandatory gender pay gap reporting for organisations (including private companies) was introduced on 6 April 2017 by the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 (SI 2017/353) (the Regulations). Organisations with 250 or more employees are required to report and publish their ‘gender pay gap’ information. Organisations with fewer than 250 employees can publish and report voluntarily but are under no obligation to do so.

The gender pay gap is the difference between the average earnings of male and female employees, expressed relative to men’s earnings. This is calculated by working out the difference between the average pay of all male employees, the average pay of all female employees and dividing that number by the average pay of all male employees. The figures must be calculated using a specific reference date called the ‘snapshot date’. This is 5 April for businesses and charities. Organisations must publish their figures within a year of the snapshot date (ie, by 4 April).

The legal entity that is the ‘relevant employer’ (ie, the organisation with 250 or more employees) for the purposes of the Regulations must register with and report to the Gender Pay Gap Reporting Service. If an organisation runs multiple payrolls, the relevant data from the payrolls must be merged and just one set of figures reported for the organisation. Private sector organisations that are part of a group must report individually if they are ‘relevant employers’. Additionally, corporate groups can voluntarily also report combined figures for the entire group.

The information that must be published on the reporting organisation’s public-facing website and reported to government is the:

• mean gender pay gap in hourly pay;

• mean gender pay gap in hourly pay;

• mean bonus gender pay gap;

• median bonus gender pay gap;

• proportion of males and females receiving a bonus payment; and

• proportion of males and females in each of four pay quartiles based on the employer’s overall pay range.

This information must be submitted alongside a written statement, signed by a senior individual within the business, confirming that the published pay gap information is accurate.

In order to help companies with the new requirements, the Government Equalities Office and Acas (the Advisory, Conciliation and Arbitration Service) have published non-statutory guidance, entitled ‘Managing Gender Pay Reporting’.

Victoria MacDuff

victoria.macduff@slaughterandmay.com

One Bunhill Row

London

EC1Y 8YY

United Kingdom

Tel: +44 20 7600 1200

Fax: +44 20 7090 5000

www.slaughterandmay.com

United States

Holly J Gregory, Rebecca Grapsas and Claire H Holland

Sidley Austin LLP

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

In the United States there are two primary sources of law and regulation relating to corporate governance:

State corporate laws

State corporate law – both statutory and judicial – governs the formation of privately held and publicly traded corporations and the fiduciary duties of directors. Delaware is the most common state of incorporation. Because Delaware law and interpretation are influential in other states, the Delaware General Corporation Law (DGCL) is used in this article as the reference point for all state law discussion. Shareholder suits are the primary enforcement mechanism of state corporate law.

Federal securities laws

On the federal level, the primary sources are the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act), each as amended. The Securities Act regulates all offerings and sales of securities, whether by public or private companies. The Exchange Act addresses many issues, including the organisation of the financial marketplace generally, the activities of brokers, dealers and other financial market participants and, as to corporate governance, specific requirements relating to the periodic disclosure of information by publicly held, or ‘reporting’, companies. A company becomes a reporting company under the Exchange Act when its securities are listed on a national securities exchange or when it has total assets exceeding US$10 million and a class of securities held of record by more than 2,000 persons or a maximum of 500 persons who are not sophisticated (‘accredited’) (with some exclusions). Both the Securities Act and the Exchange Act have addressed questions of corporate governance primarily by mandating disclosure, rather than through normative regulation.

The Public Company Accounting Reform and Investor Protection Act of 2002 (the Sarbanes-Oxley Act) was enacted in July 2002 in response to the corporate failures of 2001 and 2002. The Sarbanes-Oxley Act, which applies to all reporting companies (whether organised in the US or elsewhere) with US-registered equity or debt securities, amends various provisions of the Exchange Act (and certain other federal statutes) to provide direct federal regulation of many matters that traditionally had been left to state corporate law or addressed by federal law through disclosure requirements. Under the Sarbanes-Oxley Act, many aspects of corporate governance that were previously addressed, if at all, through stock market listing requirements, best practice standards, or policy statements from the Securities and Exchange Commission (SEC) are now the subject of direct binding law. Since 2002, the SEC has promulgated a number of rules that implement provisions of the Sarbanes-Oxley Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) was enacted in July 2010 in response to the financial crisis in 2008 and 2009. The Dodd-Frank Act is intended to significantly restructure the regulatory framework for the US financial system and also extends federal regulation of corporate governance for all public companies. The SEC has promulgated several rules that implement provisions of the Dodd-Frank Act. Ongoing rule-making by the SEC and national securities exchanges is required for full implementation.

The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) was enacted in April 2012 to, inter alia, facilitate private capital formation and ease reporting requirements that may apply to ‘emerging growth companies’ after the initial public offering. The JOBS Act requires the SEC to undertake various initiatives, including rule-making and studies touching on capital formation, disclosure and registration requirements.

Listing rules provide an additional source of corporate governance requirements. To list a security on any of the three major listing bodies – the New York Stock Exchange (NYSE), NYSE MKT (formerly known as the American Stock Exchange) or the Nasdaq Stock Market (Nasdaq) – a company must agree to abide by specific corporate governance listing rules. In 2003, the SEC approved significant amendments to both the NYSE and Nasdaq corporate governance listing rules as described below. The Dodd-Frank Act requires amendments to corporate governance listing rules to be made by the NYSE and Nasdaq.

In addition, a number of corporate governance guidelines and codes of best practice recommend how public company boards should organise their structures and processes. The American Law Institute (ALI) Principles of Corporate Governance: Analysis and Recommendations present a thorough discussion of governance practices from a legal perspective. Other influential recommendations from the business community include:

• National Association of Corporate Directors (NACD), Key Agreed Principles (developed in collaboration with Business Roundtable and the Council of Institutional Investors (CII));

• NACD, Report of the NACD Blue Ribbon Commission on Director Professionalism;

• NACD, Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board;

• Business Roundtable, Principles of Corporate Governance;

• The Conference Board, Commission on Public Trust and Private Enterprise: Findings and Recommendations; and

• Commonsense Principles of Corporate Governance issued by a coalition of high-profile representatives of leading public companies and institutional investors.

The investor community has also issued a number of corporate governance guidelines, codes of best practices and proxy voting policies that are increasingly influential. These include:

• CII, Policies on Corporate Governance;

• Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA, formerly known as TIAA-CREF), TIAA-CREF Policy Statement on Corporate Governance;

• California Public Employees’ Retirement System (CalPERS), Governance and Sustainability Principles;

• Proxy voting policies of large institutional investors such as BlackRock, Vanguard, State Street and Fidelity; and

• Investor Stewardship Group (ISG), Corporate Governance Principles for US Listed Companies and Stewardship Principles issued in January 2017 by a group of US-based institutional investors and global asset managers representing more than US$20 trillion in assets under management.

In addition, proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis have developed proxy voting guidelines that set forth the likely voting recommendations that such firms will make on particular issues to be voted on by shareholders. These guidelines are based on what such firms consider to be ‘best practices’ and have also become influential.

Unlike many corporate governance codes in the European Union and other parts of the world that call for voluntary adoption of their substantive provisions or ‘comply or explain’ disclosure requirements, the corporate governance rules in the United States are generally mandatory. However, most US federal securities regulation of listed issuers is disclosure-driven and, even where substantive matters are addressed, disclosure is most often used as the vehicle to achieve a desired objective or to add transparency to matters deemed worthy of public attention. For example, with respect to executive compensation, the rules provide for extensive disclosure requirements rather than substantive requirements. In addition, the Sarbanes-Oxley Act mandates disclosure of whether a company has adopted a code of ethics with specified provisions or whether a company has an audit committee financial expert but does not require that a listed issuer have either.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The primary means of enforcing state corporate law is through derivative suits initiated by shareholders. At the federal level, the SEC has the power to regulate, implement and enforce the Securities Act and the Exchange Act (including the Sarbanes-Oxley Act, the JOBS Act and relevant provisions of the Dodd-Frank Act). In addition, the Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB) to regulate the services accounting firms provide to companies. The SEC oversees the PCAOB, appoints its members and must approve any rules adopted by the PCAOB.

The CII is an influential association of public and private pension funds that often pushes for governance reforms. Pension funds have traditionally been the most activist of the institutional investors, working both in concert and individually. Influential pension funds include TIAA and CalPERS – respectively, among the largest private and public pension funds in the world. The New York City Pension Funds have become increasingly active in recent years with highly effective campaigns urging companies to adopt proxy access and prioritise board composition and refreshment. In addition, Vanguard Group, BlackRock Inc and State Street Global Advisors, three of the United States’ largest institutional investors, have recently become more assertive in pushing for corporate governance reforms and increased director-shareholder engagement at the companies in which they invest.

The views of proxy advisory firms ISS and Glass Lewis are also influential.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Under state corporate law, shareholders generally have the right to elect directors (see DGCL, section 216).

For many years, it was common practice for directors to be elected by a plurality of shareholders that can either vote in favour of, or withhold their votes from, the director candidates nominated by the board; ‘withheld’ votes are not counted. Accordingly, absent a contested election, the candidates nominated by the board are automatically elected whether or not a majority of shareholders vote for them. Relatively recently, shareholders have pressed companies for the ability to veto the election of a particular director nominee or nominees in the context of an uncontested election. This can be achieved through the adoption of charter or by-law provisions requiring that director nominees receive the approval of a ‘majority of the votes cast’ to be elected, or, in lieu of a charter or by-law provision, the adoption of corporate policies that effectively require a director who has not received a majority of the votes cast to resign. In 2006, the Delaware legislature adopted amendments to the DGCL that facilitate both of these options. Specifically, the amended DGCL, section 141(b) expressly permits a director to irrevocably tender a resignation that becomes effective if he or she fails to receive a majority vote in an uncontested election. The amended DGCL, section 216 provides that a by-law amendment adopted by shareholders specifying the vote required to elect directors may not be repealed or amended by the board alone (generally by-law provisions may be amended by the board).

The proportion of companies in the Standard & Poor’s (S&P) 500 that have adopted some form of majority voting in uncontested director elections has increased dramatically from 16 per cent in 2006 to over 95 per cent in 2017.

Shareholders can also nominate their own director candidates either before or at the annual general meeting (AGM). To solicit the proxies needed to elect their candidates, however, at a company that has not adopted ‘proxy access’ (discussed in question 38) a shareholder must mail to all other shareholders, at the shareholder’s own expense, an independent proxy solicitation statement that complies with the requirements of section 14 of the Exchange Act. Given these constraints, independent proxy solicitations are rare and usually undertaken only in connection with an attempt to seize corporate control (see also question 38).

In addition, shareholders generally have the right to remove directors with or without cause or, where the board is classified, only for cause (unless the certificate of incorporation provides otherwise); the vote required to remove directors is a majority of the shares then entitled to vote at an election of directors (subject to certain modifications, eg, where the company has adopted cumulative voting in director elections) (see DGCL, section 141(k)). However, as many publicly held companies do not permit shareholders to call special meetings or act by written consent, this power can be difficult to exercise in practice.

Shareholders’ liability for corporate actions is generally limited to the amount of their equity investment. In keeping with their limited liability, shareholders play a limited role in the control and management of the corporation. As discussed in question 4, a number of corporate decisions require shareholder approval. In addition, shareholders can typically enjoin ultra vires acts (see DGCL, section 124), and vote on certain issues of fundamental importance at the AGM, including the election of directors (see DGCL, section 216 and question 4).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Under state corporate law, shareholders typically have a right to participate in the following types of decisions:

• election of directors, held at least annually;

• approval or disapproval of amendments to the corporation’s certificate of incorporation (which requires prior board approval) or by-laws, although the board is also typically authorised (in the certificate of incorporation) to amend the by-laws without shareholder approval (see DGCL, sections 109, 241 and 242);

• approval or disapproval of fundamental changes to the corporation not made in the regular course of business, including mergers, dissolution, compulsory share exchanges, or disposition of substantially all of the corporation’s assets (see, for instance, DGCL, sections 251(c), 271 and 275); and

• authorisation of additional shares for future issuance by the corporation. Upon shareholder authorisation, the board has discretion to determine when and how many shares to issue at any time.

Commencing in 2011, the Dodd-Frank Act requires US public companies to conduct a separate shareholder advisory vote on:

• executive compensation – to be held at least once every three calendar years;

• whether the advisory vote on executive compensation should be held every year, every two years or every three years – to be held at least once every six calendar years; and

• certain ‘golden parachute’ compensation arrangements in connection with a merger or acquisition transaction that is being presented to shareholders for approval.

The rules of the NYSE and Nasdaq also require that shareholder approval be obtained prior to:

• any adoption of an equity compensation plan pursuant to which officers or directors may acquire stock, subject to limited exceptions;

• issuance of common stock to directors, officers, substantial security holders or their affiliates if the number of shares of common stock to be issued exceeds either 1 per cent of the number of shares of common stock or 1 per cent of the voting power outstanding before the issuance, with some exceptions including in connection with certain transactions by early stage companies (NYSE), or could result in an increase in outstanding common shares or voting power of 5 per cent or more (Nasdaq);

• issuance of common stock that will have voting power equal to or greater than 20 per cent of the voting power prior to such issuance or that will result in the issuance of a number of shares of common stock that is equal to or greater than 20 per cent of the number of shares of common stock outstanding prior to such issuance, subject to certain exceptions; and

• issuance of securities that will result in a change of control of the company.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Under state law, a corporation may issue classes of stock with different voting rights, limited voting rights and even no voting rights, if the rights are described in the corporation’s certificate of incorporation (see DGCL, section 151). If, however, a corporation issues a class of non-voting common stock, it must have an outstanding class of common shares with full voting rights.

The NYSE and Nasdaq listing rules also permit classes of stock with different voting rights; however, the listing rules prohibit listed companies from disparately reducing or restricting the voting rights of existing shareholders unilaterally.

The CII and CalPERS have recently expressed their opposition to non-voting shares.

In July 2017, two major stock index providers (S&P Dow Jones and FTSE Russell) announced changes to their index eligibility requirements that would exclude most companies going public with multiple classes of stock from the primary indices in the United States. Nevertheless, some technology companies have subsequently gone public with dual-class or multi-class stock.

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Generally, all shareholders, at the record date set by the board, may participate in the corporation’s AGM, and are entitled to vote (unless they hold non-voting shares) in person or by proxy (see DGCL, sections 212(b) and (c) and 213). The proxy appointment may be in writing (although there is no particular form) or provided by telephone or electronically.

In addition, section 14 of the Exchange Act and related SEC regulations set forth substantive and procedural rules with respect to the solicitation of shareholder proxies for the approval of corporate actions at AGMs and special shareholders’ meetings. Foreign private issuers are exempt from the provisions of section 14 and related regulations insofar as they relate to shareholder proxy solicitations.

Shareholders may act by written consent without a meeting unless the certificate of incorporation provides otherwise (see DGCL, section 211(b)). The majority of companies in the S&P 500 do not permit shareholder action by written consent.

DGCL, section 211 permits a Delaware corporation to hold a meeting of shareholders virtually if it adopts measures to enable shareholders to participate in and vote at the meeting and verify voter identity, and maintains specified records. A small but growing number of US companies have held virtual annual shareholder meetings, typically in one of two formats: exclusively online with no ability for a shareholder to attend an in-person meeting; or a hybrid approach whereby an in-person meeting is held that is open to online participation by shareholders who are not physically present at the meeting. The primary benefits of virtual shareholder meetings are increased shareholder participation and cost savings. In April 2017, the New York City Pension Funds announced a campaign to vote against governance committee members at companies that hold exclusively virtual annual shareholder meetings. For the past several years, CII Policies on Corporate Governance have provided that companies should only hold virtual meetings as a supplement – rather than a substitute – for in-person shareholder meetings. Under a new policy, beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide robust disclosure assuring shareholders that they will have the same participation rights as at an in-person meeting. Finally, ISS has suggested that it may make adverse recommendations against directors if virtual-only meetings are being used to prevent shareholder discussions or proposals.

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Generally, state law provides that every shareholder has the right to petition the court to compel an AGM if the board has failed to hold the AGM within a specified period of time (see DGCL, section 211). Special shareholders’ meetings may be called by anyone authorised to do so in the company’s certificate of incorporation or by-laws. The majority of S&P 500 companies permit shareholders meeting a minimum beneficial ownership requirement (such as 20 per cent or 10 per cent) to call special meetings.

Any shareholder of a reporting company who is eligible to bring matters before a shareholders’ meeting under state law and the company’s certificate of incorporation and by-laws may, at the shareholder’s own expense, solicit shareholder proxies in favour of any proposal. Such shareholder proxy solicitations must comply with section 14 of the Exchange Act and related SEC regulations, but need not be approved by the board.

Under circumstances detailed in Rule 14a-8 under the Exchange Act, a reporting company must include a shareholder’s proposal in the company’s proxy materials and identify the proposal in its form of proxy. The shareholder may also submit a 500-word supporting statement for inclusion in the company’s proxy solicitation materials. This allows the proponent to avoid the costs associated with an independent solicitation. To qualify, a shareholder must have continuously held at least US$2,000 in market value or 1 per cent of the company’s securities entitled to vote for at least one year by the date the shareholder submits the proposal. The shareholder must continue to hold those securities until the date of the meeting. Under specific circumstances, a company is permitted to exclude a shareholder proposal from its proxy solicitation, typically after obtaining ‘no-action’ relief from the SEC staff that confirms the company is entitled to exclude the proposal (for example, if the proposal deals with a matter relating to the company’s ordinary business operations).

Effective since September 2011, companies can no longer exclude from their proxy materials shareholder proposals (precatory or binding) relating to by-law amendments establishing procedures for shareholder nomination of director candidates and inclusion in the company’s proxy materials, as long as the proposal is otherwise not excludable under Rule 14a-8. This amendment to Rule 14a-8 has facilitated the development of ‘proxy access’ via private ordering at companies chartered in states where permissible, as shareholders are able to institute a shareholder nomination regime via binding by-law amendment or request, via precatory shareholder proposal, that such a by-law be adopted by the board. The private ordering process to adopt proxy access has gained considerable momentum since the beginning of 2015; see question 38.

As noted in question 6, shareholders may act by written consent without a meeting unless the certificate of incorporation provides otherwise. The majority of companies in the S&P 500 do not permit shareholder action by written consent.

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders owe a fiduciary duty of fair dealing to the corporation and minority shareholders when the controlling shareholder enters into a transaction with the corporation. When a controlling shareholder transfers control of the corporation to a third party, this obligation may be extended to creditors and holders of senior securities as well. A controlling shareholder who is found to have violated a duty to minority shareholders upon the sale of control may be liable for the entire amount of damages suffered, instead of only the purchase price paid or for the amount of the control premium. Minority shareholders can bring claims against a controlling shareholder for breach of fiduciary duty on either a derivative or direct basis, depending on the nature of the harm suffered.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders’ liability for corporate actions is generally limited to the amount of their equity investment. In unusual circumstances, exceptions may apply.

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

In general, anti-takeover devices are permitted. However, there are limits on what types of devices are allowed.

The shareholder rights plan or ‘poison pill’ is a device adopted by boards to grant existing shareholders the right to purchase large amounts of additional stock for a nominal price if and when an outsider acquires a certain amount of shares (for example, 15 per cent of the outstanding capital). This greatly dilutes the potential acquirer’s holdings. Poison pills can usually be ‘redeemed’ or ‘disarmed’ by the board of directors before they are ‘triggered’. Thus, a poison pill forces a potential acquirer to either negotiate with the existing board or incur the time and expense of initiating a proxy fight to replace the existing directors with directors friendly to the acquirer (who can then redeem the poison pill).

Variations on the traditional poison pill have been designed to make it even more difficult for potential hostile acquirers by restricting the ability of newly placed directors to redeem the poison pill. For example, a ‘dead-hand’ provision in a poison pill provides that only the specific directors who originally approved the adoption of the poison pill may redeem it. A ‘no-hand’ poison pill cannot be redeemed at all, and a ‘chewable’ poison pill gives the incumbent directors a specific period to negotiate before the pill becomes effective. Some states allow the use of dead-hand, no-hand and chewable poison pills (although Delaware does not permit the use of dead-hand or no-hand poison pills). Note that shareholder activists and proxy advisory firms tend to disfavour poison pills that have not been approved by shareholders.

State corporate law does not prescribe the disclosure of poison pills. However, the SEC requires reporting companies to disclose any by-law and charter provisions (eg, a poison pill) that would delay, defer or prevent a change in control in the course of an extraordinary corporate transaction, such as a merger, sale transfer or reorganisation. The rights underlying poison pills may also require SEC registration.

A variety of other anti-takeover devices and practices are also available. Courts have upheld the use of the following anti-takeover devices:

• acquisition of another business to increase the chances that the threatened takeover will raise antitrust considerations;

• adoption of voting and other procedures that make it difficult for an acquirer of a majority of voting shares to replace the board of directors (such as board classification, for example, into three classes of directors, pursuant to which one-third of the board is elected every year);

• imposition of restrictions on business combinations with significant shareholders without board approval (‘freeze-out’ – default position in Delaware, DGCL, section 203);

• institution of a suit to enjoin the offer for violations of antitrust laws, rules regulating tender offers or other legal grounds;

• issuance, or proposed issuance, of additional shares to persons who oppose the takeover (a lock-up);

• amendment of basic corporate documents to make a takeover more difficult;

• buyout of the aggressor;

• inclusion of supermajority voting requirements in the corporate charter;

• issuance of dual classes of common stock;

• greenmail (but subject to 50 per cent federal excise tax);

• provision of extremely large severance payments to key executives whose employment is terminated following a change in control (golden parachutes);

• undertaking of defensive acquisitions;

• purchase of the corporation’s own shares to increase the market price of the stock; and

• imposition of restrictions in connection with the creation of debt that frustrate an attempted takeover.

Under the NYSE and Nasdaq listing rules, listed companies are prohibited from using defensive tactics that discriminate among shareholders.

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Under Delaware law, the board is permitted to issue new shares without shareholder approval up to the amount of authorised capital as set forth in the company’s certificate of incorporation. Authorisation of additional shares for issuance will require shareholder approval. SEC rules require registration of shares prior to issuance, unless an exception applies. In addition, the rules of the NYSE and Nasdaq require shareholder approval be obtained prior to:

• any adoption of an equity compensation plan pursuant to which officers or directors may acquire stock, subject to limited exceptions;

• issuance of common stock to directors, officers, substantial security holders or their affiliates if the number of shares of common stock to be issued exceeds either 1 per cent of the number of shares of common stock or 1 per cent of the voting power outstanding before the issuance, with some exceptions including in connection with certain transactions by early stage companies (NYSE), or could result in an increase in outstanding common shares or voting power of 5 per cent or more (Nasdaq);

• issuance of common stock that will have voting power equal to or greater than 20 per cent of the voting power prior to such issuance or that will result in the issuance of a number of shares of common stock that is equal to or greater than 20 per cent of the number of shares of common stock outstanding prior to such issuance, subject to certain exceptions; and

• issuance of securities that will result in a change of control of the company.

Under Delaware law, shareholders do not have any pre-emptive rights to acquire newly issued shares unless pre-emptive rights are expressly granted to shareholders in the certificate of incorporation (DGCL, section 102(b)(3)) or are granted to shareholders on a contractual basis.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Under DGCL, section 202, restrictions on the transfer and ownership of fully paid securities are permitted. A corporation may impose these restrictions in its certificate of incorporation or by-laws, or through an agreement among shareholders. However, any restrictions imposed after the issuance of securities are not binding on those securities, unless the shareholders of the securities are parties to an agreement or voted in favour of the restriction. All permitted restrictions must be noted conspicuously on the certificate representing the restricted security, or, in the case of uncertificated shares, contained in the notice sent to the registered owner. Regardless of any such restrictions, all sales or transfers of securities by public (or private) corporations must be made pursuant to (or subject to an exemption under) the Securities Act.

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Under DGCL, section 253, a corporation owning at least 90 per cent of the outstanding shares of each class of the stock of a corporation may merge that other corporation into itself without requiring shareholder approval (known as a ‘freeze-out’ or ‘short-form’ merger). Minority shareholders who object to the merger are entitled to appraisal rights (see question 14).

In addition, corporations may issue shares of stock subject to redemption by the corporation at its option or at the option of the holders of the stock upon the occurrence of certain events.

If a corporation chooses to issue shares subject to redemption, then it must state the time, place and rate at which the stock will be redeemed in the certificate of incorporation or in a board resolution on the issue.

There are two restrictions on a corporation’s ability to redeem its own shares. First, state laws, such as DGCL, section 151, require that immediately following the redemption the corporation must have at least one class or series of stock with full voting powers that is not subject to redemption. The second restriction only applies to listed corporations. Under listing rules, such companies must promptly notify, and provide specified information to, the NYSE or Nasdaq, as applicable, before they take any action that would result in the full or partial redemption of a listed security.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Under DGCL, section 262, shareholders who do not vote in favour of a merger or consolidation are entitled to an appraisal by the Delaware Court of Chancery of the fair value of their shares unless:

• the shares were listed on a national securities exchange (for example, the NYSE or Nasdaq);

• the shares were held of record by more than 2,000 holders; or

• the merger or consolidation did not require a shareholder vote.

Notwithstanding the applicability of the above points, appraisal rights will be available if shareholders are required to accept anything other than:

(i) shares of the surviving or resulting company;

(ii) shares listed on a national securities exchange;

(iii) cash in lieu of fractional shares; or

(iv) any combination of (i) to (iii).

For example, a shareholder will retain his or her appraisal rights if he or she is required to accept cash, debt or shares of a private company in exchange for his or her shares in the company to be merged or consolidated.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for listed companies in the United States is one-tier. DGCL, section 141 states that ‘the business and affairs of every corporation organised under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation’. The board of directors delegates managerial responsibility for day-to-day operations to the CEO and other senior executives. Members of senior management may serve on the board, but they are not organised as a separate management board.

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The primary legal responsibility of the board is to direct the business and affairs of the corporation (see DGCL, section 141). While the functions of a board are not specified by statute, it is generally understood, as noted in the ALI’s Principles of Corporate Governance and other codes of best practice, that board functions typically include:

• selecting, evaluating, fixing the compensation of and, where appropriate, replacing the CEO and other members of senior management;

• developing, approving and implementing succession plans for the CEO and senior executives;

• overseeing management to ensure that the corporation’s business is being run properly;

• reviewing and, where appropriate, approving the corporation’s financial objectives and major corporate plans, strategies and actions;

• understanding the corporation’s risk profile and reviewing and overseeing the corporation’s management of risks;

• reviewing and approving major changes in the auditing and accounting principles and practices to be used in preparing the corporation’s financial statements;

• establishing and monitoring effective systems for receiving and reporting information about the corporation’s compliance with its legal and ethical obligations, and articulating expectations and standards related to corporate culture and the ‘tone at the top’;

• understanding the corporation’s financial statements and monitoring the adequacy of its financial and other internal controls, as well as its disclosure controls and procedures;

• evaluating and approving major transactions such as mergers, acquisitions, significant expenditures and the disposition of major assets;

• providing advice and counsel to senior management;

• reviewing the process for providing adequate and timely financial and operational information to management, directors and shareholders;

• establishing the composition of the board and its committees, board succession planning and determining governance practices;

• retaining independent advisers to assist the board and committees;

• assessing the effectiveness of the board, its committees or individual directors; and

• performing such other functions as are necessary.

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

Directors are elected by shareholders. They are fiduciaries of the corporation and its shareholders. Directors represent the shareholding body as a whole, and not any particular set of shareholding constituents. If a corporation becomes insolvent, directors continue to owe their fiduciary duties to the corporation, not directly to creditors; however, creditors will have standing to assert derivative claims. See North American Catholic Educational Programming Foundation Inc v Gheewalla (Del 2007).

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Shareholders can bring suit against the directors on their own behalf or on behalf of the corporation (a derivative suit), depending on the nature of the allegation. To institute a derivative suit, a shareholder must first make a demand to the board of directors that the corporation initiate the proposed legal action on the corporation’s own behalf. However, if the shareholder can show that bringing such a demand would be futile, it is not required.

Directors will not be held liable for their decisions, even if such decisions harm the corporation or its shareholders, if the decisions fall within the judicially created safe harbour known as the ‘business judgement rule’. The rule states a judicial presumption that disinterested and independent directors make business decisions on an informed basis and with the good faith belief that the decisions will serve the best interests of the corporation. If a board’s decision is challenged in a lawsuit, the court will examine whether the plaintiff has presented evidence to overcome this presumption. If the presumption is not overcome, the court will not investigate the merits of the underlying business decision.

This helps courts avoid second-guessing board decisions, and protects directors from liability when they act on an informed and diligent basis and are not otherwise tainted by a personal interest in the outcome. This is true even if the decision turns out badly from the standpoint of the corporation and its shareholders.

19 Care and prudence

Do the board’s duties include a care or prudence element?

Directors owe duties encompassing both a duty of care and a duty of loyalty to the corporation and to the corporation’s shareholders.

Although grounded in common law, the duty of care has been codified in more than 40 states. Most state statutes require that directors discharge their responsibilities in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the corporation’s best interests. Conduct that violates the duty of care may also – in certain circumstances – violate the good faith obligation that is a component of the duty of loyalty. For example, a failure to ensure that reliable information and reporting systems are in place to detect misconduct could give rise to a claim for breach of the duty of care and the obligation of good faith. See In Re Caremark International Inc Derivative Litigation (Del Ch 1996) and Stone v Ritter (Del 2006).

The duty of loyalty prohibits self-dealing and misappropriation of assets or opportunities by board members. Directors are not allowed to use their position to make a personal profit or achieve personal gain or other advantage. The duty of loyalty includes a duty of candour that requires a director to disclose to the corporation any conflicts of interest. Transactions that violate the duty of loyalty can be set aside and directors can be found liable for breach. Thus, whenever a board is considering a transaction in which a director has a personal interest, the material facts about the director’s relationship or interest in the transaction should be disclosed to the board and a majority of the disinterested directors should authorise the transaction. Alternatively, the material facts should be disclosed to shareholders, for a vote to approve the transaction.

In 2003, the Delaware Court of Chancery rendered an important opinion concerning the ‘duty of good faith’ of corporate directors (In Re The Walt Disney Co (Del Ch 2003)). In this opinion, the court held that directors who take an ‘ostrich-like approach’ to corporate governance and ‘consciously and intentionally disregard their responsibilities’, adopting a ‘we don’t care about the risks’ attitude may be held liable for breaching their duty to act in good faith. The opinion was rendered on a motion to dismiss for failure to state a claim. The opinion is notable for its sharp focus on the importance of good faith, in addition to due care and loyalty, when considering director conduct. By characterising the alleged lack of attention by directors as a breach of the duty of good faith rather than a breach of the duty of care, the court effectively stripped the directors of the protection afforded by the Delaware Director Protection Statute (which is described in greater detail in question 32).

In 2005, the Delaware Court of Chancery rendered another opinion in connection with the same Disney litigation that further defines the contours of the duty of good faith (In Re The Walt Disney Co (Del Ch 2005)). In this opinion, the court focused on the element of intent in identifying whether a breach of the duty of good faith has occurred. Generally, the court determined, the duty of good faith is not satisfied where a director ‘intentionally acts with a purpose other than [. . .] the best interests of the corporation’; where a director ‘intend[s] to violate applicable [. . .] law’; or where a director ‘intentionally fails to act in the face of a known duty to act’. With respect to the specific case at hand, however, the court ruled that the Disney directors did not, in fact, breach their duty of good faith because they did make some business judgements and, therefore, their conduct did not meet the intent elements enumerated by the court as necessary to constitute a breach of the duty of good faith.

In 2006, the Delaware Supreme Court upheld the Delaware Court of Chancery’s ruling that the Disney directors were not liable.

The Supreme Court also provided guidance with respect to the contours of the duty of good faith, describing the following two categories of fiduciary behaviour as conduct in breach of the duty of good faith: conduct motivated by subjective bad faith (that is, actual intent to do harm); and conduct involving ‘intentional dereliction of duty, a conscious disregard for one’s responsibilities’. The Supreme Court further held that gross negligence on the part of directors ‘clearly’ does not constitute a breach of the duty of good faith.

In late 2006, the Delaware Supreme Court held in Stone v Ritter (Del 2006) that ‘good faith’ is not a separate fiduciary duty. The Supreme Court stated that ‘the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty’ and the fiduciary duty of loyalty ‘encompasses cases where the fiduciary fails to act in good faith’.

20 Board member duties

To what extent do the duties of individual members of the board differ?

Generally, all board members owe the same fiduciary duties regardless of their individual skills. However, case law suggests that when applying the standard of due care (namely, that a director acted with such care as an ordinarily prudent person in a like position would exercise under similar circumstances) subjective considerations, including a director’s background, skills and duties, may be taken into account. For example, ‘inside’ directors – usually officers or senior executives – are often held to a higher standard because they more actively participate in and have greater knowledge of the corporation’s activities.

Additionally, in 2004, the Delaware Court of Chancery rendered an important opinion concerning the fiduciary duties of directors with special expertise (Emerging Communications Shareholders’ Litigation (Del Ch 2004)). In Emerging Communications, the court held a director in breach of his duty of good faith for approving a transaction ‘even though he knew, or at the very least had strong reason to believe’ that the per share consideration was unfair. The court, in part, premised the culpability of the director (described in the opinion as a ‘principal and general partner of an investment advisory firm’) on his ‘specialised financial expertise, and [. . .] ability to understand [the company’s] intrinsic value, that was unique to [the company’s] board members’. As the court also found that the director in question was not ‘independent’ of management, the Emerging Communications decision should not necessarily be interpreted as a pronouncement holding directors with ‘specialised expertise’ to a higher standard of care in general.

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

State corporate law generally provides that the business and affairs of the corporation shall be managed by or under the direction of the board of directors. The board has wide-ranging authority to delegate day-to-day management and other aspects of its responsibilities both to non-board members and to board committees and even individual directors. Typically, the board delegates wide powers to the corporation’s senior managers. State laws generally make a distinction between those matters a board must address directly and those it may delegate to officers or other agents of the corporation, or to board committees. For example, under DGCL, section 141(c), the board of a company incorporated prior to 1 July 1996 cannot delegate the power to:

• adopt, amend or repeal any by-law of the corporation;

• amend the corporation’s certificate of incorporation (except that a board committee may make certain specified decisions relating to the rights, preferences or issuance of authorised stock, to the extent specifically delegated by the board);

• adopt an agreement of merger or consolidation;

• recommend to shareholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets;

• recommend to shareholders a dissolution of the corporation or a revocation of a dissolution;

• approve, adopt or recommend to shareholders any action or matter that is required by the DGCL to be submitted to shareholders for approval;

• declare a dividend, unless that power is expressly provided for in the certificate of incorporation, resolution or by-laws; and

• authorise the issuance of stock or adopt a certificate of ownership and merger, unless that power is expressly provided for in the certificate of incorporation, resolution or by-laws.

The Sarbanes-Oxley Act and the NYSE and Nasdaq listing rules also require that each listed company has an audit committee comprising independent directors who have responsibility for certain audit and financial reporting matters. As required by the Dodd-Frank Act, NYSE and Nasdaq listing rules also require that each listed company has a compensation committee comprising independent directors who are responsible for certain matters relating to executive compensation. NYSE listing standards require that each listed company has a nominating or corporate governance committee comprising independent directors who are responsible for director nominations and corporate governance. Nasdaq listing rules require independent directors (or a committee of independent directors) to have responsibility for certain decisions relating to director nominations. (See questions 25 and 27.) These committees are permitted to delegate their responsibilities to subcommittees solely comprising one or more members of the relevant committee.

Directors may also reasonably rely on information, reports and recommendations provided by officers, other agents and committees on matters delegated to them (see DGCL, section 141(e)). Nevertheless, the board retains the obligation to provide oversight of its delegates, to act in good faith and to become reasonably familiar with their services or advice before relying on such advice.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

NYSE and Nasdaq listing rules require that independent directors comprise a majority of the board. Controlled companies (ie, companies in which more than 50 per cent of the voting power is held by an individual, group or another company) and foreign private issuers are exempt from this requirement.

Under the NYSE rules, for a director to be deemed ‘independent’, the board must affirmatively determine that he or she has no material relationship with the company. A material relationship can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. Under the NYSE rules, directors having any of the following relationships may not be considered independent:

• a person who is an employee of the listed company or is an immediate family member of an executive officer of the listed company;

• a person who receives, or is an immediate family member of a person who receives, compensation directly from the listed company, other than director compensation or pension or deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), of more than US$120,000 per year;

• a person who is a partner of, or employed by, or is an immediate family member of a person who is a partner of, or employed (and works on the listed company’s audit) by a present or former internal or external auditor of the company;

• a person, or an immediate family member of a person, who has been part of an interlocking compensation committee arrangement; or

• a person who is an employee or is an immediate family member of a person who is an executive officer, of a company that makes payments to or receives payments from the listed company for property or services in an amount that in a single fiscal year exceeds the greater of 2 per cent of such other company’s consolidated gross revenues or US$1 million.

In applying the independence criteria, no individual who has had a relationship as described above within the past three years can be considered independent (except in relation to the test set forth in the final bullet point above, which is concerned with current employment relationships only). The Nasdaq listing rules take a different but similar approach to defining independence.

For NYSE and Nasdaq companies, only independent directors are allowed to serve on audit, compensation and nominating or governance committees. Note that the Sarbanes-Oxley Act, section 301, defines an independent director for audit committee purposes as one who has not accepted any compensation from the company other than directors’ fees and is not an ‘affiliated person’ of the company or any subsidiary. NYSE and Nasdaq listing standards require NYSE and Nasdaq companies to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. That rule, which embodies the independence requirements of the Sarbanes-Oxley Act, section 301, provides that an executive officer of an ‘affiliate’ would not be considered independent for audit committee purposes. As required by the Dodd-Frank Act, the NYSE and Nasdaq developed heightened independence standards for compensation committee members that became effective during 2014. Under these standards, in affirmatively determining the independence of a director for compensation committee purposes, the board of directors must ‘consider’ all factors specifically relevant to determining whether a director has a relationship to the listed company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including the source of compensation received by the director and whether the director is affiliated with the company or any subsidiary.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

DGCL, section 141(b) requires that the board of directors comprises one or more members, each of whom must be a natural person. Beyond the requirement for at least one director, corporate law does not set a minimum or a maximum. As a practical matter, a board should be of a size sufficient to accommodate an appropriate amount of experience, independence and diversity for the full board and its committees. The number of directors is fixed by or in the manner provided in the by-laws or certificate of incorporation; typically the by-laws will specify a range and the board will fix the exact number of directors by resolution. Directors need not be shareholders of the corporation. The certificate of incorporation or the by-laws may provide for director qualifications and address who is authorised to fill vacancies on the board. Generally, the board is authorised to fill vacancies.

The NYSE and Nasdaq require that listed companies have an audit committee comprising at least three members. Nasdaq requires listed companies to have a compensation committee comprising at least two members; the NYSE does not require a minimum number of members of the compensation committee.

ISS has stated that a company should have no fewer than six nor more than 15 directors, with a board size of between nine and 12 directors ‘considered ideal’.

The SEC requires companies to provide the following proxy statement disclosures relating to board composition:

• which directors qualify as ‘independent’ under applicable independence standards; and

• for each director and nominee:

• name, age and positions and offices held with the company;

• term of office as a director;

• any arrangements or understandings between the director or nominee and any other person pursuant to which the director or nominee was or is to be selected as a director or nominee;

• family relationships with any director, nominee or executive officer;

• business experience and other public company directorships over the past five years;

• the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company; and

• whether the director or nominee has been involved in certain kinds of legal proceedings during the past 10 years.

There is no legal requirement or listing rule that mandates a certain number of female or minority directors. There is increasing concern in the institutional investor community about the lack of gender and racial diversity on public company boards of directors, as well as long-tenured directors and lack of board refreshment. SEC rules currently require companies to provide proxy statement disclosure regarding whether and, if so, how the nominating committee considers diversity in identifying nominees for director and, if the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy. In March 2017, State Street Global Advisors published guidance in connection with a new initiative to promote greater gender diversity on corporate boards. State Street indicated that it will initially target companies that do not have any female directors and, beginning in 2018, it may vote against the chairman of a nominating or governance committee of a company that fails to take action to increase the number of women on its board. Consistent with this guidance, in 2017, State Street voted against or withheld votes from nominating and governance committee chairmen at 400 of its portfolio companies with no female directors.

In August 2017, Vanguard announced that it will ‘take more public positions on select governance topics such as . . . gender diversity on boards’. In September 2017, the New York City Pension Funds announced a letter-writing campaign known as the Boardroom Accountability Project 2.0 targeting over 150 US public companies focused on board composition (eg, experience or skill-sets, tenure and diversity), refreshment and director succession planning. BlackRock issued updated proxy voting guidelines in February 2018 stating its expectation for the US public companies in which it invests to have at least two female directors and noting that it may vote against nominating and governance committee members at a company BlackRock believes ‘has not adequately accounted for diversity in its board composition’. The New York City Pension Funds announced in March 2018 that it will vote against all directors at companies with no female directors and against governance committee members at companies with just one female director. Finally, under a new policy, beginning in 2019, Glass Lewis will generally recommend voting against nominating committee chairmen at companies with no female board members, with limited exceptions.

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no legal requirement or listing rule that mandates that the positions of board chairman and CEO be held separately or jointly. Corporate boards are generally free to decide for themselves the leadership structure of the board and company (although the corporate charter or by-laws could provide otherwise). Shareholder proposals calling for a separation of the board chairman and CEO roles have become increasingly common in recent years; such proposals tend to receive relatively high (but typically less than majority) shareholder support.

The NYSE and Nasdaq listing rules, however, require that the non-management directors meet without management present on a regular basis. Under the NYSE rules, companies are required to either choose and disclose the name of a director to preside during executive sessions or disclose the method it uses to choose someone to preside (for example, a rotation among committee chairmen). Although the NYSE rules do not set forth other specific duties for the presiding director, some companies have a ‘lead independent director’ perform the presiding function while also having a role in agenda-setting and determining the information needs of the outside directors. The Nasdaq listing rules also require that boards convene executive sessions of independent directors, but do not include a presiding director disclosure requirement.

In late 2009, the SEC adopted rules requiring each reporting company to disclose the board’s leadership structure and why the company believes it is the best structure for the company. Each company has to disclose whether and why they have chosen to combine or separate the CEO and board chairman roles. Where these positions are combined, the company must disclose whether and why the company has a lead independent director and the specific role the lead independent director plays in the leadership of the company.

Independent board leadership is also supported by governance effectiveness guidance that expresses a ‘best practice’ consensus that boards should have some form of independent leadership. Several best practice codes recommend a clear division of responsibilities between a board chairman and CEO to ensure that the board maintains its ability to provide objective judgement concerning management. Some recommend that the board should separate the roles of board chairman and CEO, while others recommend designating a lead outside or independent director for certain functions. For example, the NACD’s Report on Director Professionalism recommends appointing an independent board leader to:

• organise the board’s evaluation of the CEO and provide feedback;

• chair sessions of the non-executive directors;

• set the agenda (with the CEO or chairman and CEO); and

• lead the board in anticipating and responding to a crisis.

Many companies have recently expanded the responsibilities of the independent lead director. These can include, in addition to the items set forth above from the NACD report:

• presiding over board meetings at which the chairman is not present;

• approving board schedules;

• approving information provided to the board;

• serving as liaison between the chairman and the independent directors;

• having the authority to call meetings of the independent directors or the full board;

• being available for consultation and direct consultation with major shareholders;

• advising on, recommending or approving the retention of outside advisers and consultants who report to the board; or

• guiding, leading or assisting with the board and director self-assessment process, the CEO succession planning process or the board’s consideration of CEO compensation.

Furthermore, under its proxy voting guidelines, ISS will generally vote for shareholder proposals requiring that the board chairman position be filled by an independent director, taking into consideration the following:

• the scope of the proposal, such as whether it is precatory or binding;

• the company’s current board leadership structure, including recent transitions in board leadership and the designation and responsibilities of an independent lead director;

• the company’s governance structure and practices to assess whether more independent oversight at the company may be advisable; and

• the company’s financial performance compared to its peers and the market as a whole.

Many companies combine the roles of CEO and chairman; however, separation of the roles has become increasingly prevalent at S&P 500 companies over the past 10 years – the roles were separated at 51 per cent of S&P 500 companies in 2017, up from 35 per cent in 2006. Chairmen who qualified as independent were in place at 28 per cent of S&P 500 companies in 2017 compared to 13 per cent in 2007. The vast majority of companies that do not have an independent chairman have appointed a lead or presiding director.

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Since 1999, the NYSE and Nasdaq listing rules have required that listed companies have audit committees consisting entirely of independent directors (prior to that time, a majority of independent directors had been a long-standing audit committee requirement for companies listed on the NYSE). In 2003, the NYSE and Nasdaq adopted listing rules that also require companies to have compensation and nominating or governance committees (or committees that perform those functions) consisting entirely of independent directors, although Nasdaq permits nomination decisions (and, until 2014, permitted certain executive compensation decisions) to be made by a majority of independent directors (definitions of independence are provided in question 22). The Sarbanes-Oxley Act requires that all boards of companies with listed securities have audit committees composed entirely of directors who receive no compensation from the company other than directors’ fees and are not affiliated with the company. In addition, companies are required to disclose the name of at least one audit committee member who is an ‘audit committee financial expert’ as defined by the SEC, or explain why they do not have one. The NYSE and Nasdaq rules also require that the audit committee comprises at least three members and impose requirements with respect to the financial literacy of audit committee members. Effective beginning in 2014, each Nasdaq listed company must have, and certify that it has and will continue to have, a compensation committee of at least two members, each of whom must be an independent director; the NYSE does not require a minimum number of members of the compensation committee. As required by the Dodd-Frank Act, the NYSE and Nasdaq each adopted heightened independence standards for compensation committee members that became effective in 2014 and require the board to ‘consider’ the source of compensation received by the director and whether the director is affiliated with the company or any subsidiary, when determining if a director is independent for purposes of serving on the compensation committee.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Under state law, the corporation’s by-laws or certificate of incorporation prescribe the requirements for board meetings and may or may not prescribe a set number of meetings; it is typical for companies to not specify a minimum number of meetings in the certificate of incorporation or by-laws. Generally, it is believed that a board should meet at least once per financial-reporting quarter. However, most boards of large publicly traded corporations meet more frequently. For example, companies represented on the S&P 500 held 8.2 board meetings on average in 2017. SEC rules require companies to disclose the total number of board and committee meetings held during the past year and provide details regarding director attendance at such meetings.

ISS and Glass Lewis will issue negative vote recommendations with respect to directors who failed to attend a minimum of 75 per cent of the aggregate of his or her board and committee meetings (with some exceptions).

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

As discussed in response to question 36, the SEC requires disclosure of certain board practices, including disclosures about the identity and compensation of directors and the composition and activities of the audit, compensation and nominating committees.

Under the NYSE listing rules, listed companies are required to adopt and disclose ‘corporate governance guidelines’ that address:

• qualification standards for directors;

• responsibilities of directors;

• director access to management and, as necessary, independent advisers;

• compensation of directors;

• continuing education and orientation of directors;

• management succession; and

• an annual performance evaluation of the board.

Nasdaq-listed companies are not required to adopt corporate governance guidelines, but many have done so as a best practice.

The NYSE rules also require listed companies to adopt and disclose charters for their compensation, nominating or governance and audit committees.

The compensation committee’s charter must detail the committee’s purpose and responsibilities, which include reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, setting his or her compensation level based on this evaluation, making recommendations to the board with respect to non-CEO executive officer compensation, incentive-based compensation plans and equity-based plans and producing a compensation committee report on executive compensation required by SEC rules to be included in the company’s proxy statement. The charter must also provide that the committee will perform an annual self-evaluation. In addition, pursuant to the Dodd-Frank Act, the NYSE and Nasdaq adopted listing standards that became effective beginning in 2014 requiring compensation committees to consider specified independence factors prior to engaging consultants and other advisers and giving compensation committees the authority and discretion to retain or obtain the advice of consultants and other advisers at the company’s expense.

The nominating or governance committee’s charter must detail the committee’s purpose and responsibilities. These include:

• identifying the board’s criteria for selecting new directors;

• identifying individuals who are qualified to become board members;

• selecting or recommending that the board select nominees for election at the next AGM;

• developing and recommending to the board a set of corporate governance principles for the corporation; and

• overseeing the evaluation of the board and management.

In addition, the charter must include a provision for an annual performance evaluation of the committee. Unlike the NYSE, Nasdaq does not include a requirement with respect to the charter for the nominating or governance committee, although companies are required to certify that they have adopted a formal written charter or board resolution, as applicable, addressing the nominations process.

The audit committee charter must specify the committee’s purpose, which must include: assisting board oversight of the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the company’s internal audit function and independent auditors; and preparing the report that SEC rules require to be included in the company’s annual proxy statement. The NYSE listing rules require that the charter must also detail the duties and responsibilities of the audit committee, including:

• the ability to hire and fire the company’s independent auditor and other registered public accounting firms;

• establishing whistle-blowing policies and procedures for handling complaints or concerns regarding accounting, internal accounting controls or auditing matters;

• at least annually:

• obtaining and reviewing a report by the independent auditor describing the independent auditor’s internal quality control procedures;

• reviewing any material issues raised by the auditor’s most recent internal quality control review of themselves or peer review, or any inquiry or investigation by governmental or professional authorities within the preceding five years; and

• assessing the auditor’s independence;

• discussing the annual audited financial statements and quarterly financial statements with management and the independent auditor;

• discussing earnings press releases, as well as financial information and earnings guidance that is given to analysts and rating agencies;

• obtaining the advice and assistance of outside legal, accounting or other advisers, as necessary, with funding to be provided by the company;

• discussing policies with respect to risk assessment and risk management;

• meeting separately, from time to time, with management, with the internal auditors and with the independent auditor;

• reviewing with the independent auditor any audit problems or difficulties and management’s response to such issues;

• setting clear hiring policies for employees or former employees of the independent auditor;

• reporting regularly to the board of directors; and

• evaluating the audit committee on an annual basis.

The Nasdaq listing rules also require an audit committee to have a charter addressing all of its duties and responsibilities under the Sarbanes-Oxley Act, including: having the sole power to hire, determine funding for and oversee the outside auditors; having the authority to consult with and determine funding for independent counsel and other advisers; and having the responsibility to establish procedures for receipt of complaints.

In addition, both the NYSE and Nasdaq rules require that companies adopt and disclose a code of conduct applicable to directors, officers and employees that addresses conflicts of interest and legal compliance. The NYSE rules also require that the code address corporate opportunities, confidentiality, fair dealing and protection of company assets.

Public companies post their corporate governance guidelines, board committee charters, codes of conduct and other governance documents on their corporate websites, typically under a heading such as ‘Corporate Governance’ or ‘Investor Relations’.

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

The remuneration of directors is generally a matter for the board of directors, or a committee of the board (usually, the compensation committee or the nominating or governance committee), to determine.

In determining the appropriate amount of compensation to be paid to directors, many boards and compensation or nominating or governance committees rely on the advice of independent compensation consultants, whose expertise lies in analysing compensation trends in industry or other market segments. As discussed in question 36, the SEC amended its regulations in 2012 to require enhanced disclosure with respect to a company’s use of compensation consultants.

Boards should exercise caution when approving equity compensation plans that permit equity awards to be made to non-employee directors. Even if such a plan includes meaningful limits on the amount of equity that directors can award themselves and the plan is approved by shareholders, the directors must abide by their fiduciary duties when making awards under the plan, In Re Investors Bancorp, Inc (Del 2017)).

Compensation given to all directors must be disclosed by reporting companies. Under the Sarbanes-Oxley Act, audit committee members can only receive director’s fees (including fees for committee work) from the companies they serve. In addition, as discussed in questions 22 and 25, the board must consider the source of compensation of a director when considering his or her suitability for compensation committee service. As discussed in question 27, the NYSE requires listed companies to adopt and disclose corporate governance guidelines, which are required to address, among other things, the compensation of directors. Since 2016, Nasdaq listed companies have been required to disclose compensatory arrangements between directors or nominees and third parties in connection with that person’s candidacy or service as a director (‘golden leashes’).

There is no law, regulation or listing requirement that affects the length of directors’ service contracts. Rather, directors are elected for a term by the shareholders and it is up to each company to determine whether to place any limits on the number or length of such terms, although NYSE listing rules provide that directors’ terms of office should not exceed three years.

Term limits are very rare among large public companies, but retirement age policies are common. The average tenure of directors at S&P 500 companies is 8.2 years. Nineteen per cent of S&P 500 boards have an average director tenure of five years or less, 62 per cent have an average director tenure between six and 10 years, and 19 per cent have an average tenure of eleven or more years. ISS’ corporate governance assessment tool tracks the proportion of non-executive directors who have served for less than six years, which suggests that ISS considers a term of longer than six years to be lengthy. While most institutional investors do not support individual term and age limits applicable to directors, some are adopting policies focused on average director tenure or individual director tenure (eg, by generally considering long-tenured directors to not be independent).

Section 402 of the Sarbanes-Oxley Act prohibits companies from extending or maintaining personal loans to their directors, other than certain consumer credit arrangements (eg, home improvement or credit card loans) made in the ordinary course of business of a type generally made available by the company to the public and on market terms or terms no more favourable than offered by the company to the general public.

The duty of loyalty restricts directors from competing with the corporation. Thus, while directors are not precluded from engaging in other businesses, they may not:

• use their position as directors to prevent the corporation from competing with their other businesses;

• divert corporate assets to their own uses or the uses of their other businesses;

• disclose the corporation’s trade secrets or confidential information to others;

• lure corporate opportunities, business or personnel away from the corporation; or

• receive, unbeknown to the corporation, a commission on a corporate transaction.

Under the corporate opportunity doctrine, directors cannot divert to themselves an opportunity that belongs to the corporation. An opportunity belongs to the corporation if the corporation has a right to it, a property interest in it, an expectancy interest in it or if by ‘justice’ it should belong to the corporation. The corporation may renounce any interest or expectancy in an opportunity in its certificate of incorporation or by action of its board of directors (see DGCL, section 122(17)). At times, a director’s interest may still conflict with the interests of the corporation. Conflicts that cannot be avoided must be fully disclosed by the interested director and any action that needs to be taken should be taken by vote of the disinterested directors.

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The remuneration of a corporation’s CEO and senior management is generally a matter for the board of directors, or a committee of the board (usually, the compensation committee), to determine.

NYSE listing rules require that a compensation committee comprising independent directors determine the amount of compensation paid to the CEO and make recommendations to the board with respect to non-CEO executive officer compensation. These provisions are interpreted broadly, such that a compensation committee or group of independent directors, as the case may be, must approve each specific element of CEO compensation at all listed companies. Since 2014, Nasdaq listing rules have required that CEO and executive officer compensation be determined by a compensation committee comprising at least two independent directors.

In addition, applicable tax and securities rules require the approval of independent directors to grant equity-based awards (eg, stock option and restricted stock awards) to senior management and best practice would have the board or compensation committee approve the compensation paid to key members of senior management. Historically Internal Revenue Code section 162(m) provided tax incentives for certain performance-based compensation decisions when made by a committee of outside directors. With the enactment of tax reform in the United States in December 2017, this performance-based compensation exemption has been eliminated except with respect to grandfathered arrangements. The responsibility between the board (or compensation committee) and the CEO in determining the elements and amount of compensation paid to senior managers (other than the CEO) differs from company to company and, even within a company, from element of compensation to element of compensation.

In determining the appropriate amount of compensation to be paid to the CEO and other senior managers, many boards and compensation committees rely on the advice of independent compensation consultants, whose expertise lies in analysing compensation trends in industry or other market segments. As discussed in question 36, the SEC amended its regulations in 2012 to require enhanced disclosure with respect to a company’s use of compensation consultants.

Section 402 of the Sarbanes-Oxley Act prohibits companies from extending or maintaining personal loans to their executive officers, other than certain consumer credit arrangements (eg, home improvement or credit card loans) made in the ordinary course of business of a type generally made available by the company to the public and on market terms or terms no more favourable than offered by the company to the general public.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Companies may purchase and typically do maintain directors’ and officers’ liability insurance to protect directors and officers against the risk of personal liability (see DGCL, section 145(g)). Although such coverage has become substantially more expensive, it is usually available and has not been limited by legislative and regulatory actions. Companies are allowed to pay the premiums for directors’ and officers’ liability insurance.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

A company may indemnify a director for liability incurred if that director: acted in good faith; acted in a manner that he or she reasonably believed was in the best interests of the company; and in the case of a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful (see DGCL, section 145). Many companies employ such indemnities (see also the discussion of the duty of good faith in question 19).

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The Delaware Director Protection Statute allows the shareholders of a corporation to provide additional protection to corporate directors through the adoption of a provision in the certificate of incorporation ‘eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of a fiduciary duty as a director’ (DGCL, section 102(b)(7)). Such a provision, however, may not shield directors from liability for: breaches of the duty of loyalty; ‘acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law’; unlawful payments of dividends or unlawful stock purchases or redemptions; or ‘any transaction from which the director derived an improper personal benefit’ (see also the discussion of fiduciary duties in question 19).

33 Employees

What role do employees play in corporate governance?

Employees play no formal role in corporate governance at public companies in the United States. However, it is not uncommon for employees to own shares of the corporation’s stock directly or through employee stock option or retirement plans. Stock ownership enables employees to participate in corporate governance as shareholders.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Under the NYSE listing rules, listed companies are required to adopt and disclose ‘corporate governance guidelines’ that address, among other things, an annual performance evaluation of the board. According to the rules, the ‘board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively’. The NYSE listing rules also require that each of the audit, compensation and nominating and governance committee charters provide for an annual performance evaluation of the committee. Companies listed on Nasdaq do not have similar requirements, but many still engage in self-evaluation as a matter of good governance practice. In addition, independent auditors often inquire into the board’s evaluation of the audit committee as part of the auditor’s assessment of the internal control environment.

There has been a greater focus on director evaluations in recent years as investors are increasingly concerned about board quality and refreshment mechanisms in light of long director tenures, rising mandatory retirement age limits and perfunctory director renomination decisions. A robust performance evaluation of individual directors can help inform the renomination decision process.

In 2017, 98 per cent of boards at S&P 500 companies reported conducting an annual performance evaluation. Fifty-four per cent of S&P 500 boards evaluate the full board and committees and 33 per cent evaluate the full board, committees and individual directors annually. Forty-three percent of S&P 500 companies reported that their board assessments include self-appraisals and 25 per cent include peer evaluations, while 8 per cent take other approaches such as interviews of individual directors by the board chairman, lead director or governance committee chairman.

The NYSE listing rules include ‘overseeing the evaluation of the board and management’ as a responsibility of the nominating or governance committee that must be included in its committee charter. Boards should determine the evaluation methodology, for example, the use of a written survey or interviews, or both, followed by a facilitated discussion, and will determine who will lead the evaluation process (eg, the chairman, lead director or a third-party facilitator). A composite report of the feedback and any related recommendations are typically distributed to the board, committee or individual directors by the party leading the evaluation and discussed at a meeting.

In 2014, the CII issued a report calling for enhanced disclosure relating to board evaluation. Specifically, the CII provided ‘best in class’ examples of disclosure that explain the mechanisms of the evaluation process and discuss the key takeaways from the most recent evaluation. The CII acknowledged that the latter type of disclosure is uncommon among US public companies but is more prevalent in Europe and Australia. US public companies can expect more pressure to disclose their self-evaluation processes, especially in circumstances where shareholders have concerns about governance failures, the absence of regular director turnover or board composition generally.

In September 2017, the New York City Pension Funds announced a letter-writing campaign targeting over 150 US public companies focused on board composition and refreshment. The group asked to engage with directors about the company’s processes for refreshing the board, including an explanation of the evaluation process for individual directors and a description of processes for encouraging underperforming directors to come off the board.

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Corporate certificates of incorporation are publicly available for a small fee from the office of the secretary of state in the state of incorporation. By-laws of private companies are generally not publicly available because they are not required to be filed with the secretary of state. If the corporation is a reporting company, its certificate of incorporation and by-laws are also available as exhibits to various forms filed with the SEC, which can be accessed over the internet free of charge from EDGAR, the SEC database, which is accessible via the SEC’s website (www.sec.gov).

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

Federal securities laws and SEC rules require reporting companies (or companies making public offerings) to disclose a wide variety of information in annual and quarterly reports, as well as in proxy statements and public offering prospectuses. In general, a company must disclose all information that would be material to investors. This includes:

• a business description;

• a description of material legal proceedings;

• detailed disclosure of the risks associated with the business and market risk;

• related person transaction disclosure;

• the number of shareholders of each class of common equity;

• management’s discussion and analysis of the company’s financial condition and results of operations (MD&A);

• a statement as to whether the company has had any disagreements with its accountants;

• disclosure regarding the effectiveness of disclosure controls and procedures, and changes in internal control over financial reporting;

• financial information;

• executive and director compensation; and

• a signed opinion of the company’s auditors with respect to the accuracy of the financial information.

Corporations are expected to keep all this public information current by filing ‘current’ reports whenever certain specified events occur, as well as issuing press releases and providing website disclosure.

Since the passage of the Sarbanes-Oxley Act and its accompanying SEC implementing rules, reporting companies are also required to disclose all material off-balance-sheet transactions, arrangements, obligations (including contingent obligations) and certain other relationships of the company with unconsolidated entities or other persons. In addition, the Sarbanes-Oxley Act requires that a reporting company’s financial reports reflect ‘all material correcting adjustments’ identified by outside auditors.

Section 404 of the Sarbanes-Oxley Act requires that a reporting company’s annual report include an internal control report from management containing a statement of the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting and an assessment at the end of the company’s most recent fiscal year of the effectiveness of the company’s internal control structure and procedures for financial reporting. The company’s registered public accounting firm must also attest to, and report on, the effectiveness of the company’s internal control over financial reporting.

Reporting companies are also required to disclose the ‘total compensation’ received by the corporation’s CEO, its CFO and its three most highly compensated executive officers other than the CEO and CFO (together, the named executive officers) and directors. The information is required to be presented in the form of a summary compensation table listing the name of the employee, the year, salary, bonus, other annual compensation, stock and option awards, changes in pension value and non-qualified deferred compensation earnings, all other forms of compensation and total compensation, as well as several other tables relating to grants of plan-based awards, outstanding equity awards, option exercises and vested stock, pension benefits, non-qualified deferred compensation and director compensation. In addition, reporting companies are required to include a ‘compensation discussion and analysis’ section in their disclosure documents that explains all material elements of the company’s compensation of the named executive officers, and includes a description of the company’s compensation philosophy and objectives.

The JOBS Act affords ‘emerging growth companies’ (companies that conducted an IPO after 8 December 2011 and have total annual revenues of less than US$1 billion) the flexibility to provide reduced disclosures relating to financials, MD&A and compensation for a maximum period of five years.

SEC regulations also require the disclosure of certain information concerning any beneficial owner known to the company to possess more than 5 per cent of any class of the corporation’s voting securities, including the amount of ownership and percentage and title of the class of stock owned. Note that any person acquiring more than 5 per cent of the equity of a reporting company also must publicly disclose its intentions with respect to such acquisition. In addition, the Exchange Act requires that officers, directors and beneficial owners of 10 per cent or more of a company’s equity securities file a statement of ownership each time there has been a change in that person’s beneficial ownership of the company’s securities.

In addition, special attention is given to corporate governance. Reporting companies must include a copy of the audit committee report in their annual proxy statements. This report must disclose, inter alia, whether the committee has reviewed the audited financial statements with management, recommended that the audited statements be included in the corporation’s annual report to the board, and discussed certain matters with independent auditors to assess their views on the auditors’ independence, the quality of the corporation’s financial reporting and the name of the committee member with financial expertise (if any). Under section 406 of the Sarbanes-Oxley Act, companies are required to disclose whether they have adopted a code of ethics for their senior financial officers. If a company has not adopted such a code it must explain why it has not done so. Certain changes to or waivers of any provision of the code must also be disclosed.

Under the Sarbanes-Oxley Act, the reliability and accuracy of the financial and non-financial information disclosed in a company’s periodic reports has to be certified by the company’s CEO and CFO. In each quarterly report both officers must certify, among other things, that:

• they reviewed the report;

• to their knowledge the report does not contain a material misstatement or omission and that the financial statements and other financial information in the report fairly present, in all material respects, the financial condition of the company, results of its operations and cash flows for the periods covered in the report;

• they are primarily responsible for the company’s controls and procedures governing the preparation of all SEC filings and submissions, not just the periodic reports subject to certification; and

• they evaluated the ‘effectiveness’ of these controls and procedures and reported to the audit committee any significant deficiencies or material weaknesses in the company’s financial reporting controls, together with any corrective actions taken or to be taken. Their conclusions must be disclosed in the certified report.

NYSE-listed companies are required to disclose their corporate governance guidelines. Committee charters (if any) must be disclosed as described in detail in question 27.

In 2003, the SEC adopted rules that require reporting companies to disclose in their proxy statements or annual reports certain information regarding the director nomination process, including:

• whether the company has a nominating committee and, if not, how director nominees are chosen;

• whether the members of the nominating committee are independent;

• the process by which director nominees are identified and evaluated;

• whether third parties are retained to assist in the identification and evaluation of director nominees;

• minimum qualifications and standards used in identifying potential nominees;

• whether nominees suggested by shareholders are considered; and

• whether nominees suggested by large, long-term shareholders have been rejected.

These rules also require reporting companies to disclose certain information regarding shareholder communications with directors, including:

• the process by which shareholders can communicate with directors (and, if the company does not have an established process, why it does not);

• whether communications are screened and, if so, how;

• any policies regarding the attendance of directors at AGMs; and

• the number of directors that attended the preceding year’s AGM.

In 2006, the SEC adopted rules that require reporting companies to disclose in their proxy statements or annual reports certain information regarding the corporate governance structure that is in place for considering and determining executive and director compensation, including:

• the scope of authority of the compensation committee;

• the extent to which the compensation committee may delegate any authority to other persons, specifying what authority may be so delegated and to whom;

• any role of executive officers in determining or recommending the amount or form of executive and director compensation; and

• any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying such consultants, stating whether such consultants are engaged directly by the compensation committee or any other person, describing the nature and scope of their assignment and the material elements of the instructions or directions given to the consultants with respect to the performance of their duties under the engagement.

Moreover, in late 2009, the SEC adopted rules requiring companies to provide the following enhanced proxy statement disclosures:

• for each director and nominee, the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company;

• other directorships held by each director or nominee at any public company during the previous five years (rather than only current directorships);

• expanded legal proceedings disclosure relating to the past 10 years (rather than five years);

• whether and, if so, how the nominating committee considers diversity in identifying nominees for director;

• if the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy;

• the board’s leadership structure and why the company believes it is the best structure for the company;

• whether and why the board has chosen to combine or separate the CEO and board chairman positions;

• where these positions are combined, whether and why the company has a lead independent director and the specific role the lead independent director plays in the leadership of the company;

• the board’s role in the oversight of risk management and the effect, if any, that this has on the company’s leadership structure;

• the company’s overall compensation policies or practices for all employees generally, not just executive officers, ‘if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company’; and

• fees paid to and services provided by compensation consultants and their affiliates if the consultants provide consulting services related to director or executive compensation and also provide other services to the company in an amount valued in excess of US$120,000 during the company’s last fiscal year.

In early 2010, the SEC also issued an interpretive release on disclosure relating to climate change, which is intended to provide guidance to reporting companies on the application of existing disclosure requirements to climate change and other matters. In addition, in September 2010, the SEC issued an interpretive release relating to disclosure of liquidity and funding risks posed by short-term borrowing practices.

The SEC issued disclosure guidance relating to cybersecurity (October 2011, which was updated in 2018 as described below) and European sovereign debt exposure (January 2012), among other matters.

In 2011, the SEC approved final rules relating to advisory votes on executive compensation (say-on-pay) pursuant to the Dodd-Frank Act, which also require companies to include a discussion in the proxy statement as to whether and, if so, how the company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions and, if so, how that consideration has affected the company’s executive compensation decisions and policies.

In 2012, the SEC approved final rules mandated by the Dodd-Frank Act requiring proxy statement disclosure regarding compensation consultant conflicts of interest. Such disclosure became required to be included in proxy statements for annual meetings occurring on or after 1 January 2013.

In August 2012, the Exchange Act was amended by the Iran Threat Reduction and Syria Human Rights Act of 2012 to require public companies to provide disclosure if the company or any of its affiliates (including its directors and officers) has knowingly engaged in certain enumerated activities subject to US trade sanctions involving Iran or specified Iranian entities or nationals as well as certain other non-Iranian persons or entities deemed to promote terrorist activities or the proliferation of weapons of mass destruction. Such disclosure became required to be included in quarterly and annual reports beginning in February 2013.

The Dodd-Frank Act amended the Exchange Act to require disclosure relating to ‘conflict minerals’ (gold, tantalum, tin and tungsten) originating from the Democratic Republic of Congo or an adjoining country. Beginning in May 2014, public companies were required to make various disclosures where conflict minerals are necessary to the functionality or production of a product that is either manufactured by the company or by a third party with which the company contracts for such manufacture. A group of business groups filed litigation challenging the conflict minerals rule on several grounds, including that the required disclosure would violate the First Amendment to the US Constitution. In April 2014, the US Court of Appeals for the District of Columbia Circuit found that one disclosure provision of the conflict minerals rule violated the First Amendment but upheld the remainder of the rule. The Court reaffirmed its original ruling in August 2015 and final judgment in the case was entered in April 2017. In January 2017, the acting chairman of the SEC had requested comments on the rule and related guidance through March 2017. In April 2017, the staff of the SEC’s Division of Corporation Finance announced that it will not recommend enforcement action if a company fails to comply with certain aspects of the rule relating to due diligence on the source and chain of custody of conflict minerals and an independent private sector audit. The acting chairman of the SEC released a statement on the same day announcing that this relief is appropriate because the primary purpose of those requirements is to enable companies to make the disclosure that was found to violate the First Amendment. He directed the SEC Staff to develop a recommendation for future SEC action on the rule after taking into consideration the public comments received.

In addition, the Dodd-Frank Act amended the Exchange Act to require ‘resource extraction issuers’ to disclose specified information regarding payments made to a foreign government or the US federal government for the purpose of commercial development of oil, natural gas or minerals. The SEC adopted a resource extraction disclosure rule in August 2012 that was vacated by the US District Court for the District of Columbia in July 2013. In September 2013, the SEC announced that it would redraft the resource extraction rule rather than appeal the ruling. The SEC reproposed the resource extraction rule in December 2015. The SEC rule was repealed in February 2017, but the underlying Dodd-Frank Act mandate for SEC rule-making remains intact.

The Dodd-Frank Act requires several new disclosures requiring SEC rule-making, including in relation to ‘pay versus performance’, ‘CEO pay ratio’ (requiring disclosure of the median of the annual total compensation of all company employees except the CEO, the CEO’s total annual compensation and the ratio of the former to the latter), ‘clawback’ policies requiring the recovery of excess compensation paid to executives and corporate policies on hedging of company stock by directors and employees. The SEC has adopted rules relating to the ‘CEO pay ratio’ disclosure requirements (see question 41) and has proposed rules relating to the ‘pay versus performance’ disclosure requirements, ‘clawback’ policies and corporate hedging policies.

In April 2016, the SEC issued a concept release seeking public comment on modernising certain business and financial disclosures required to be included in US public companies’ periodic reports. In August 2016, the SEC requested public comment through October 2016 on the compensation and corporate governance information to be included in US public companies’ proxy statements. The SEC proposed rules in October 2017 intended to streamline and improve disclosure requirements applicable to US public companies. The key proposals would streamline MD&A disclosure in annual reports, reduce the need to submit confidential treatment requests to the SEC and simplify exhibit filing requirements. These actions are part of the SEC’s ongoing ‘disclosure effectiveness project’ discussed in ‘Update and trends’.

In September 2017, the SEC published guidance to assist US public companies as they prepare for compliance with the ‘CEO pay ratio’ disclosure rule. Taken as a whole, the guidance makes clear that companies have substantial flexibility in developing their response to the new disclosure requirement.

In February 2018, the SEC issued new interpretive guidance on cybersecurity disclosure that reinforced and expanded upon the 2011 guidance issued by the SEC’s Division of Corporation Finance. The guidance illustrates the SEC’s increased expectations with respect to how US public companies monitor and disclose cybersecurity risks and incidents.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

Commencing in 2011, the Dodd-Frank Act requires US public companies to conduct a separate shareholder advisory vote on:

• executive compensation – to be held at least once every three calendar years;

• whether the advisory vote on executive compensation should be held every year, every two years or every three years – to be held at least once every six calendar years; and

• certain ‘golden parachute’ compensation arrangements in connection with a merger or acquisition transaction that is being presented to shareholders for approval.

The predominant practice is to hold a shareholder advisory vote on executive compensation every year.

See question 29 for further details about the remuneration of executives.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Since September 2011, companies can no longer exclude from their proxy materials shareholder proposals (precatory or binding) relating to by-law amendments establishing procedures for shareholder nomination of director candidates and inclusion in the company’s proxy materials, as long as the proposal is not otherwise excludable under Rule 14a-8. This amendment to Rule 14a-8 facilitates the development of ‘proxy access’ via private ordering at companies chartered in states where permissible, as shareholders are able to institute a shareholder nomination regime via binding by-law amendment or request, via precatory shareholder proposal, that such a by-law be adopted by the board.

The private ordering process gained considerable momentum during 2015, which saw a significant increase in the number of shareholder proxy access proposals submitted (over 100) and shareholder support for such proposals (60 per cent of the total proposals voted on passed), as well as an increased frequency of negotiation and adoption of proxy access via board action – including an accelerating trend towards board adoption without receipt of a shareholder proposal. These trends continued in 2016, and to a lesser extent in 2017. In response to shareholder proposals and increasing pressure from institutional investors and proxy advisory firms, over 500 companies have adopted proxy access, including more than 68 per cent of S&P 500 companies as of May 2018 (up from less than 1 per cent in 2014). The market standard that has emerged gives a group of up to 20 shareholders who hold 3 per cent of the company’s common stock for at least three years the right to nominate up to 20 per cent of the company’s directors (or at least two directors) using the company’s proxy materials. Proxy access provisions typically include limitations on the use of proxy access (eg, in contested election situations) and require detailed information to be provided in relation to the nominee and the nominating group, among other requirements.

In the past two years, shareholders have been submitting proposals requesting that companies make amendments to their proxy access by-laws (eg, to increase or remove the limit on the size of the nominating shareholder group). These ‘fix-it’ proposals have: largely been excludable if the SEC staff has agreed that the company has substantially implemented the proposal, or failed to receive majority support.

Furthermore, the SEC proposed changes to the federal proxy rules in October 2016 to require the use of universal proxy cards, which would allow shareholders to vote for a mix of management and dissident nominees in a contested director election.

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Shareholder influence is more potent than ever and continued attention to the quality of shareholder relations has become paramount. Companies are engaging with their key large institutional investors more directly and more frequently to hear their interests and concerns, including from a governance perspective. Whereas engagement with shareholders used to occur primarily during the annual meeting season, companies are now engaging with their shareholders throughout the year. There are several reasons for this including:

• the advent of the shareholder advisory vote on executive compensation;

• a rise in hedge fund activism;

• proxy advisory firm policies that expect companies to respond to shareholder advisory votes that receive significant (but less than passing) support; and

• shareholder expectations.

Shareholders are also increasingly seeking to engage with companies outside of the shareholder proposal mechanism. For example, in addition to more frequent one-on-one meetings between the company and shareholders, it is becoming more common for large institutional investors to send letters on specific issues of concern to portfolio companies. In recent years, public campaigns of this sort have urged CEOs to disclose a long-term strategic plan to shareholders, the adoption of proxy access and more direct engagement between directors and shareholders. In particular, Vanguard Group and BlackRock Inc, two of the largest institutional investors in the United States, have recently become more assertive in pushing for corporate governance reforms and increased director–shareholder engagement at the companies in which they invest.

Members of senior management, such as the CEO and CFO, are typically the company representatives who engage with shareholders. Investor relations personnel may also be involved in shareholder engagement efforts. Outside counsel rarely participates. Directors are becoming more involved in shareholder engagement. Which director is involved depends on the topics to be discussed. Often the lead director or the relevant committee chairman will meet with the shareholder along with a member of senior management. For example, the compensation committee chairman may be called upon to meet with an investor who has concerns with the company’s executive compensation programme.

Directors of US public companies should understand the composition and particular interests of their shareholder base and be actively involved in overseeing the company’s shareholder engagement and investor relations efforts. Many companies are also engaging with a broader group of shareholders rather than just the top few holders. Companies are also increasingly providing disclosure regarding their shareholder engagement efforts in their annual meeting proxy statements. In 2015, the CII issued a report calling for enhanced disclosure relating to company-shareholder engagement. Specifically, the CII provided ‘best in class’ examples of disclosure of engagement policies and practices.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

It is common for US public companies to report on corporate social responsibility (CSR) matters including environmental, social and ethical issues. Several SEC disclosure requirements tend to trigger disclosure of CSR matters, typically in quarterly and annual reports:

• business description disclosure;

• legal proceedings disclosure;

• material known events and uncertainties disclosure included in MD&A;

• risk factor disclosure;

• guidance regarding climate change disclosure; and

• conflict minerals disclosure.

Many companies also report on CSR matters voluntarily (eg, by publishing a sustainability report). Companies may be subject to additional disclosure requirements under state law (eg, certain companies doing business in California are required to disclose measures they take to eliminate slavery and human trafficking in their supply chains).

Large institutional investors have recently urged companies to disclose how long-term strategy incorporates corporate sustainability considerations.

Many companies consider two influential guides when determining if and what to disclose regarding CSR issues: the Global Reporting Initiative Sustainability Reporting Standards; and the Sustainability Accounting Standards Board Implementation Guide.

In February 2018, ISS launched an Environmental & Social (E&S) QualityScore scoring tool that measures the depth and extent of corporate disclosure on environmental and social issues, including sustainability governance, and identifies key disclosure omissions. This new metric for institutional investors to use to evaluate the E&S risk of their portfolio companies may prompt greater disclosure of CSR matters by US public companies.

Finally, in February 2018, State Street sent letters to all companies in the S&P 500 encouraging them to proactively disclose their compliance with the Investor Stewardship Group’s corporate governance and sustainability principles. State Street has indicated that it will vote against the independent board leader at companies that do not comply with the principles at companies that cannot explain the nuances of their governance structure effectively, either publicly or through engagement.

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The SEC adopted the ‘CEO pay ratio’ rule in August 2015 requiring US public companies to disclose the median of the annual total compensation of all company employees except the CEO, the CEO’s total annual compensation and the ratio of the former to the latter. For calendar-year companies, the first disclosure was required in 2018 annual meeting proxy statements based on 2017 compensation. In September 2017, the SEC published guidance to assist US public companies as they prepare for compliance with the ‘CEO pay ratio’ disclosure rule. Taken as a whole, the guidance makes clear that companies have substantial flexibility in developing their response to the new disclosure requirement.

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

US public companies are not required to disclose ‘gender pay gap’ information. However, in recent years some investors have filed shareholder proposals primarily at companies in the technology and financial services industries requesting them to measure, disclose and take action to close gender pay gaps. In exchange for withdrawal of the proposals, some of the targeted companies have committed to report certain pay data by gender and take steps to reduce any identified gender pay gaps. Under a new policy for 2018, ISS evaluates shareholder proposals seeking reports on a company’s pay data by gender, or policies or goals aimed at reducing any gender pay gap, on a case-by-case basis considering specified factors. Glass Lewis adopted a similar policy that took effect from the 2017 proxy season.

Update and trends

In October 2017, the NACD published a Blue Ribbon Commission Report on Culture as a Corporate Asset, which reiterates that oversight of corporate culture must be a key board responsibility. Furthermore, in the wake of several highly publicised scandals highlighting sexual harassment as a key reputational risk for companies and important area for board oversight, CII published a report in March 2018 providing recommendations as to how boards can combat sexual harassment in the workplace and engage with investors on the topic.

In February 2018, the SEC issued new interpretive guidance on cybersecurity disclosure that sets forth the SEC’s increased expectations with respect to how US public companies monitor and disclose cybersecurity risks and incidents. The guidance stresses the need for companies to consider implementing policies to prevent insider trading on the basis of any material nonpublic cybersecurity-related information.

The SEC adopted the ‘CEO pay ratio’ rule in August 2015 requiring US public companies to disclose the median of the annual total compensation of all company employees except the CEO, the CEO’s total annual compensation and the ratio of the former to the latter. For calendar-year companies, the first disclosure was required in 2018 annual meeting proxy statements based on 2017 compensation. In September 2017, the SEC published guidance to assist US public companies as they prepare for compliance with the ‘CEO pay ratio’ disclosure rule. Taken as a whole, the guidance makes clear that companies have substantial flexibility in developing their response to the new disclosure requirement.

A small but growing number of US companies have held virtual annual shareholder meetings, typically in one of two formats: exclusively online with no ability for a shareholder to attend an in-person meeting; or a hybrid approach whereby an in-person meeting is held that is open to online participation by shareholders who are not physically present at the meeting. The prevalence of virtual meetings increased as 5 per cent of S&P 500 companies held virtual-only annual meetings in 2017 (compared to 3 per cent in 2016). However, some institutional investors and proxy advisory firms have made their opposition to virtual-only meetings known (see question 6).

In July 2017, two major stock index providers (S&P Dow Jones and FTSE Russell) announced changes to their index eligibility requirements that would exclude most companies going public with multiple classes of stock from the primary indexes in the United States. Nevertheless, some technology companies have subsequently gone public with dual-class or multi-class stock.

Since early 2014, the SEC has engaged in a ‘disclosure effectiveness project’. The goal of the project is to review existing disclosure requirements to determine whether modifications should be made to reduce the costs and burdens on public companies while also promoting the disclosure of material information to investors and eliminating duplicative disclosures. In September 2015, the SEC requested comment on the form and content of financial statement disclosures required under Regulation S-X. In April 2016, the SEC issued a concept release seeking public comment on modernising certain business and financial disclosures required by Regulation S-K to be included in public companies’ periodic reports. In August 2016, the SEC requested public comment through October 2016 on the compensation and corporate governance information to be included in US public companies’ proxy statements. In August 2016, the SEC proposed rules intended to update and simplify certain disclosure requirements by eliminating redundant, overlapping, outdated and superseded requirements owing to changes in disclosure rules, accounting principles and technology. In March 2017, the SEC approved rules that will require US public companies to provide hyperlinks to the exhibits to their SEC filings, which became effective for the largest category of filers in September 2017. The SEC proposed rules in October 2017 intended to streamline and improve disclosure requirements applicable to US public companies. The key proposals would streamline MD&A disclosure in annual reports, reduce the need to submit confidential treatment requests to the SEC and simplify exhibit filing requirements.

The staff of the SEC’s Division of Corporation Finance issued new guidance in November 2017 that impacts the ability of US public companies to exclude shareholder proposals. The new guidance sets forth a revised framework for analysing requests to exclude proposals under certain exceptions to the rule (ie, the ‘ordinary business’ exception and the ‘economic relevance’ exception) in which the significance of the proposal to the company’s business is at issue. In such cases, the SEC staff will now expect to see a well-developed discussion of the board’s well-informed and well-reasoned analysis regarding the proposal and its significance.

In late 2017, ISS and Glass Lewis released updates to their proxy voting policies for the 2018 proxy season. The key policy updates relate to the following topics:

• climate change shareholder proposals;

• long-term poison pills not approved by shareholders;

• board gender diversity;

• board responsiveness (the trigger under the Glass Lewis policy will now be opposition of 20 per cent rather than 25 per cent);

• proxy access ‘fix it’ shareholder proposals;

• virtual-only shareholder meetings;

• dual-class share structures; and

• compensation-related matters.

In February 2018, ISS launched an E&S QualityScore scoring tool that measures the depth and extent of corporate disclosure on environmental and social issues, including sustainability governance, and identifies key disclosure omissions (see question 40).

Shareholders are increasingly seeking to engage with companies outside of the shareholder proposal mechanism. For example, in addition to more frequent one-on-one meetings between the company and shareholders, it is becoming more common for large institutional investors to send letters on specific issues of concern to portfolio companies. In recent years, public campaigns of this sort have urged CEOs to disclose a long-term strategic plan to shareholders, the adoption of proxy access and more direct engagement between directors and shareholders.

Boards and key investors are increasingly scrutinising board composition (eg, experience or skill sets, tenure and diversity), refreshment and director succession planning. In 2017, State Street voted against or withheld votes from nominating and governance committee chairmen at 400 of its portfolio companies with no female directors. BlackRock supported nearly all board diversity proposals during the 2017 proxy season and voted against nominating and governance committee members at certain companies for failure to address gender diversity issues. Vanguard announced in August 2017 that it intends to take a more aggressive stance on board gender diversity. In September 2017, the New York City Pension Funds announced a letter-writing campaign known as the Boardroom Accountability Project 2.0 targeting over 150 US public companies focused on board composition and refreshment. BlackRock issued updated proxy voting guidelines in February 2018 stating its expectation for the US public companies in which it invests to have at least two female directors and noting that it may vote against nominating and governance committee members at a company BlackRock believes ‘has not adequately accounted for diversity in its board composition’ . The New York City Pension Funds announced in March 2018 that it will vote against all directors at companies with no female directors and against governance committee members at companies with just one female director. Finally, under a new policy, beginning in 2019, Glass Lewis will generally recommend voting against nominating committee chairmen at companies with no female board members, with limited exceptions.

Key institutional investors are also continuing to prioritise environmental issues. BlackRock, State Street and Vanguard have identified environmental issues as key investment stewardship priorities and called for enhanced climate risk disclosure. Fidelity and Vanguard revised their voting guidelines in 2017 to provide that they may now support (rather than abstain from voting on) environmental shareholder proposals. Environmental proposals constituted the largest category of proposals submitted for the 2017 and 2018 proxy seasons. According to ISS, more than two-thirds of shareholder proposals submitted for the 2018 proxy season related to environmental and social issues (eg, political spending, board and workplace diversity, climate and sustainability). Nine of the 10 most prevalent types of proposals filed for 2018 addressed environmental and social issues. Support for climate change proposals has dramatically increased over the past five years and three proposals calling for a report on the impact of climate change policies passed at large energy companies in 2017. The E&S QualityScore scoring tool was launched in February 2018 by ISS and measures the depth and extent of corporate disclosure on environmental and social issues, including sustainability governance, and identifies key disclosure omissions. This new metric is designed to help institutional investors evaluate the E&S risk of their portfolio companies. Also in February 2018, State Street sent letters to all companies in the S&P 500 encouraging them to proactively disclose their compliance with the Investor Stewardship Group’s corporate governance and sustainability principles. State Street has indicated that it will vote against the

Update and trends (continued)

independent board leader at companies that do not comply with the principles at companies that cannot explain the nuances of their governance structure effectively, either publicly or through engagement.

Proxy access has gained considerable momentum since the beginning of 2015 through private ordering, as discussed in question 38. In the past two years, shareholder proponents have shifted from submitting proposals asking companies to adopt proxy access to proposals asking companies to amend certain provisions of their existing proxy access by-laws (eg, to increase or remove the limit on the number of shareholders that may aggregate to form a nominating group). These ‘fix-it’ proposals have largely been excludable if the SEC has agreed that the company has substantially implemented the proposal or failed to receive majority support. The staff of the SEC’s Division of Corporation Finance recently denied some companies’ requests to exclude fix-it proposals solely seeking the removal of the limit on the size of the nominating group. Previously the staff had allowed dozens of companies to exclude fix-it proposals solely seeking an increase in the limit on the basis that they had substantially implemented the shareholder proposal by adopting proxy access on market standard terms.

Holly J Gregory

holly.gregory@sidley.com

Rebecca Grapsas

rebecca.grapsas@sidley.com

Claire H Holland

cholland@sidley.com

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Vietnam

Hikaru Oguchi, Taro Hirosawa and Vu Le Bang

Nishimura & Asahi

Sources of corporate governance rules and practices

1 Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The Law on Enterprises (LOE), which took effect from 1 July 2015, is the primary source of corporate laws that encompass the establishment, governance and operation of companies in Vietnam. For public companies, which are those made public by the offer of shares, or having shares listed on the stock exchange or a securities trading centre, or having shares owned by at least 100 investors excluding professional securities investors and having paid-up charter capital of 10 billion dong or more, the Law on Securities (LOS) and the legal guiding documents thereof including Decree 71/2017/ND-CP and Circular 95/2017/TT-BTC provide further regulations on corporate governance as part of their public status. Additionally, for companies that are joint ventures between foreign investors and Vietnamese partners engaging in the services as committed to by Vietnam under the commitments on specific services in accession to the World Trade Organization (joint venture companies), Resolution No. 71/2006/NQ-QH11 still appears to function as another source of law relating to corporate governance of joint venture companies despite the fact that certain laws under this Resolution are amended, replaced or due to be replaced (eg, law on enterprises, law on promulgating legal normative documents).

As a matter of principle, listed companies shall comply with both listing rules and the relevant laws for matters that are not specifically regulated by listing rules. As such, it is mandatory for listed companies to comply with listing rules.

2 Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The Ministry of Planning and Investment mainly drafts bills for laws and governmental decrees on corporate regulations and issues its own guidance and clarification whenever necessary. Likewise, the State Securities Commission of Vietnam and its direct parent agency, which is the Ministry of Finance, are in charge of the sector of public companies, whether unlisted or listed. Enforcement of the laws and regulations is carried out by various competent authorities, including the Ministry of Planning and Investment, the local people’s committees, the local authorities for planning and investment, or the State Securities Commission itself for the securities sector.

There are no well-known shareholder activist groups or proxy advisory firms in Vietnam that would have a material influence on companies’ policies or corporate governance-related issues.

The rights and equitable treatment of shareholders

3 Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

A shareholder or a group of shareholders in a joint-stock company may nominate candidates for the board if they have held at least 10 per cent of the total ordinary shares for a consecutive period of six months or more (major shareholders) unless a lower percentage is set forth in the company’s charter (articles 114.2 and 114.4 of the LOE). Any share with a voting right can be counted in a vote at a shareholders’ meeting, including a meeting for the election of directors. Cumulative voting is a compulsory measure for the election of directors; the total number of votes of each shareholder shall be equal to the total number of the shareholder’s shares multiplied by the total number of vacant positions (although shares with preferential votes will be entitled to a greater number of votes in accordance with the company’s charter) and each shareholder may exercise all of his or her votes in favour of a single candidate or a number of candidates (article 144.3 of the LOE). However, a different mechanism for the election of directors may be applied if so regulated under the company’s charter (article 144.3 of the LOE).

Successful candidates will be selected from those with the highest number of votes to those with the lowest number of votes, in descending order, until the total number of vacant positions has been filled, and where there are two or more candidates receiving the same number of votes for the last vacant position, another vote taken on such candidates will be held, or the director shall be selected in accordance with the criteria set forth in the voting rules or the company’s charter (article 144.3 of the LOE). The directors are elected at the shareholders’ meeting (article 144.3 of the LOE) and may only be removed by a resolution passed by the shareholders’ meeting (article 135.2(c) of the LOE). By the default in law, a resolution removing a director shall be passed if it is agreed by shareholders representing at least 51 per cent of the total number of voting slips of all attending shareholders. However, the law permits the charter of the company to provide for a higher specific percentage (articles 144.1 and 144.2 of the LOE).

The shareholders’ meeting, comprising shareholders with voting rights, is the highest decision-making body in the company. While the board should follow the resolution of the shareholders’ meeting, a shareholder or a group of shareholders cannot, without resolution of the shareholders’ meeting, impose obligations upon the board, except for the right to require the board to convene the general meeting of shareholders (see question 7). However, a shareholder or a group of shareholders holding shares of the company for at least one year may require the board to stop the implementation of any decision or resolution that has been passed by the board contrary to the laws or the company’s charter and which caused loss to the company (article 149.4 of the LOE). Additionally, a shareholder or a group of shareholders holding at least 1 per cent of the total ordinary shares for six consecutive months have the right to directly, or on behalf of the company, make a claim for civil liability against the director, manager or general director under certain circumstances (article 161 of the LOE).

4 Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following decisions are subject to the authority of the shareholders’ meeting:

• to adopt the development strategy of the company (article 135.2(a) of the LOE);

• to decide on the class and total amount of shares of each class that may be issued by the company, and the amount of dividend per share of each class on an annual basis (article 135.2(b) of the LOE);

• to elect, remove and dismiss directors of the board and members of the supervisory board (article 135.2(c) of the LOE);

• to decide on investment or approve the sale of 35 per cent or more of the total value of assets recorded in the company’s latest financial statement, unless a different percentage is provided for in the company’s charter (article 135.2(d) of the LOE);

• to approve contracts or transactions executed between the company and a related party, as defined under the laws, of 35 per cent or more of the total value of assets recorded in the company’s latest financial statement unless a different percentage is provided for in the company’s charter (article 162.3 of the LOE);

• to decide on amendment of or supplement to the company’s charter (article 135.2(dd) of the LOE);

• to approve annual financial statements (article 135.2(e) of the LOE);

• to decide on redemption of more than 10 per cent of issued shares of each class (article 135.2(g) of the LOE);

• to consider and decide on breaches committed by the board of directors or the supervisory board that cause damage to the company and the shareholders (article 135.2(h) of the LOE);

• to decide on the restructuring or dissolution of the company (article 135.2(i) of the LOE); and

• other rights and duties as provided for in the laws and the company’s charter (article 135.2(k) of the LOE).

Notwithstanding the foregoing, decisions that are subject to the authority of the shareholders’ meeting of a joint venture company (defined in question 1) may be, subject to meeting statutory conditions (see Official Letter No. 771-BKH-TCT of the Ministry of Planning and Investment), regulated differently in the company’s charter. Further, additional items that do not fall within the statutory authority of other statutory bodies of the company may be added to the charter to be subject to the resolution of the shareholders’ meeting.

5 Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In principle, each ordinary share of a joint-stock company is granted only one vote (article 114.1(a) of the LOE). However, the company is permitted to issue shares with preferential votes, which are granted a larger number of votes than that of ordinary shares, provided, however, that only founding shareholders or organisations as authorised by the government may hold shares with preferential votes and, even in such cases, such shares may be held by founding shareholders only for a period of three years after the company is established (articles 113.3 and 116 of the LOE). Additionally, the company may issue shares with preferential dividends or preferential redemption rights that have no voting rights (articles 117 and 118 of the LOE). The company may decide to issue other kinds of preferential shares in accordance with the company’s charter (article 113.2(d) of the LOE).

6 Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Based on the company’s register of shareholders at the time of having a decision on convening the shareholders’ meeting (article 137.1 of the LOE) or based on the cut-off date of the shareholders’ list describing the shareholders entitled to attend the shareholders’ meeting that is applied to a public company, any shareholder holding ordinary shares or shares with preferential votes may participate in the shareholders’ meeting and exercise the voting rights associated with their respective shares, except for those shareholders holding preferential shares without voting rights (as discussed in question 5).

In cases of related-party transactions that require approval of the shareholders’ meeting, the shareholders who have interests in such transactions may not vote on the approval (article 162.3 of the LOE). In a similar manner, a founding shareholder may not vote on the approval of his or her transfer of the shares within three years from the issuance date of the enterprise registration certificate of the company (article 119.3 of the LOE).

Besides physical meetings, it is worth noting that the shareholders may adopt resolutions via a process of collecting written opinions (article 145 of the LOE). In such a case, the minimum vote for adopting any resolution shall be 51 per cent of the total voting shares (article 144.4 of the LOE).

Virtual meetings of shareholders are permitted as long as the location of meetings (eg, the location of the chairman if the meeting is carried out in multiple locations at once) is within the territory of Vietnam (article 136.1 of the LOE). Shareholders may attend and vote at meetings conducted via online conference (article 140.2(c) of the LOE).

7 Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

A shareholders’ meeting may be convened by major shareholders (as defined in question 3) if either the board of directors or supervisory board fails to convene the meeting in accordance with the laws or the company’s charter (article 136.6 of the LOE). Regardless of who convenes the meeting, the major shareholders can always propose matters to the meeting agenda for discussion unless the procedures or contents of such proposals are contrary to the laws or the company’s charter (article 138.2 of the LOE). The meeting convenor is required to include the proposed matters in the draft programme and agenda for the meeting, except for those that fall under cases wherein the convenor may refuse the proposed matter. The draft programme and agenda are sent with the notice of invitation to all shareholders entitled to attend the meeting (articles 138.4 and 139.3 of the LOE). The proposed matters are added officially to the programme and agenda if the shareholders’ meeting so agrees (article 138.4 of the LOE). There is no requirement by the laws for the board of directors to circulate the statements or opinions of the dissident shareholders other than the requirement that the minutes of the vote-counting result and the minutes of the shareholders’ meeting, which may contain a summary of the statements of the dissident shareholders, must be forwarded to the shareholders within a certain period of time (articles 145.6 and 146.3 of the LOE).

8 Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders of a public company (shareholders directly or indirectly holding at least 5 per cent of the total shares with voting rights of the company) are required not to take advantage of their influence to cause any damage to the rights and other benefits of the company and other shareholders (including non-controlling shareholders) (articles 6.9 and 29 of the LOS; article 5 of Decree 71/2017/ND-CP).

Transactions, contracts between the company and a shareholder holding more than 10 per cent of the total ordinary shares under the LOE (or their related person) must be approved by the board of directors or the shareholders’ meeting, depending on the value of such transactions, otherwise it shall be void and invalid (article 162.1(a) of the LOE).

A corporate shareholder holding more than 50 per cent of the total ordinary shares, or capable of directly or indirectly appointing all or most of the board of directors, or otherwise capable of amending the company’s charter shall be considered a ‘parent company’ (article 189.1 of the LOE) and be subject to the duties of a parent company under the laws, which include bearing liability for damages in cases of non-arm’s-length transactions undertaken by the company as a result of the shareholder’s intervention (article 190 of the LOE).

Failure to perform the duties that controlling shareholders owe to the company will result in such controlling shareholders being subject to liability for damage incurred and injunctions.

9 Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

If a ‘parent company’ shareholder (as defined in question 8) intervenes in the operation of the company beyond the normal authority of a shareholder and causes the company to undertake non-arm’s-length transactions or otherwise non-profitable transactions without compensation, such a shareholder shall be liable for damage incurred by the company (article 190 of the LOE).

Corporate control

10 Anti-takeover devices

Are anti-takeover devices permitted?

Anti-takeover devices are not expressly governed by Vietnamese laws. It is permissible to apply anti-takeover devices or customisation of the company’s charter provided that no statutory rights of shareholders or the board or otherwise are expressly violated. For example, an anti-takeover device in the form of a preferential share plan is permitted under the laws as part of the rights of the company (article 113.2(d) of the LOE), but a super-voting preferential share plan, which is offered to shareholders other than founding shareholders or organisations as authorised by the government or offered to any entity that is not an organisation as authorised by the government after the period of three years from the date on which the company is issued with the enterprise registration certificate, may be held invalid as a breach of the legal provisions on shares with preferential voting power (article 113.3 of the LOE).

11 Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Issuance of new shares or a new class of shares must be approved by the shareholders’ meeting (article 135.2(b) of the LOE), although the board of directors may decide on an offer of new shares within the authorised number of shares for each class as approved by the shareholders’ meeting (article 149.2(c) of the LOE). Existing shareholders are granted pre-emptive rights to acquire newly issued shares in proportion to their shareholding ratio at the time of issuance (article 114.1(c) of the LOE). However, it appears from the LOS and the legal guiding documents thereof that the shareholders’ meeting of a public company may waive such pre-emptive rights of the shareholders by a valid resolution (article 6.6 of the model charter issued together with Circular 95/2017/TT-BTC), though there is the possibility that the legal validity of such a resolution would be challenged in practice in the courts.

12 Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Except for circumstances as provided for by law, and certain restrictions on the transferability of shares that may be set forth under the company’s charter and the validity of which is enforced by way of stipulating the same on the respective share certificates (article 126.1 of the LOE), any shares are freely transferable (article 126.1 of the LOE). The securities laws also allow the same restrictions to be placed on the transfer of shares in accordance with the LOE (article 4.1(a) of Decree 71/2017/ND-CP).

A number of restrictions expressly provided by law include the case in which a founding shareholder transfers its shares to non-founding shareholders of the company, which transfer will be subject to approval of the shareholders’ meeting within the period of three years from the date of establishment (article 119.3 of the LOE), or the case in which shareholders hold shares in a public company that were issued through a private placement where such shares are subject to transfer restrictions within the period of at least one year from the date of completion of the private placement (article 10a.2(b) of the amended LOS).

13 Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

In relation to shareholders, acceptance of a share repurchase offer is not compulsory under the laws (article 130.3 of the LOE). The procedures and circumstances of share repurchase are expressly provided for in the laws, so it may be illegal to enforce repurchase of any shares without consent of the relevant shareholders. On the other hand, in relation to a company, share repurchase may become compulsory in certain circumstances. Specifically, the company may have to make a share repurchase at the request of shareholders who object to a decision on the reorganisation of the company or a change in the shareholders’ rights and obligations in the charter (article 129.1 of the LOE), as explained in question 14.

Additionally, the company may make a share repurchase in respect of redemption preference shares whenever so requested by the shareholder holding such shares or pursuant to conditions stipulated in the respective share certificates of such shares (article 118 of the LOE).

On a related note, unless exempted by statute, a public company will be required to conduct a tender offer when it repurchases ordinary shares leading to the total amount of treasury shares being equivalent to 25 per cent or more of the total outstanding shares of the same class (article 37.1(dd) of Decree 58/2012/ND-CP); however, the shareholders’ acceptance is not compulsory in this case either.

14 Dissenters’ rights

Do shareholders have appraisal rights?

Shareholders who object to the restructuring of the company or changes to the company’s charter in respect of the shareholders’ rights and obligations may request that the company buy back their shares at a fair value or a price regulated under the company’s charter (article 129.1 of the LOE). In case the company fails to reach an agreement on such transfer price, the company shall introduce at least three professional appraisal firms to enable the shareholders to select one firm and the price appraised by such selected firm shall be final and binding upon the parties (article 129.2 of the LOE). The current LOE (unlike its previous version) keeps silent on the possibility of the shareholders to transfer such shares to other parties in this case.

The responsibilities of the board (supervisory)

15 Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The board structure for listed companies is categorised as two-tier including the board of directors (which assumes management functions as to the business operation of the company) and the supervisory board (which assumes supervisory functions as to the management and operation of the company by the board of directors and general director (or CEO)). With regard to the structure of the board of directors, it needs to maintain a balance between executive directors and non-executive directors, so that at least one-third of the directors must be non-executive directors (article 13.2 of Decree 71/2017/ND-CP). Additionally, the board of directors needs to be supplemented with specialist committees (article 17.1 of Decree 71/2017/ND-CP). If the company prefers not to establish such committees, independent directors must be assigned such special duties instead (article 17.2 of Decree 71/2017/ND-CP).

It should be noted that a company may choose not to establish a supervisory board, even where it has 11 shareholders or more, or where the shareholders are organisations holding 50 per cent or more of the total shares; provided, however, that in such case at least 20 per cent of the directors are independent directors and there is an internal auditing board under the board of directors (article 134.1(b) of the LOE). Where a listed company and unlisted company choose a one-tier option, there must be a balance between executive directors and independent directors, so that, respectively, at least one-third and one-fifth of the directors must be independent directors (articles 13.4 and 13.5 of Decree 71/2017/ND-CP).

16 Board’s legal responsibilities

What are the board’s primary legal responsibilities?

Except for the matters reserved for the shareholders’ meeting as mentioned in question 4, the board of directors is primarily in charge of all other matters of the company (article 149.2 of the LOE), although certain day-to-day activities and lower level decisions are within the authority of the general director of the company (article 157 of the LOE). Meanwhile, the supervisory board is primarily in charge of supervising activities of the board of directors as well as the general director in management and operation of the company (article 165.1 of the LOE).

17 Board obligees

Whom does the board represent and to whom does it owe legal duties?

The board of directors acts on behalf of the company to decide and exercise the rights and duties of the company (article 149.1 of the LOE) and owes legal duties to the company and the shareholders (article 160.1 of the LOE; article 15.1 of Decree 71/2017/ND-CP). The board is required to act in the interest of the company and shareholders (article 160.1(c) of the LOE). In addition, the board of directors of a public company must not only show impartial treatment to shareholders but also protect the interests of persons whose interests are related to the company (article 15.2 of Decree 71/2017/ND-CP).

In respect of the supervisory board, it is required to be loyal to the interests of the company and shareholders (article 168.3 of the LOE).

18 Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Eligible shareholders may request suspension of decisions that have been passed by the board of directors contrary to the laws or the company’s charter and that cause loss to the company (article 149.4 of the LOE). Such shareholders may directly make such a claim against the director without going through the supervisory board regardless of the fact that the company has a supervisory board under the LOE (article 161 of the LOE). When the case is brought to the court, temporary injunctive relief or enforcement, or both, may be taken by the courts in accordance with the rules of civil procedure. If a director is found by the supervisory board to have breached his or her duties, the supervisory board shall immediately notify such a breach in writing to the board of directors and request that the director cease the act constituting a breach and take proper measures to remedy the consequences (article 165.8 of the LOE). In addition, a shareholder or a group of shareholders holding 10 per cent or more of the total shares for at least six consecutive months, or a lower percentage as provided for in the company’s charter, may also convene a shareholders’ meeting when a director allegedly prejudices the rights of shareholders, violates its managerial duties or makes a decision exceeding his or her authority (article 114.3(a) of the LOE) to dismiss such director or take other appropriate action within the authority of the shareholders’ meeting.

Similarly, where a member of the supervisory board is found by the board of directors to have breached the law, the board of directors shall immediately notify such a breach in writing to the supervisory board and request that the member cease the act constituting a breach as well as take proper measures to remedy the consequences (article 168.6 of the LOE).

19 Care and prudence

Do the board’s duties include a care or prudence element?

Yes, both the directors and members of the supervisory board must carry out their assigned duties with honesty, care and the best lawful interests of the company and the shareholders in mind (articles 160.1(b) and 168.2 of the LOE).

20 Board member duties

To what extent do the duties of individual members of the board differ?

All the directors on the board have the same duties under the laws and the members of the supervisory board are subject to the same duties, except for the chairman of the board and head of the supervisory board, who are subject to further rights and duties. In addition, if the company is a listed company, certain directors may be assigned specialist duties according to the resolution of the shareholders’ meeting (article 17.1 of Decree 71/2017/ND-CP).

The law requires that the directors must have professional expertise and experience in the business management of the company and not necessarily be company shareholders, unless otherwise stipulated in the company charter (article 151.1(b) of the LOE). The members of the supervisory board are not required to have any specific skills or experience unless otherwise regulated in the company’s charter (article 164.1(d) of the LOE), except that the head of the supervisory board must be a professional accountant or auditor and must work full-time at the company (article 163.2 of the LOE and article 20.4 of Decree 71/2017/ND-CP) and for listed companies or public companies where the state holds more than 50 per cent of the charter capital, members of the supervisory board must be an accountant or auditor (article 20.3 of Decree 71/2017/ND-CP).

21 Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board of directors cannot delegate a responsibility expressly and exclusively assigned to the board of directors to other internal bodies. Other than that, some of the duties or responsibilities of the board may be delegated to the general director in accordance with the company’s charter and resolution of the board of directors (article 157.3(i) of the LOE) and the board committee or a dedicated director may be in charge of specific matters such as human resources, remuneration and bonuses (see question 25). However, the board of directors is still held liable for such duties assigned to other internal bodies.

22 Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Non-public companies are not required to have non-executive or independent directors under law, whereas at least one-third of the total directors of the board of a public company must be non-executive directors (article 13.2 of Decree 71/2017/ND-CP) if the company goes with the two-tier management structure. A non-executive director is defined as a person who is not the general director, deputy general director, chief accountant or any other executive person as specified in the company’s charter (article 2.6 of Decree 71/2017/ND-CP). Where a listed company and unlisted public company go with the one-tier management structure, respectively, at least one-third and one-fifth of the directors must be independent directors as mentioned in question 15 (articles 13.4 and 13.5 of Decree 71/2017/ND-CP). A director is considered independent if he or she satisfies the following statutory conditions (article 151.2 of the LOE; article 2.7 of Decree 71/2017/ND-CP):

• not a current employee of the company or its subsidiaries and not someone that used to work for the company or the company’s subsidiaries in the previous three consecutive years (article 151.2(a) of the LOE);

• not someone receiving salary or wage from the company, except for the benefits to which members of the board of directors are entitled (article 151.2(b) of the LOE);

• not have a spouse, natural parent, adoptive parent, natural child, adopted child or sibling who is a major shareholder of the company, being a manager of the company or the company’s subsidiary (article 151.2(c) of the LOE);

• not directly or indirectly holding at least 1 per cent of the company’s voting shares (article 151.2(d) of the LOE); and

• not have held the position of member of the board of directors or the supervisory board for at least the previous five consecutive years (article 151.2(dd) of the LOE).

There appears to be no statutory difference between non-executive or independent directors and other directors in respect of responsibilities according to the laws except that if a board committee is not established within the board of directors of a listed company, the board of directors is required to appoint independent directors to be in charge of certain matters individually (article 17.2 of Decree 71/2017/ND-CP). Under the LOE, the appointment of independent directors is also required if the company is structured without having a supervisory board as discussed in question 15.

23 Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The LOE sets forth criteria for board members including independent directors, as outlined below.

Criteria for board members

Board members must:

• have full civil capacity and not be prohibited from management of companies in general (article 151.1(a) of the LOE);

• have appropriate experience or professional knowledge in business administration (members of the board of directors are not necessarily shareholders of the company, unless otherwise prescribed by the company’s charter (article 151.1(b) of the LOE));

• with regard to subsidiaries 50 per cent of whose charter capital is held by the state, members of the board of directors must not be spouses, natural parents, adoptive parents, natural children, adopted children, or siblings of the director or general director and other managers; and

• not be related persons of the manager and the person competent to designate the manager of the parent company (article 151.1(d) of the LOE).

From 1 August 2019, a board member of a public company shall be prohibited from concurrently holding the position of board member in more than five other public companies (articles 12.3 and 37.3 of Decree 71/2017/ND-CP).

Criteria for independent board members

Independent board members must possess the conditions enumerated in question 22.

Criteria for supervisory board members

Members of the supervisory board must:

• have full civil capacity (article 164.1(a) of the LOE);

• not be prohibited from establishment and management of a company (article 164.1(a) of the LOE);

• not be a spouse, natural parent, adoptive parent, natural child, adopted child or sibling of any member of the board of directors, director or general director, or any other managers (article 164.1(b) of the LOE). A member of the supervisory board is not permitted to hold a managerial position in the company and is not necessarily a shareholder or employee of the company, unless otherwise prescribed by the company’s charter (article 164.1(c) of the LOE); and

• satisfy other standards and conditions of relevant regulations of law and the company’s charter (article 164.1(d) of the LOE).

The LOE also requires that more than half of the members of the supervisory board permanently reside in Vietnam, and the head of the supervisory board must be a professional accountant or auditor and has to work full-time at the company, unless higher standards are prescribed by the company’s charter (article 163.2 of the LOE).

Members of the supervisory board of a listed company and public company in which the state holds more than 50 per cent of the charter capital must meet additional criteria and qualifications, such as being an accountant or auditor (article 20.3 of Decree 71/2017/ND-CP). Similar to changes to the board of directors, a change in the supervisory board of a public company is subject to public disclosure obligation in accordance with law (article 9.1(n) of Circular 155/2015/TT-BTC).

Disclosure requirements

For public companies, any change of the board must be publicly disclosed in accordance with the securities laws (article 9.1(n) of Circular 155/2015/TT-BTC). A public company must disclose information on corporate governance at the annual general assembly of shareholders and in the company’s annual report in compliance with the securities law on information disclosure (article 30.1 of Decree 71/2017/ND-CP). Under the LOE, certain information related to changes of the board shall be publicly disclosed (see question 36).

Minimum and maximum number of seats

The board of directors must comprise three to 11 directors, and the specific number of directors is stipulated in the company’s charter (article 150.1 of the LOE; article 13.1 of Decree 71/2017.ND-CP).

The supervisory board must have three to five members (article 163.1 of the LOE; article 20.1 of Decree 71/2017/ND-CP).

Vacancy

In the case of vacancy, by default vacant positions will be filled by election during the shareholders’ meeting (article 135.2(c) of the LOE).

24 Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The chairman of the board of directors and the general director are two separate positions with different powers under the laws, although a single person can simultaneously hold the two positions (article 152.1 of the LOE). It is common practice in non-public companies for a single person to act as both the chairman and the general director at the same time.

In public companies and companies in which the state holds more than 50 per cent of voting shares, a single person is not permitted to simultaneously hold these two positions (article 12.2 of Decree 71/2017/ND-CP; article 152.2 of the LOE). However, for public companies, as this is a new regulation, the prohibition against one person holding these two positions shall only be effective as from 1 August 2020, and the existing companies must adjust these positions accordingly (article 37.2 of Decree 71/2017/ND-CP).

Under the LOE, a company may have one or multiple legal representatives (article 13.2 of the LOE). If there is only one legal representative, the chairman of the board of directors or the general director or director shall be the legal representative; unless otherwise prescribed by the company’s charter, the chairman of the board of directors shall be the legal representative of the company. If there is more than one legal representative, both the chairman of the board of directors and the general director or director shall be the legal representatives of the company (article 134.2 of the LOE).

25 Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Unlisted public companies are not required to have any board committee or dedicated director. For a listed company, as mentioned in question 15, board committees are merely optional. These companies may choose not to form board committees, provided that they have dedicated directors for specific matters instead. Default committees available under the laws include committees of development policy, human resources, remuneration and bonuses. Additional committees can be stipulated under the resolution of the shareholders’ meeting. The heads of the committee of human resources and committee of remuneration and bonuses, or the two dedicated directors for these matters if no committee is formed, must be independent directors (article 17 of Decree 71/2017/ND-CP).

Under the LOE, as noted in question 15, where a company that has 11 shareholders or more, or where the shareholders are organisations holding 50 per cent or more of the total shares, decides not to set up a supervisory board it must establish an internal auditing board under the board of directors.

26 Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

At least one regular board meeting must be held every quarter of a calendar year according to law (article 153.3 of the LOE), although the chairman can convene a board meeting at any time.

In respect of the supervisory board, the law does not provide for a certain number of required meetings in a non-public company, although such meetings must be held at least twice a year in a public company (article 23.1 of Decree 71/2017/ND-CP).

27 Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Under the LOE, certain information related to board practices is required to be disclosed (see question 36). For listed companies, the laws require them to make a disclosure of the company management, including members of the board, number of meetings, and adopted decisions, among others, twice a year (article 11.6 of Circular 155/2015/TT-BTC) and unlisted public companies are required to make disclosure of the company management once a year in their annual report (article 8.2 of Circular 155/2015/TT-BTC).

28 Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration of directors is determined in accordance with the basis and method as provided for under the company’s charter. If the charter does not specify, the directors by default shall be entitled to remuneration based on the total working days and pay rates per day, all of which shall be estimated by unanimous agreement of the board, provided that the total remuneration of the board does not exceed the amount as approved by the shareholders’ meeting (article 28 of the model charter issued with Circular 95/2017/TT-BTC; article 158.2(a) of the LOE). There is no specific regulation for service contracts between the directors and the company, but the laws generally deem any transaction between the directors and the company as transactions with related parties, which must be approved by the board of directors or the shareholders’ meeting, depending on the value of such transactions (article 162 of the LOE). For public companies, no loans may be granted to the directors by the company unless approved by the shareholders’ meeting (article 26.4(a) of Decree 71/2017/ND-CP).

Under the LOE, members of the supervisory board may also receive salaries in accordance with a decision of the shareholders’ meeting unless provided otherwise by the company’s charter (article 167 of the LOE). For public companies, no loans may be granted to members of the supervisory board by the company unless approved by the general meeting of shareholders (article 26.4(a) of Decree 71/2017/ND-CP).

A director may also be held liable for compensation with respect to damage or loss incurred by the company in certain cases of violation of the laws in his or her role as a director (articles 136.4 and 162.4 of the LOE). It is optional for the companies to have compensatory arrangements with directors. The model charter for public companies provides for a standard clause that directors may be compensated or held harmless by the company in certain cases against damage, loss, claims, among others, in their role as directors as well as covered with directors’ liability insurance policy (article 41 of the model charter issued with Circular 95/2017/TT-BTC).

29 Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Aside from the board of directors and the supervisory board, the laws only govern remuneration and other benefits given to the general director and other managerial positions. Accordingly, the general director and other officers of the company are paid wages and bonuses as determined by the board of directors unless the company’s charter requires otherwise (articles 158.2(c) and 149.2(i) of the LOE). Transactions between the company and the members of the board of directors including the general director must also be approved by the board of directors or shareholders’ meeting in the same manner as in the directors’ cases (article 162 of the LOE; article 26 of Decree 71/2017/ND-CP). There is neither special nor separate regulation on compensatory arrangements with senior management.

30 D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

For public companies, D&O liability insurance is expressly regulated under the laws, premiums of which can be paid by the company itself if so determined by the shareholders’ meeting, provided that such a policy does not cover liability arising from breaches of laws or the company’s charter (article 14.3 of Decree 71/2017/ND-CP). For non-public companies, D&O liability insurance is not regulated by the laws and it is not a very common practice that D&O liability insurance is purchased by the company for its directors.

31 Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

No comprehensive and unified legislation exists in respect of indemnities made by the company for the directors and officers for such liabilities. However, under article 41 of the model charter regulated in Circular 95/2017/TT-BTC as issued by the Ministry of Finance for public companies, the directors and other officers of the company shall be indemnified by the company in such circumstances only if they have not committed any breach of law or the company’s charter or their duties and obligations.

32 Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The laws by default hold the directors, general director and members of the supervisory board liable for certain acts or omissions, such as failure to comply with the law, charter or the resolutions of the shareholders’ meeting. However, to the extent that such liability is civil in nature, it would be possible for the shareholders’ meeting, as the highest authority in the company, to preclude, limit or waive such liability in relation to the company, although the courts might have different interpretations on this issue. The shareholders may, and cause the company to, provide for limit of liability and compensatory arrangements in the company’s charter and directors’ liability insurance policy, such as the sample clause in the model charter for public companies (article 41 of the model charter issued with Circular 95/2017/TT-BTC).

33 Employees

What role do employees play in corporate governance?

Employees are not generally involved in corporate governance unless otherwise regulated by the corporate documents of the company, such as the company’s charter or policies.

34 Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

As explained in question 15, a company may choose to establish a supervisory board (article 134.1(a) of the LOE) that supervises the management and operation of the company by the board of directors and general director (or CEO). The law does not prescribe how often such evaluations are conducted; however, the supervisory board is required to submit evaluation reports during the annual shareholders’ meeting (article 165.3 of the LOE). The supervisory board may use an independent consultant or the internal audit department of the company to perform any of its assigned duties (article 165.10 of the LOE). Companies are required to provide all information and documents relating to their management, administration and business operations upon demand of the supervisory board (article 166.5 of the LOE).

Disclosure and transparency

35 Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

A public company is required by law, within six months of becoming public, to have its charter, internal management rules, and prospectus, among others, disclosed on its official website in the shareholders section (articles 5.2(a) and (c) of Circular 155/2015/TT-BTC). The LOE requires the non-public company’s charter to be published on the company’s website (article 171.2(a) of the LOE) (see question 36).

36 Company information

What information must companies publicly disclose? How often must disclosure be made?

The laws provide for two kinds of disclosure for public companies, namely, regular and extraordinary disclosures. Regular disclosure includes the disclosure of audited financial statements, annual reports, contents of general meetings of shareholders, offering and report on use of funds, and foreign ownership ratio. Extraordinary disclosure includes the disclosure of any important event, including dissolution of the company, decisions of share buyback, new share issuance, dividend distributions or any change in executive officers, among others. In certain circumstances, such as any event that may have a material effect on the shareholders’ benefits, public companies may be requested by the authorities to make disclosures (chapter II of Circular 155/2015/TT-BTC).

Under the LOE, after the enterprise registration certificate of a new company is issued, the company must make a public announcement regarding its business lines and list of founding shareholders and shareholders who are foreign investors through the National Business Registration Portal (the Portal) (article 33.1 of the LOE). Additionally, where there are changes to the enterprise registration contents, the company shall also make a public announcement on such changes through the Portal (article 33.2 of the LOE). Moreover, the company shall post the following information on its website (article 171.2 of the LOE):

• the company’s charter;

• curricula vitae, qualifications, and professional experience of directors, members of the supervisory board, the general director or director of the company;

• annual financial statements ratified by the shareholders’ meeting; and

• annual reports of the business made by the board of directors and the supervisory board.

Hot topics

37 Say-on-pay

Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?

The shareholders’ meeting only votes on the total amount and calculation method of executive remuneration and bonuses, which will be binding and valid (articles 158.2(a) and 167.1 of the LOE). The board of directors shall then make specific decisions of remuneration and bonuses according to such resolutions. The exact power may be customised in the company’s charter. There is no say-on-pay vote in Vietnamese law, although it is not explicitly prohibited.

38 Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

A shareholder or a group of shareholders in a company may nominate directors for the board if they have held at least 10 per cent of the total ordinary shares for a consecutive period of six months or more (major shareholders) unless a lower percentage is set forth in the company’s charter (articles 114.2 and 114.4 of the LOE). Therefore, unless a shareholder holds a minimum ratio of shareholding that provides the power to nominate directors, such a shareholder must solicit proxy voting in order to exercise such a right. The nomination of directors proposed by major shareholders shall be included in the agenda of the shareholders’ meeting upon the written proposal of such major shareholders (article 138.2 of the LOE). Such a proposal must be sent to the company no later than three working days prior to the opening date of the shareholders’ meeting (unless the company’s charter provides for another time limit) (article 138.2 of the LOE). Of note, the proposal must specify the names of shareholders, the amount of each type of shares and the issues proposed to the agenda (eg, the nomination of the directors with details of the candidates) (articles 136.7(dd) and 138.2 of the LOE).

39 Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Engagement or transaction between the company and its shareholders are allowed at any time, provided that such engagement or transaction shall comply with the conditions in law, such as conditions for related-party transactions, disclosure procedure, among others.

Typically, certain persons are designated as authorised representatives to communicate with the company on behalf of the shareholders, who shall concurrently participate in general meetings of shareholders (article 16 of the LOE). Also, for corporate shareholders, their legal representatives, who have the right to enter into and perform civil transactions on behalf of and in the interests of the shareholders under the law, may also engage or transact with the company on behalf of the shareholders (article 141.2 of the Civil Code).

The frequency of direct engagement between the shareholders and the company should vary case by case.

40 Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

With respect to ordinary companies, the laws do not explicitly require disclosure with respect to corporate social responsibility matters. However, for internal disclosure, the company is required to publish regulations on environment protection and employment policy (article 6 of Decree 60/2013/ND-CP). Public companies are required to disclose corporate social responsibility matters if they, among other cases:

• have major impact on the production, business and administration of the company (article 9.1(s) of Circular 155/2015/TT-BTC);

• cause serious effects to the lawful interests of the investors or cause major effects to securities prices that needs to be verified (article 10 of Circular 155/2015/TT-BTC); or

• affect decisions of the shareholders and investors (article 28.1 of Decree 71/2017/ND-CP).

In addition, annual reports of public companies also include information related to the impact of the company on the environment and society (eg, raw materials, energy consumption, water consumption, compliance with the law on environmental protection and policies related to employees, among others (article 8.2 of Circular 155/2015/TT-BTC)).

41 CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

In general, the salary scale and salary table of all employees in the company must be published in the workplace before they are implemented and notified to the competent authority (article 7.6 of Decree 49/2013/ND-CP). The salary scale and salary table include the ratio between the monthly salary for each position (and levels in each position) and the lowest monthly salary.

In addition, the laws require the company to disclose separately information regarding the remuneration and salary of the director (general director), members of the board of directors and other managers in the annual financial statement of the company (article 158.3 of the LOE; article 31 of Decree 71/2017/ND-CP). Further, the operation expenses and other interests of the board of directors and each member thereof need to be recorded in the operation report of the board of directors, which has to be submitted during the annual shareholders’ meeting (article 158.3 of the LOE; article 9.1 of Decree 71/2017/ND-CP).

42 Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

There is no specific requirement on companies to disclose ‘gender pay gap’ information. However, the law requires that the salary scale and salary table be established on the principles of equality and non-discrimination based on gender, among others (article 7.4 of Decree 49/2013/ND-CP). Female employees who are pregnant or raising children under 12 months of age are entitled to certain favourable humanitarian conditions (eg, shortened working time with full pay (article 155 of the Labor Code)).

Update and trends

Important legislation on corporate governance for public companies was issued in 2017, namely Decree 71/2017/ND-CP and Circular 95/2017/TT-BTC, which updated the regulations on public companies to harmonise them with the Law on Enterprise 2014 as well as provide for new regulations regulating public companies in Vietnam. New legislation on support for small and medium-sized enterprises and start-up enterprises has also been issued, including the Law on Support of Small and Medium-Sized Enterprises, its guidance, Decree 39/2018/ND-CP, and Decree 38/2018/ND-CP for start-up enterprises, which has provisions on corporate governance for small and medium-sized enterprises.

With respect to state-owned companies, Decree 32/2018/ND-CP was issued on 8 March 2018, updating the contents of the existing regulations in line with the general policy of the state to restructure and enhance the performance of state-owned companies.

In addition, the Ministry of Planning and Investment is preparing regulations amending and supplementing some articles of the Law on Investment and Law on Enterprises (the Draft), which was publicly disclosed on 30 November 2017. The Draft provides several amendments to the corporate governance of enterprises including enhancement of the operation and management of joint-stock companies as outlined below:

• adding further provisions dealing with the case where the chairman and secretary refuse to sign the resolution and meeting minutes of the meeting of the general meeting of shareholders or meeting of the board of management (by updating article 146 and article 154 of the LOE). This protects the interests and rights of shareholders and members of the board of management in case the chairman and secretary of such meeting abuse their rights;

• requiring the head of the supervisory board of the company to have only professional accounting and auditing knowledge, without having a certificate of accounting and audit (article 163.2 of the LOE currently requires the head of the supervisory board to be a professional auditor or accountant); and

• with respect to the management of the supervisory board of a listed company and a company where the state holds more than 50 per cent of the charter capital, requiring only at least one member of the supervisory board to be an accountant or auditor (amending article 164.2 of the LOE). This is to make the management of the supervisory board more effective, as the supervisory board may have other members with appropriate specialisation to handle the supervisory board’s duties, and to also simplify the criteria and conditions of a member of the supervisory board.

The proposal is for the Draft to come into effect from 1 January 2019.

Hikaru Oguchi

h_oguchi@jurists.co.jp

Taro Hirosawa

taro.hirosawa@jurists.jp

Vu Le Bang

vu.le.bang@jurists.jp

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115 Nguyen Hue, District 1

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