chapter ii & iii oecd.docx

7/25/2019 Chapter II & III OECD.docx

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rinciple II.7 should (e chec$ed for consistency with the assess#ent

of principle II.C which strengthens and further re0nes the (asic rights of

shareholders.

2.6.1.1 rinciple II.7 -1! Secure #ethods of ownership registration


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6. >here securities can (e de#aterialised -i.e. electronic for# and

transferred (y (oo$ entry/ the syste# is widespread and relia(le. ?ini#u#

perfor#ance standards should e%ist for registrars@transfer agents/ such as

record$eeping rules/ as well as the possi(ility of inspection and

e%a#ination of registrars@transfer agents (y the authorities. Co#panies or

their agents are lia(le for #aintaining an accurate register of

shareholders.

2.6.1.2 rinciple II.7 -2! Convey or transfer of shares

here refusal to register share transfers can (e part of a co#panys

charter and is widespread/ the 4urisdiction should (e assessed as either

not i#ple#enting the principle or as only partly i#ple#enting -if such

provisions are possi(le (ut seldo# used.

1 . See also ?ethodology for 7ssessing I#ple#entation of the IOSCO

O(4ectives and rinciples of Security Regulation/ rinciple 26 -especially/

(ut not li#ited to/ Key Auestion ;. >hile the reco##endations of IOSCO

are li$ely to (e relevant to an assess#ent of principle II.7.1 they are #uch

#ore prescriptive than the rinciples/ specifying the #echanis# to (e

used to o(tain the o(4ective.


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The authorities also have a legiti#ate interest in (eing a(le to

restrict or prohi(it the transfer of shares. This is particularly so in the case

of 0nancial institutions where the prudential re*uire#ents for a 0t and

proper owner #ight need to (e enforced (y li#iting transfera(ility. The

enforce#ent of co#petition policy and ta$eover rules are also legiti#ate

reasons for the authorities to (e a(le to prevent transfers. So#e securities

regulators #ay place restrictions on shareholders a(ility to resell their

securities in the pu(lic #ar$ets if the securities were sold in the 0rst

instance pursuant to certain e%e#ptions fro# securities registration

re*uire#ents. The e%istence of such restrictions should therefore not lead

to an assess#ent of noni#ple#entation of the principle.

7 nu#(er of 4urisdictions have restrictions on ownership (y

foreigners either in general or in particular sectors such as those involving

national security. In so#e cases/ there are re*uire#ents that no #ore than

a particular percentage of outstanding shares can (e owned (y foreigners.

Such policy action should not for# part of an assess#ent! "The rinciples

support e*ual treat#ent for foreign and do#estic shareholders in

corporate governance. They do not address policies to regulate foreign

direct invest#ent -p. 9B'. owever/ the concern of the rinciples to

ensure e3ective corporate governance/ which includes contesta(le control/

would indicate a need (y the authorities to assess the (ene0ts of the

invest#ent policy against the side e3ects on corporate governance. This

issue could (e ta$en up in the 0nal report as a policy issue to (e

discussed.

Such practices and the intent of the principle suggest the following

essential criteria! 1. ither as a conse*uence of laws/ listing re*uire#ents

and@or #ar$et discipline/ pu(lic co#panies do not in general restrict the

transfer or conveyance of shares. Restrictions widely regarded as

legiti#ate in the international co##unity -see a(ove #ay (e i#posed (y

the authorities su(4ect to transparent rule #a$ing and wor$a(le appeals

procedures.

2. The security depositaries are ade*uately sta3ed and funded/

independent of special interests and are accepted (y #ar$et participants.

The clearing and settle#ent fra#ewor$ is regarded (y #ar$et participantsas functioning e3ectively.


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2.6.1.6 rinciple II.7 -6! O(tain relevant and #aterial infor#ation on the

corporation on a ti#ely and regular (asis

here this is widespread/ the 4urisdiction

should (e assessed as either not or only partly i#ple#enting the principle.


essential criteria!

1. Internal procedural or legal #echanis#s availa(le to co#panies are not

used to i#pede shareholders or their representatives fro# o(tainingrelevant and #aterial co#pany infor#ation without undue delay and cost.

The type of infor#ation that should (e readily availa(le includes co#pany

charters@articles@(ylaws/ 0nancial state#ents/ #inutes of shareholder

#eetings and the capital structure of the co#pany.

2.6.1.9 rinciple II.7 -9! articipate and vote in general shareholder

#eetings The assess#ent of this principle should (e consistent with that

for principle II C.2.


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restricted/ the reviewer #ight raise it as a policy issue since the structure

could contri(ute to the underdevelop#ent of corporate governance

standards and #ight (e closely associated with the non5i#ple#entation of

other principles.

Of #ore direct concern to a reviewer are cases where shareholder

participation and voting is i#peded (y the #isuse of procedural rules and

(ylaws such as voter pre5registration and share (loc$ing rules. The

reviewer should consult the investor co##unity/ securities regulator/

stoc$ e%change/ etc/ a(out such practices. >here they are used (y a

signi0cant #inority of co#panies/ including very large and pro#inent

co#panies/ the reviewer should (e inclined to view that the principle is

only partly i#ple#ented due to a de0cient legal fra#ewor$ and@or

enforce#ent.


essential criteria!

1. rocedural and@or legal #echanis#s availa(le to a co#pany do not

per#it it to i#pede entitled shareholders fro# participating and voting in

a general shareholder #eeting. 3ective #eans of redress are availa(le

for those whose rights have (een i#peded or violated.

2.6.1.: rinciple II.7 -:! lect and re#ove #e#(ers of the (oard

The assess#ent of this principle should (e consistent with that for

principle II C.6.


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Of #ore concern to a reviewer is whether there is widespread

resort to procedures/ etc that are designed to restrict the legiti#ate rights

of shareholders. The reviewer should consult the investor co##unity/

securities regulator/ stoc$ e%change/ etc/ a(out such practices. >here

they are used (y a signi0cant #inority of co#panies/ including very large

and pro#inent co#panies/ the reviewer should (e inclined to view that the

principle is only partly i#ple#ented due to a de0cient legal fra#ewor$

and@or enforce#ent.


essential criteria!

1. rocedural and@or legal #echanis#s availa(le to a co#pany do not

per#it it to i#pede entitled shareholders fro# electing and re#oving

#e#(ers of the (oard. 3ective #eans of redress are availa(le for those

whose rights have (een i#peded or violated.

2.6.1.; rinciple II.7 -;! Share in the pro0ts of the corporation


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1. Shareholders in the sa#e class are treated e*ually and in accordance

with the rights of the respective share classes with respect to the

distri(ution of pro0ts. 3ective #eans of redress are availa(le for those

whose rights have (een violated.

2. There is a transparent and enforcea(le legal fra#ewor$ de0ning how

decisions are #ade a(out distri(uting pro0ts.

2.6.2 rinciple II.+

The principle states that shareholders should have the right to

participate in/ and to (e su)ciently infor#ed on/ decisions concerning

funda#ental corporate changes such as! 1 a#end#ents to the statutes/

or articles of incorporation or si#ilar governing docu#ents of the

co#pany8 2 the authorisation of additional shares8 and 6 e%traordinary

transactions/ including the transfer of all or su(stantially all assets/ that in

e3ect result in the sale of the co#pany.

The principle addresses the #ost (asic issues surrounding a

co#pany. Co#pany law and practices/ however/ di3er #ar$edly around

the world! so#e 4urisdictions give full rights to shareholders to propose

and to change the governing docu#ents of a co#pany/ in others they canonly vote on a proposal of the (oard and in so#e it depends on the charter

of the co#pany. In other 4urisdictions/ (oards can decide on the changes

the#selves. In so#e 4urisdictions it is co##on for (oards to (e delegated

authority to su(stantially increase the shares outstanding -often in

connection with antita$eover defences while in others/ strong pre5

e#ption rights and the need for shareholder approval results in li#ited

(oard authority.

In for#ing an assess#ent of whether the su(5principles are

o(served/ it is i#portant to (ear in #ind that the principle calls for

shareholder "participation' and that they (e "su)ciently' infor#ed

a(out these funda#ental decisions. Thus a situation where they can only

vote on a reco##endation of the (oard should (e considered as a case

where the principle is i#ple#ented. The sa#e situation applies to the

other two su(principles. >here they cannot vote at all/ the principle

should (e assessed as not i#ple#ented. The second aspect/ that

shareholders (e "su)ciently' infor#ed/ is (ased on two funda#ental


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aspects of the rinciples! shareholders should (e infor#ed when ta$ing

decisions and they should also have full e%5ante infor#ation a(out aspects

li#iting their rights that would nor#ally (e factored into the price of the

security. Surprises and the capacity for ad hoc action are a concern of the

rinciples. 3ective #echanis#s for challenging corporate actions could

include/ inter alia/ court proceedings/ ad#inistrative proceedings and

ar(itration that is used in so#e 4urisdictions as a co#ple#entary #easure.

3ective re#edies could include/ inter alia/ en4oining/ unwinding or

#andating corporate actions/ 0nes or penalties/ da#ages or restitutionary

awards/ or enforcea(le rights to have ones shares purchased at a fair

value deter#ined without giving e3ect to the corporate action a(out which

the shareholders have co#plained.

2.6.2.1 rinciple II.+ -1! 7#end#ents to the statutes/ or articles of

incorporation or si#ilar governing docu#ents of the co#pany.

ssential criteria

1. The legal fra#ewor$ gives either e%clusive power to the shareholder

#eeting or re*uires the (oard to see$ shareholder approval of change to

the (asic governing docu#ents of the co#pany. rocedural rules adopted

(y co#panies do not frustrate the e%ercise of these rights and #aterial

infor#ation #ust (e provided su)ciently in advance of #eetings to per#it

considered decisions.

2. Shareholders can challenge actions concerning funda#ental corporate

changes either if! -a the action re*uired shareholder authorisation and

such authorisation was either not o(tained or shareholders were

i#properly denied the opportunity to participate in the decision8 or -(

shareholders did not receive su)cient and ti#ely infor#ation a(out the

proposed action. There are e3ective #echanis#s for challenging such

actions and e3ective re#edies.

2.6.2.2 rinciple II.+ -2!The authorisation of additional shares

ssential criteria

1. The corporate governance fra#ewor$ gives either e%clusive power to

the shareholder #eeting -delegation of this authority for a li#ited period

to the (oard could (e per#itted or re*uires the (oard to see$ shareholder


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approval of changes to the authorised capital of the co#pany. rocedural

rules adopted (y co#panies should not frustrate the e%ercise of these

rights and full infor#ation #ust (e provided su)ciently in advance of the

#eeting to per#it considered decisions. There are e3ective #eans of

redress where procedures have not (een followed.

2.6.2.6 rinciple II.+ -6! %traordinary transactions/ including the transfer

of all or su(stantially all assets/ that in e3ect result in the sale of the

co#pany.

ssential criteria

1. The corporate governance fra#ewor$ gives either e%clusive power to

the shareholder #eeting or re*uires the (oard to see$ shareholder

approval of e%traordinary transactions/ including transfer of all or

su(stantially all assets/ which in e3ect result in the sale of the co#pany.

?aterial infor#ation a(out the proposed transaction #ust (e provided

su)ciently in advance of the #eeting to per#it considered decisions.

There are e3ective #eans of redress where procedures have not (een

followed.

2.6.6 rinciple II.C

rinciple II.C states that "shareholders should have the opportunity

to participate e3ectively and vote in general shareholder #eetings and

should (e infor#ed of the rules/ including voting procedures/ which govern

general shareholder #eetingsG'.

orld +an$ as part of the ROSC and the OCE as part of the

Regional Corporate =overnance Roundta(les report nu#erous instances of

ad hoc devices intended to #ute shareholder voice such as voting (y

show of hands without the right to de#and a (allot/ only a li#ited nu#(er

of entry cards granted to custodians/ delayed infor#ation and even the

place for the #eeting of shareholders (eing out of the way H or indeed


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even un$nown ?any of the rules and procedures are only in part

deter#ined (y law and regulation. They are rather often heavily in,uenced

(y the (oard through corporate charters and (ylaws. The reviewer #ust

therefore (e aware of general practices in the country and ta$e these into

account when for#ing an assess#ent a(out whether the principle is

i#ple#ented.

2.6.6.1 rinciple II.C.1! Shareholders should (e furnished with su)cient

and ti#ely infor#ation concerning the date/ location and agenda of

general #eetings/ as well as full and ti#ely infor#ation regarding the

issues to (e decided at the #eeting.

The assess#ent of rinciple II.C.1 should (e chec$ed for

consistency with principle II.7.6.

hat is appropriate will in part depend on the gravity of theissues to (e decided as well as on the nature of the shareholding

structure. >ith respect to the issues for decision/ research indicates that

#aterials sent to shareholders #ight not (e very infor#ative/ in so#e

cases shareholders only discovering the day of the #eeting the

i#portance of issues covered (y su##ary descriptions. >ith #any shares

now held through a chain of inter#ediaries there see#s to (e a consensus

that a longer period is necessary for shareholders (oth to #a$e their

decisions and then to co##unicate their decisions to the co#pany

through the chain of inter#ediaries. owever/ one siJe does not 0t all and

the availa(ility and use of electronic #eans for the delivery of #aterial

and for voting will also need to (e ta$en into consideration. ?ore and #ore

pu(lic co#panies #a$e shareholder #eeting #aterial availa(le for free on

their we(sites and@or there is a free/ internet5(ased and easily accessi(le

pu(lic register of pu(lic co#panies #eeting #aterial. Considera(le

4udge#ent will therefore (e re*uired of reviewers to deter#ine the

situations where co#panies are in fact #anipulating shareholder rights


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through insu)cient ti#e and insu)cient infor#ation for shareholders to

for# a 4udge#ent. This will involve e%tensive discussions with investors to

see if they are co#forta(le with the general (ehaviour of co#panies in a

4urisdiction.

7nother practice that has often (een o(served and that reduces

shareholder participation involves uncertainty a(out a #eeting date. In

so#e 4urisdictions that specify *uoru#s for a general #eeting of

shareholders/ co#panies #ay #a$e a 0rst announce#ent of a #eeting

(ut will then change it at short notice to another date if it feels that there

will not (e a *uoru#. >hile this is legiti#ate/ it can also (e used to

dissuade so#e shareholders fro# participating.


essential criteria!

1. The corporate governance fra#ewor$ re*uires or encourages

co#panies to provide su)cient advance notice of shareholder #eetings

and to deliver #eeting #aterial covering the issues to (e decided that is

ade*uate for shareholders to #a$e infor#ed decisions The standardgenerally is o(served in the 4urisdiction and investors generally

ac$nowledge that notice and infor#ation provided (y co#panies is

ade*uate. There are e3ective #eans of redress for shareholders where

re*uired procedures are not followed.

2.6.6.2 rinciple II.C.2! Shareholders should have the opportunity to as$

*uestions to the (oard/ including *uestions relating to the annual e%ternal

audit/ to place ite#s on the agenda of general #eetings/ and to proposeresolutions/ su(4ect to reasona(le li#itations.


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e3ectively prevent *uestions. The assessor will have to for# a 4udge#ent

a(out whether actual practices are on (alance fair or are used to prevent

accounta(ility of the (oard to all shareholders/ a $ey re*uire#ent of

chapter III.

The situation with respect to placing ite#s on the agenda and

proposing resolutions is considera(ly #ore co#ple% and the assess#ent

will need to adapt to the legal and structural features of the 4urisdiction. In

so#e 4urisdictions/ shareholders can through an ordinary or e%traordinary

#eeting of shareholders control the actions of the (oard. Certain #atters

are viewed as #ore appropriate for (oard decision #a$ing in other

4urisdictions/ rather than shareholder consideration/ and this dichoto#y is

often re,ected in legal re*uire#ents. The annotations to the principle note

that "it is reasona(le/ for e%a#ple/ to re*uire that in order for

shareholder resolutions to (e placed on the agenda/ they need to (e

supported (y shareholders holding a speci0ed #ar$et value or percentage

of shares or voting rights. This threshold should (e deter#ined ta$ing into

account the degree of ownership concentration/ in order to ensure that

#inority shareholders are not e3ectively prevented fro# putting any ite#s

on the agenda'. The intent of the principle is that this threshold should (e

a(le to include a nu#(er of co5operating shareholders/ an intent given

speci0c for# through principle II.=.

The #ethod of appoint#ent of an e%ternal auditor varies widely

with the (oard or a co##ittee of the (oard -#ore often now/ an

independent co##ittee #a$ing appoint#ents in so#e 4urisdictions and

shareholders in others. Auestions directly proposed to auditors are allowed

in so#e 4urisdictions especially where they have (een appointed (y the

7=?. The principle ta$es the general position that accounta(ility of the

(oard re*uires that shareholders should (e a(le to as$ *uestions of the

(oard a(out the e%ternal audit


essential criteria!


co#panies to! -a facilitate shareholders as$ing *uestions of the (oard8

and -( per#it shareholders to propose ite#s for discussion on the agenda


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or to su(#it proposals@resolutions for consideration at the #eeting of

shareholders regarding #atters viewed as appropriate for shareholder

action (y applica(le law. There is an e3ective #eans of appeal on

procedural grounds. >here voluntary/ the standard is widespread.

2. Thresholds for share ownership esta(lishing the right of individual

shareholders/ or groups of shareholders/ to pose *uestions/ to place ite#s

on the agenda or to su(#it proposals@resolutions for consideration at the

#eeting of shareholders regarding #atters viewed as appropriate for

shareholder action (y applica(le law should not (e restrictive and should

ta$e into account the concentration of ownership in the 4urisdiction and

the average siJe of co#panies.

2.6.6.6 rinciple II.C.6! L3ective shareholder participation in $ey

corporate governance decisions/ such as the no#ination and election of

(oard #e#(ers/ should (e facilitated. Shareholders should (e a(le to

#a$e their views $nown on the re#uneration policy for (oard #e#(ers

and $ey e%ecutives. The e*uity co#ponent of co#pensation sche#es for

(oard #e#(ers and e#ployees should (e su(4ect to shareholder

approvalG.


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the co#panys pro%y #aterials. Shareholders in a nu#(er of 4urisdictions

have such access although so#eti#es su(4ect to conditions to prevent

a(use. ow restrictive these conditions are in practice will need to (e

assessed after consultations with investors/ custodians etc. %clusion fro#

the pro%y process i#poses very costly (urdens for those challenging the

accounta(ility of the (oard.

7 $ey issue is how to 4udge in practice whether shareholder

participation is indeed e3ective. One indicator #ight (e to loo$ at the

nu#(er of (oard #e#(ers for#ally declared as independent or/ in so#e

4urisdictions/ as no#inated and elected (y #inority shareholders. 7nother

#ight (e to e%a#ine the nu#(er of contested elections in a 4urisdiction/

although if a co#pany feels that a no#ination #ight not (e accepta(le it

#ight si#ply (e withdrawn or not even considered. The 4udge#ent of the

investor co##unity will in any case need to re#ain an i#portant input.

For shareholder participation to (e e3ective/ it is also i#portant for

shareholders to (e infor#ed a(out the no#inated (oard #e#(ers.

rinciple M.7.9 calls for full disclosure of the e%perience and (ac$ground of

candidates for the (oard and the no#ination process. >here there is not

ade*uate disclosure/ the assess#ent of II.C.6 #ight need to (e ad4usted

accordingly.

The procedures for the no#ination of candidates vary widely and in

this area there are a nu#(er of functional e*uivalents that the reviewer

#ight need to consider. In so#e 4urisdictions where ownership is

characterised (y a nu#(er of large shareholdings/ for#al or infor#al tal$s

#ight (e held (etween the chair#an of the (oard and the #a4or

shareholders to deter#ine a list. In other countries with concentrated

shareholding and powerful owners/ several positions #ight (e reserved for

#inority shareholders. In other 4urisdictions/ especially those where

#anage#ent or the (oard itself have traditionally controlled (oard

no#ination/ it is increasingly regarded as good practice for independent

(oard #e#(ers to have a $ey role in no#ination/ often through

co#prising the #a4ority of a no#ination co##ittee.

+oard and e%ecutive contracts are usually not an appropriate

su(4ect for approval (y the general #eeting of shareholders/ (ut theprinciple advocates there should (e a #eans (y which they can e%press


16/43

their views. owever/ in so#e countries (oard co#pensation -usually in

aggregate is approved (y the general #eeting of shareholders. The

#eans for shareholders to e%press their views #ight (e (y an advisory

vote or (y so#e other #ethod. In #any 4urisdictions the principle

-especially with respect to e%ecutives is pro(a(ly not as yet i#ple#ented.

This is not the case with e*uity5(ased incentive sche#es especially in

those 4urisdictions with strong pre5e#ption rights. The principle calls for

e*uity sche#es to (e approved either for individuals or for the sche#e as

a whole. They should not (e su(su#ed under general approval for a

potential increase in issued e*uity/ a practice that should (e classi0ed as

partial or non5 i#ple#entation of the principle. In an increasing nu#(er of

4urisdictions/ any #aterial changes to e%isting sche#es #ust also (e

approved and in these cases the principle should (e assessed as fully

i#ple#ented.

Such practices and the facilitating intent of the principle suggest the

following essential criteria!


co#panies to facilitate the e3ective participation of shareholders in

no#inating and electing (oard #e#(ers. The practice of facilitatingparticipation is widespread including through for#alised procedures in

co#pany charters and (y5laws. >here e3ective participation is a listing

re*uire#ent/ it is enforced (y the listing authority.


co#panies to present the opportunity for shareholders to #a$e their views

$nown either at the #eeting of shareholders or (y e*uivalent #eans a(out

the co#pensation policy for (oard #e#(ers and $ey e%ecutives. There areprovisions for shareholders to e%plicitly approve e*uity5(ased

co#pensation sche#es and this power is not delegated to the (oard.

2.6.6.9 rinciple II.C.9! Shareholders should (e a(le to vote in person or in

a(sentia/ and e*ual e3ect should (e given to votes whether cast in person

or in a(sentia.


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>ith respect to voting in a(sentia/ it is i#portant that investors can

place reliance upon directed pro%y voting. The corporate governance

fra#ewor$ should ensure that pro%ies are voted in accordance with the

direction of the pro%y holder and that disclosure is provided in relation to

how undirected pro%ies will (e voted. The for#er aspect is crucial. In so#e

4urisdictions only (lan$ pro%ies can (e sent to the 0r#. In this case/ the

principle should (e regarded as not i#ple#ented. Only where a

shareholder can #andate a pro%y for or against any resolution can the

principle (e assessed as fully i#ple#ented. >here pro%ies are held (y the

(oard or #anage#ent for co#pany pension funds and for e#ployee stoc$

ownership plans/ the voting records should (e $ept and (e availa(le to

plan 0duciaries and regulators as needed to ensure that an e*ual e3ect is

given to all votes.

So#e pro%y syste#s are (ased on the concept of power of attorney

(ut nevertheless allow a shareholder to vote in a(sentia. Moting in

a(sentia #ight also ta$e place through an authorised representative which

is *uite co##on in #any 4urisdictions. 7nother alternative to pro%ies is

si#ply sending a vote (y #ail or (y electronic #eans. These are cases of

functional e*uivalence so long as/ consistent with i#ple#entation of the

principle/ so long as such votes are given e*ual e3ect. So#e #echanis#s

#ay prove in practice to (e cu#(erso#e and costly/ an issue ta$en up in

principle III.7.:.

In a nu#(er of 4urisdictions/ voting #echanis#s are only generally

speci0ed (y co#pany law and securities regulation and a great deal will

depend on co#pany charters/ (y5laws and practices. In for#ing a

4udge#ent a(out i#ple#entation of the principle/ a reviewer #ight (e

a(le to #a$e use of the nu#erous surveys now (eing conducted (y pro%y

agents and investor groups a(out the actual practices adopted (y

co#panies.


essential criteria!

1. The corporate governance fra#ewor$ per#its shareholders to vote in

a(sentia -including postal voting and other procedures and that this vote

can (e for or against a resolution/ and fully e*uivalent to the possi(ilities


18/43

allowed to those shareholders present. Shareholders have an e3ective

re#edy against the co#pany if it does not provide the options prescri(ed

(y law. 7doption of one or #ore of the functionally e*uivalent range of

options (y co#panies is widespread.

2.6.9 rinciple II.E!

The principle states that capital structures and arrange#ents that

ena(le certain shareholders to o(tain a degree of control disproportionate

to their e*uity ownership should (e disclosed.

The assess#ent of rinciple II.E needs to (e chec$ed for its

consistency with the assess#ent of principle M.7.6 -Eisclosure should

include/ (ut not (e li#ited to/ #aterial infor#ation on #a4or share

ownership and voting rights


19/43

the co#pany as soon as it (eco#es aware of a shareholder agree#ent or

with the shareholder. Eisclosure should also e%tend to infor#al

agree#ents although enforce#ent #ight prove di)cult. Shareholder

agree#ents should not (e confused with the right of shareholders to

consult with each other/ so long as (y doing so they are not e%ercising or

see$ing to o(tain control over the co#pany -see principle II.=.

7n i#portant case where the degree of control is often

disproportionate to e*uity ownership concerns co#pany groups and

especially those organised as a pyra#id structure. Research indicates that

control is particularly opa*ue in such groups/ in part (ecause private

co#panies a(out which little is $nown are integral to the pyra#id. ?any

4urisdictions #ight therefore (e assessed as not or only partly

i#ple#enting this aspect of the principle. Cross shareholdings (etween

co#panies are also co##on (ut are fre*uently li#ited (y law -in order to

protect the notion of co#pany capital to no #ore than a 0%ed percentage

of capital -often 1B per cent. Transparency is often poor in this area/

although analysts and infor#ed investors can often o(tain the (asic

infor#ation fro#/ inter alia/ co#pany registrars. The reviewer should also

pay attention to principle M.7.6/ where the annotations note that

shareholders also have a right to infor#ation a(out the structure of a

group of co#panies and intra5group relations.

The disclosure of capital structures is so funda#ental that the

criterion does not foresee a voluntary disclosure re*uire#ent. Infor#ation

a(out corporate groups and the di)cult area of shareholder agree#ents

are treated as in the #ore general for# of the other criteria! the

fra#ewor$ re*uires or encourages disclosure. The disclosure re*uire#ents

can often (e frustrated (y dividing disclosure (etween #any di3erent

docu#ents such as co#pany charters and statutes/ and prospectuses.

These can (e di)cult to access and can (e used to avoid transparency!

shareholders can never (e sure that they have the whole picture. 7

reviewer should not regard the principle as fully i#ple#ented unless

co#panies generally disclose the re*uired infor#ation at least annually in

a co#prehensive/ easy to access and easy to use for#at so that interested

persons can o(tain a clear picture of the relevant capital structures.


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Eisclosure o(ligations should also apply at the #o#ent of #aterial

changes to the arrange#ents.


essential criteria!

1. The corporate governance fra#ewor$ re*uires the disclosure on a

continuing (asis to shareholders of all capital structures that allow certain

shareholders to e%ercise a degree of control disproportionate to their cash

,ow rights. These would include/ inter alia/ voting caps/ #ultiple voting

rights/ golden shares/ pyra#id structures and any associated cross

shareholdings. There are e3ective #echanis#s for enforcing disclosure

re*uire#ents.


co#panies to disclose the structure of co#pany groups and the nature of

#aterial intra5group relations. There are e3ective #echanis#s for

enforcing re*uire#ents and there is widespread i#ple#entation of the

standard.

6. The corporate governance fra#ewor$ re*uires or encourages the

disclosure of shareholder agree#ents (y either the co#pany or theshareholders concerned covering/ inter alia/ loc$5ins/ selection of the

chair#an and (oard #e#(ers/ (loc$ voting and right of 0rst refusal. There

are e3ective #echanis#s for enforcing re*uire#ents and there is

widespread i#ple#entation of the standard.


disclosures to (e #ade in an easy to access and easy to use for#at so

that interested persons can o(tain a clear picture of the relevant capitalstructures and other arrange#ents. Infor#ation is updated on a ti#ely

(asis if there is any change. There are e3ective #echanis#s for enforcing

re*uire#ents and there is widespread i#ple#entation of the standard.

2.6.: rinciple II.

rinciple II. states that "?ar$ets for corporate control should (e

allowed to function in an e)cient and transparent #anner. 1. The rules

and procedures governing the ac*uisition of corporate control in the

capital #ar$ets/ and e%traordinary transactions such as #ergers/ and


21/43

sales of su(stantial portions of corporate assets/ should (e clearly

articulated and disclosed so that investors understand their rights and

recourse. Transactions should occur at transparent prices and under fair

conditions that protect the rights of all shareholders according to their

class. 2. 7nti5ta$e5over devices should not (e used to shield #anage#ent

and the (oard fro# accounta(ility'.

rinciple II. is concerned with ensuring an e)cient allocation of

resources su(4ect to procedures to ensure that other aspects of the

rinciples concerning shareholder rights are protected. 7n e3ective #ar$et

for corporate control #a$es it possi(le for those who can use the

corporate resources (est to ac*uire control over the#. *uity #ar$ets will

thus #a$e a contri(ution to structural change. owever/ such transactions

can involve *uestions a(out the e*ual treat#ent of shareholders/

particularly the treat#ent of #inority shareholders/ which is an i#portant

aspect of the rinciples The principle is also concerned with the control

power e%erted (y insiders -e.g. entrenched #anage#ent that serves to

raise a nu#(er of corporate governance issues -e.g. increase agency

costs.

In setting the (ac$ground for an assess#ent/ the reviewer will needto 0rst loo$ at loo$ at the recent history in the #ar$et for corporate

control. ostile ta$eovers are the e%ception in #any 4urisdictions (ut

#ergers/ agreed ta$eovers and sales of control (loc$s are #ore co##on.

Ei3erent ownership structures are in part responsi(le for this disparity so

that a co#parative lac$ of ta$eover activity should not (e construed as a

pri#a facie case for non5i#ple#entation of the principle.

2.6.:.1 rinciple II..1! The rules and procedures governing the ac*uisitionof corporate control in the capital #ar$ets/ and e%traordinary transactions

such as #ergers/ and sales of su(stantial portions of corporate assets/

should (e clearly articulated and disclosed so that investors understand

their rights and recourse. Transactions should occur at transparent prices

and under fair conditions that protect the rights of all shareholders

according to their class.


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The rules and procedures governing the ac*uisition of corporate

control -including transfer of control through sales of su(stantial portions

of the assets #ight vary considera(ly (etween co#panies in a 4urisdiction

depending on co#pany charters and (y5laws/ the structure of ownership

and listing regulations. So#e 4urisdictions have ta$e5over codes or laws

specifying procedures *uite closely/ including the esta(lish#ent of toe5

holds to support a ta$e5over (id. They usually include provisions to

#inority shareholders (y re*uiring (idders to o3er to purchase shares at a

particular price -i.e. #andatory tender o3er rules and there #ight also (e

thresholds at which #inority shareholders can re*uire the #a4ority to (uy

their shares/ and@or a threshold at which the outstanding shareholders can

(e s*ueeJed out. The principle does not set an a(solute standard for the

nature of the rules and procedures/ (ut the reviewer should (e satis0ed

that arrange#ents are clearly articulated/ disclosed and i#ple#ented so

that the rights can (e incorporated into the price of di3erent classes of

shares. The reviewer should therefore loo$ at cases of ad hoc or

une%pected actions (y controlling shareholders and (oards/ which (ecause

they could not have (een ade*uately foreseen/ are to the detri#ent of

other shareholders.

In the #any 4urisdictions where control rights are concentrated/

hostile ta$eovers are rare (ut transfers of control nevertheless do occur

through private sales. The concern is that controlling shareholders will act

in their own self5interest to the detri#ent of other shareholders thus

(rea$ing the principle of e*ual treat#ent within the sa#e class of shares.

Such action could involve a related party transaction as when assets are

sold to another co#pany controlled (y the sa#e shareholder. The principle

therefore advocates transparent prices and conditions to protect #inority

shareholders and the reviewer will need to e%a#ine how this is (eing

achieved in practice. In so#e 4urisdictions/ e#phasis is on the role of

independent #e#(ers of the (oard in assessing the fairness of the

transaction. Redress #echanis#s #ight also (e availa(le to shareholders

in principle/ (ut e%perience often shows that the process of discovery can

(e li#iting. 7 special case involves privatisations when the govern#ent

0rst #a$es an IO to the pu(lic and then at a later stage sells a re#aining

control (loc$ to a group of investors. rivatisation law will in these casesoften override the usual ta$eover rules such as #andatory tender o3ers.


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For the principle to (e fully i#ple#ented/ the reviewer should (e satis0ed

that the initial IO prospectus has #ade it *uite clear to investors that

they will not (ene0t fro# any control pre#iu#.

Ee5listing a co#pany is another special aspect of the #ar$et incorporate control and #ight (e particularly da#aging to so#e

shareholders and to sta$eholders such as creditors. here the

arrange#ents depend on individual corporate charters/ the standard is

widely applied.


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6. To underpin price transparency and fair conditions in the #ar$et for

corporate control/ the corporate governance fra#ewor$ re*uires that the

plans and 0nancing of the transaction are clearly $nown to (oth the

shareholders of the o3ering enterprise when it is a pu(lic co#pany as well

as to those of the target co#pany. There is su)cient ti#e and infor#ation

for shareholders to #a$e an infor#ed decision.

2.6.:.1 rinciple II..2 .2! 7nti5ta$e5over devices should not (e used to

shield #anage#ent and the (oard fro# accounta(ility.

The annotation to the principle notes that in i#ple#enting any

antita$eover devices and in dealing with ta$e5over proposals/ the 0duciary

duty of the (oard to shareholders and the co#pany #ust re#ain

para#ount. The principle is thus closely related to principle MI.7 that

speci0es the 0duciary responsi(ilities of the (oard.


25/43

over codes or laws/ stoc$ e%change re*uire#ents etc/ which #ight

regulate use of various (arriers. 7n assess#ent will have to therefore see$

to deter#ine 0rst what is the actual situation or potential in a 4urisdiction

for a #ar$et in corporate control/ and then to deter#ine the role of the

(arriers. 7 4udge#ent will also need to consider that 0r#s often di3er

widely in a 4urisdiction in their o(4ectives and use of (arriers.

The i#ple#entation status of other principles will need to (e ta$en

into account in for#ing a 4udge#ent. Clearly/ the greater are the direct

powers of shareholders as speci0ed in rinciples II.+ and II.C/ the greater is

the li$elihood that restrictions will (e used as (argaining devices rather

than as (arriers to the operation of a #ar$et for corporate control.

Si#ilarly/ the stronger is the 0duciary duty of the (oard/ principle MI.7/ and

the a(ility of the (oard to e%ercise o(4ective independent 4udge#ent on

corporate a3airs/ principle MI./ the greater is the li$elihood that a #ar$et

in control will e%ist and that (arriers will (e used as negotiating

instru#ents. If the (oard can act without regard to the interests of

shareholders or where the concept of duty to the co#pany is very (road

and fre*uently cited to re4ect o3ers/ the 4urisdiction should (e noted as not

having i#ple#ented the principle. In #any instances/ the assess#ent of

other principles in this chapter #ight have to (e reconsidered to #a$e the

assess#ents consistent.


essential criteria!

1. There should (e a well de0ned concept of the duty of loyalty owed (y

the co#panys (oard #e#(ers and o)cers to the co#pany and

shareholders generally which in the case law or 4urisprudence of the4urisdiction e%tends to the consideration of a ta$e5over proposal received

(y the co#pany. There should (e e3ective enforce#ent -(y authorities or

through ine%pensive private action/ either individually or collectively and

re#edial syste#s.

2. ?ar$et participants 4udge that #anage#ent and (oards are su(4ect

generally to su)cient #ar$et pressure so as to (e de facto/ as well as de

4ure/ accounta(le for their stewardship of co#panies.

2.6.; rinciple II.F.


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rinciple II.F states that! The e%ercise of ownership rights (y all

shareholders/ including institutional investors/ should (e facilitated. 1.

Institutional investors acting in a 0duciary capacity should disclose their

overall corporate governance and voting policies with respect to their

invest#ents/ including the procedures that they have in place for deciding

on the use of their voting rights8 2. Institutional investors acting in a

0duciary capacity should disclose how they #anage #aterial con,icts of

interest that #ay a3ect the e%ercise of $ey ownership rights regarding

their invest#ents.

The principle is pri#arily/ though not e%clusively/ oriented to one

class of institutional investor that invests in e*uities on (ehalf of its

clients. Such institutions #ight not e%ist in so#e 4urisdictions. In others/

the laws and regulations/ and even court 4udge#ents in co##on law

countries/ #ight not yet have adapted to viewing the e%ercise of voting

rights as contri(uting to the stewardship of funds held in trust -i.e. the

0duciary duty.

2.6.;.1 rinciple II.F -1! Institutional investors acting in a 0duciary

capacity should disclose their overall corporate governance and voting

policies with respect to their invest#ents/ including the procedures thatthey have in place for deciding on the use of their voting rights


27/43

1. rocedures adopted (y co#panies to deter#ine voting rights are not

considered (y investors/ (oth do#estic and foreign/ to constitute a

disincentive to the e%ercise of ownership rights.

2. The legal and regulatory syste#/ including court rulings/ clearlyrecognise the duty of institutional investors acting in a 0duciary capacity

to consider whether and under what conditions they should e%ercise the

voting rights attaching to the shares held on (ehalf of their clients.

6. The corporate governance fra#ewor$ re*uires or encourages the

disclosure of voting policies and of the procedures in place to decide on

the use of these rights. >here disclosure is re*uired there are e3ective

#echanis#s for enforce#ent. >here disclosure is encouraged/ the

standard is widely o(served.

2.6.;.2 rinciple II.F. -2! Institutional investors acting in a 0duciary

capacity should disclose how they #anage #aterial con,icts of interest

that #ay a3ect the e%ercise of $ey ownership rights regarding their

invest#ents.


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1. The corporate governance fra#ewor$ encourages or re*uires

institutional investors acting in a 0duciary capacity to! -a develop a policy

for dealing with con,icts of interest that #ay a3ect their decisions

regarding the e%ercise of $ey ownership rights8 and -( disclose the policy

to their clients together with the nature of the actions ta$en to i#ple#ent

the policy. >here disclosure is re*uired there are e3ective #echanis#s for

enforce#ent. >hether re*uired or encouraged/ the standard is widely

o(served.

2.6.N rinciple II.=

The principle states that shareholders/ including institutional

shareholders/ should (e allowed to consult with each other on issues

concerning their (asic shareholder rights as de0ned in the rinciples/

su(4ect to e%ceptions to prevent a(use.

The co5ordination pro(le#s facing dispersed shareholders are well

docu#ented and can result in under5#onitoring of (oards and

#anage#ent -i.e. agency costs. The annotations to the principle note

that shareholders should (e allowed and even encouraged to co5operate

and co5ordinate their actions in no#inating and electing (oard #e#(ers/

placing proposals on the agenda and putting *uestions to the (oard and

#anage#ent. ?ore generally/ shareholders should (e allowed to

co##unicate with each other without having to co#ply with the

for#alities of pro%y facilitation.


29/43

alleviating concerns a(out under#ining ta$e5over rules and #ar$et

#anipulation. The reviewer will need to e%a#ine this particular situation

when assessing essential criteria 1.

Such practices and the intent of the principle suggest the followingessential criteria!

1. The corporate governance fra#ewor$ esta(lishes clear rules for pro%y

solicitation which are not so enco#passing as to prevent shareholders

consulting with each other over the use of their (asic rights/ for e%a#ple/

to elect and re#ove (oard #e#(ers.

2. ?ar$et trading rules should prevent #ar$et #anipulation (ut still (e

,e%i(le enough to per#it and encourage consultations (etween

shareholders.

Chapter III

The *uita(le Treat#ent of Shareholders

6.1 Introduction

The overarching principle of chapter III of the rinciples states that

"The corporate governance fra#ewor$ should ensure the e*uita(le

treat#ent of all shareholders/ including #inority and foreign shareholders.

7ll shareholders should have the opportunity to o(tain e3ective redress for

violation of their rights. The outco#e advocated (y the principle is to

preserve the integrity of capital #ar$ets (y protecting non5controlling

shareholders fro# potential a(use such as #isappropriation (y (oards/

#anagers and controlling shareholders. Investors con0dence that their

interests will not (e su(4ect to a(use will reduce the ris$ pre#iu# they willde#and for #a$ing an invest#ent/ lower capital costs and raise/ ceteris

pari(us/ the value of e*uity.

In providing protection to investors/ the annotation to the principle

notes that a distinction can usefully (e #ade (etween e%5ante and e%5post

shareholders rights/ and this distinction can (e usefully applied during an

assess#ent. %5ante rights are/ for e%a#ple/ pre5e#ptive rights and

*uali0ed #a4orities for certain decisions. % post rights cover access to

redress once rights have (een violated. The annotations note that the


30/43

(alance (etween e%ante and e%5post rights will li$ely vary (etween

4urisdictions so that a reviewer will need to (e particularly sensitive to

functional e*uivalence in for#ing a 4udge#ent a(out whether the principle

has (een i#ple#ented. This is particularly so with respect to whether

shareholders can o(tain redress for grievances at a reasona(le cost and

without e%cessive delay. In for#ing a 4udge#ent a(out this e%5post aspect

of the principle/ attention will also need to (e paid to the avoidance of

e%cessive litigation. ?any countries protect #anage#ent and (oard

#e#(ers fro# the a(use of litigation in the for# of tests for su)ciency of

shareholder co#plaints through safe har(ours such as the (usiness

4udge#ent rule. 7 reviewer will need to e%a#ine such rules that #ight (e

unsuita(le legal i#plants fro# another legal syste# and not re,ect the

structure of ownership and control in a 4urisdiction. It is the overall

consistency of the corporate governance syste# that is crucial.

The reviewer will also need to e%a#ine the e%perience with

#ethods of enforce#ent other than litigation (y shareholders. ?any

4urisdictions are (ased on the view that alternative ad4udication

procedures/ such as ad#inistrative hearings or ar(itration procedures

organised (y the securities regulators or other regulatory (odies/ are an

e)cient #ethod of dispute settle#ent/ at least in the 0rst instance.

6.6 Issues and 7ssess#ent Criteria

6.6.1 rinciple III.7

rinciple III.7 states that "all shareholders of the sa#e

series of a class should (e treated e*ually' while the su(5principles/

which are i#portant in for#ing a 4udge#ent a(out i#ple#entation/

specify in #ore detail the di3erent di#ensions that "une*ual

treat#ent' #ight ta$e in practice.

3.3.1.1 Principle III.A.1: Within any series of a class, all shares

should carry the same rights. All investors should be able to obtain

information about the rights attached to all series and classes of

shares before they purchase. Any changes in voting rights should

be subject to approval by those classes of shares hich are

negatively a!ected.


31/43

The principle recognises that #any countries and 4urisdictions

per#it co#panies to issue shares with di3erent rights and does not

ta$e a position on "one share/ one vote'. owever/ variations in

rights should not arise in an ad hoc #anner. >ith full infor#ation

a(out the class and series of shares availa(le at the ti#e of

purchase/ the share price should nor#ally re,ect the di3erent

(alance of rights and ris$.

here approval is re*uired/ there should (e e3ective

#eans of redress if procedural rules such as ade*uate notice of a


32/43

#eeting are not followed. >hether re*uired or encouraged/ the

standard is widely o(served.

2. The corporate governance fra#ewor$ re*uires co#panies to

disclose su)cient/ relevant infor#ation a(out the #aterialattri(utes of all of the co#panys classes and series of shares on a

ti#ely (asis to prospective investors so that they can #a$e an

infor#ed decision a(out whether or not to purchase shares. 7n

updated su##ary description of the #aterial attri(utes of the

co#panys share capital should (e #ade availa(le for listed

co#panies on a regular (asis. >here these re*uire#ents are si#ply

reco##endations/ there should (e widespread adherence for the

principle to (e classed as i#ple#ented. >here the re*uire#ent is

#andatory/ there should (e e3ective redress -e.g. the right to

rescind the share purchase transaction or da#ages.

6.6.1.2 rinciple III.7.2! ?inority shareholders should (e protected

fro# a(usive actions (y/ or in the interest of/ controlling

shareholders acting either directly or indirectly/ and should have

e3ective #eans of redress.


33/43

o)cers to the co#pany and to all its shareholders that is re*uired

(y principle MI.7. In the a(sence of such a clear duty/ redress #ight

prove #ore di)cult. 7 particular issue re*uiring investigation (y a

reviewer arises in so#e 4urisdictions where groups of co#panies are

prevalent and where the duty of loyalty of a (oard #e#(er #ight

(e a#(iguous and even interpreted as to the group. In these cases/

so#e countries are now #oving to control negative e3ects (y

specifying that a transaction in favour of another group co#pany

#ust (e o3set (y the receipt of a corresponding (ene0t fro# other

co#panies of the group. The e%perience with such arrange#ents

will need to (e carefully assessed since a nu#(er have only (een in

force for a short ti#e so that 4udicial interpretations #ight (e

li#ited and redress ine3ective.

%5ante provisions to protect #inority shareholders that are

relevant for the essential criteria include pre5e#ptive rights in

relation to share issues and *uali0ed #a4orities for certain

shareholder decisions including #a4orityof5the5#inority approval for

transactions so that related shareholders can (e treated di3erently

fro# unrelated shareholders. The a(ility of #inority shareholders to

convene a #eeting of shareholders -e.g. an e%traordinary #eeting

is also a potentially i#portant #echanis# to protect #inority

shareholders. So#e have advocated cu#ulative voting for electing

#e#(ers of the (oard (ut where this option is voluntary it has not

(een widely used (y co#panies. In so#e co#panies and

4urisdictions/ several (oard #e#(ers -or #e#(ers of an audit (oard

or si#ilar (ody #ight (e appointed (y the #inority (ut the practice

is not widespread. %5post #eans of redress include derivative and

class action law suits/ and enforce#ent@investigation (y the

regulatory authorities. The (alance (etween e%5ante and e%5post

protection will vary fro# one 4urisdiction to another and the a(sence

of one $ind or another doesnt necessarily #ean that a reviewer

should regard the principle as less than fully i#ple#ented.

In for#ing an assess#ent for 4urisdictions characterised (y

controlling shareholders/ the reviewer will need to e%a#ine the

evidence for a(use of #inority shareholders and how e3ective the


34/43

di3erent enforce#ent #echanis#s have (een in practice. +arriers

to e3ective enforce#ent include thresholds for shareholder action

that can (e easily #anipulated and poor powers of discovery if a

resort is #ade to litigation. The assess#ent will also need to (e

consistent with MI.7 and MI.E.; which deal with the 0duciary duties

of the (oard and with the control of related party transactions

respectively. >ea$nesses in the i#ple#entation of any of these

associated principles will need to (e re,ected in the assess#ent of

this su(principle.

Such practices and the intent of the principle suggest the


1. The corporate governance fra#ewor$ provides either e%5ante

#echanis#s for #inority shareholders to protect their rights that

have proved e3ective and@or e%5post sanctions against controlling

shareholders for a(usive action ta$en against the#. There are

e3ective #eans of redress for #inority shareholders and ade*uate

re#edies.

6.6.1.6 rinciple III.7.6! Motes should (e cast (y custodians or

no#inees in a #anner agreed upon with the (ene0cial owner of the

shares.


35/43

no instruction to the contrary is received/ the custodian will vote the

shares in the way it dee#s consistent with shareholder interest.

The principle re*uires that holders of depository receipts

should (e provided with the sa#e ulti#ate rights and practicalopportunities to participate in corporate governance as are

accorded to holders of the underlying shares. >here the direct

holders of shares #ay use pro%ies/ the depositary/ trust o)ce or

e*uivalent (ody should therefore issue pro%ies on a ti#ely (asis to

depository receipt holders. The depository receipt holders should (e

a(le to issue (inding voting instructions with respect to the shares/

which the depositary or trust o)ce holds on their (ehalf for the

principle to (e fully i#ple#ented. In so#e countries/ such rights are

restricted to nor#al co#pany issues such as electing (oards/

there(y e%cluding the right to vote a(out ta$eover o3ers and other

e%traordinary transactions. >here this is the case/ the principle

should (e assessed as partly i#ple#ented. It should (e noted that

the assess#ent is with respect to the 4urisdiction under review and

to the institutions do#iciled therein. The fact that do#estic

shareholders #ay not (e a(le to e%ercise such rights in another

country is outside the scope of the assess#ent.

In so#e cases/ such as with respect to 7#erican Eepository

Receipts -7ER/ voting rights can only (e esta(lished if a deposit

agree#ent e%ists that includes as a party the foreign private issuer

whose securities underlie the 7ER. In those cases/ a #echanis#

e%ists for the depository to distri(ute shareholder co##unications

at the re*uest of the foreign private issuer/ and to act as pro%y for

the 7ER holders. >hen the foreign private issuer is not a party to

the deposit agree#ent/ no such #echanis#s e%ists and the 7ER

holders are not a(le to vote. In these cases/ the voting ter#s of the

7ER should (e #ade clear to the purchasers of the 7ER.


following essential criteria !

1. The legal fra#ewor$ or private contracts esta(lish that the

relationship (etween custodians and no#inees/ and their clients


36/43

#a$es clear! -a the rights of (ene0cial shareholders to direct the

custodian or no#inee as to how the shareholders vote should (e

cast8 -( that votes will (e cast in accordance with any instructions

provided (y the (ene0cial shareholder8 and -c the custodian or

no#inee will disclose to the shareholder how they would vote

shares for which no instructions were given. There are e3ective

enforce#ent #echanis#s to ensure co#pliance with the wishes of

shareholders. Trustees or other persons operating under a special

legal #andate/ such as (an$ruptcy receivers and estate e%ecutors/

would not (e covered (y this criterion.

2. The legal fra#ewor$ re*uires that depositary receipt holders can

issue (inding voting instructions on all issues with respect to their

shares to depositaries/ trust o)ces or e*uivalent (odies. There are

e3ective enforce#ent #echanis#s to ensure co#pliance with these

re*uire#ents. >here depositary receipts without voting rights can

(e esta(lished/ the lac$ of voting rights should (e disclosed clearly

to the holder of the depositary receipt.

6.6.1.9 rinciple III.7.9! I#pedi#ents to cross (order voting should

(e eli#inated.


37/43

The co#ple% holding chain together with (usiness practices

and regulations/ which provide only a very short notice period -see

principle II.C.1 and the associated assess#ent criteria/ often leaves

shareholders with only very li#ited ti#e to react to a convening

notice (y the co#pany and to #a$e infor#ed decisions concerning

ite#s for decision. This #a$es cross(order voting di)cult. For the

assess#ent/ the reviewer is only concerned with do#iciled

institutions and do#estic regulations and practices/ and not with

foreign practices. Thus a 4urisdiction #ight (e regarded as

i#ple#enting the principle even though foreign shareholders

continue to e%perience pro(le#s due to de0ciencies in other

4urisdictions. For e%a#ple/ disputes (etween foreign shareholders

and their glo(al custodian are li$ely to (e ad4udicated outside the

local #ar$et and should not (e considered (y the reviewer/ even if

infor#ation is availa(le.



1. The legal fra#ewor$ should clearly specify who is entitled to

control the e%ercise of voting rights attaching to shares held (yforeign investors through a chain of inter#ediaries and/ if

necessary/ si#plify the e3ect of the chain in the 4urisdiction.


co#panies to provide su)cient notice of #eetings to ena(le foreign

investors to have opportunities si#ilar to those of do#estic

investors to e%ercise their voting rights. There is ti#ely and

e3ective enforce#ent where needed of such standards and foreigninvestors have e3ective re#edies where there appears to have

(een non5co#pliance with standards. >hether re*uired or

encouraged/ the standard is widely o(served.

6. Co#panies are re*uired or encouraged to #a$e use of secure

and e3ective processes and technologies that facilitate voting (y

foreign investors.

6.6.1.: rinciple.III.7.:! rocesses and procedures for general

shareholder #eetings should allow for e*uita(le treat#ent of all


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shareholders. Co#pany procedures should not #a$e it unduly

di)cult or e%pensive to cast votes .

The intent of the principle is that all shareholders are entitled

to participate at the general #eeting of shareholders in accordancewith the rights of the respective share class. Rights #ight vary

(etween the general and e%traordinary #eetings (ut this practice is

within the #eaning of the rinciples.


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corporate governance fra#ewor$ ensures that all votes cast are

counted e*ually and that that the results of all votes cast in

whatever for# are registered. ?any investors would li$e to see

results co##unicated to shareholders and this is standard practice

in so#e 4urisdictions and co#panies.




co#panies to! -a facilitate voting (y #ini#ising the costs involved

to shareholders8 -( use voting #ethods at shareholder #eetings

that ensure the e*uita(le treat#ent of shareholders8 and -c #a$e

voting results availa(le to shareholders on a ti#ely (asis. There is

ti#ely and e3ective enforce#ent/ as needed/ of such standards/

and there are e3ective #echanis#s ena(ling shareholders to raise

concerns a(out co#pliance with standards and o(tain ade*uate

re#edies where there has (een no co#pliance. >hether re*uired or

encouraged/ the standard is widely o(served.

6.6.2 rinciple III.+

The principle states that insider trading and a(usive self5

dealing should (e prohi(ited. The principle rea)r#s that it is

reasona(le for investors to e%pect that the a(use of insider power

(e prohi(ited. 7(usive self5dealing occurs when persons having

close relationships to the co#pany/ including controlling

shareholders/ e%ploit those relationships to the detri#ent of the

co#pany and investors and can include unreasona(le #anagerial

per*uisites/ loans fro# the co#pany on non5#ar$et ter#s and

a(usive related party transactions.


40/43

and dissuasive sanctions for violations. In so#e 4urisdictions/ the

de0nition of insider trading can (e rather narrow so that the intent

of the principle #ight not (e i#ple#ented. Indeed/ in so#e

4urisdictions there has never (een a case even though legislation

has (een on the (oo$s for *uite so#e ti#e. In for#ing a 4udge#ent/

a reviewer should review the record of vigorous enforce#ent

including prosecutions and successful prosecutions. >here there

have (een few or even no successful prosecutions/ the reviewer

should (e inclined to the 4udge#ent that the principle is only partly

i#ple#ented and the #ain cause identi0ed.

The annotations for principle III.+ call for a(uses to (e

speci0cally for(idden (y law and for e3ective enforce#ent. The $ey

issue appears to (e enforce#ent and indeed the IOSCO

#ethodology places *uite speci0c restrictions on what is re*uired

for legislation to (e e3ective and should for# a guide for the

reviewer.2 It should also (e noted that the IOSCO principles address

a (roader category of (ehaviour #any of which are still within the

spirit of the OCE rinciples. The essential criteria draw on the

IOSCO standard giving attention to the actual process of

enforce#ent. Should all ele#ents not (e ful0lled/ the 4urisdiction

should (e assessed as not or only partly i#ple#enting the principle/

(ut attention should also (e paid to the assess#ent of principle

MI.E.; and M..

7(usive self5dealing covers another aspect of persons close

to a co#pany e%ploiting the relationship to the detri#ent of the

co#pany and the investors (ut is usually #ore co#ple%. 7s a

conse*uence/ self5dealing per se is often not prohi(ited -although

so#e transactions such as #aterial loans #ight (e prohi(ited (ut

is rather su(4ect to laws and regulations and co#pany

arrange#ents of a di3erent for# fro# those associated with insider

trading. To o(tain a co#plete picture for what is a widespread

pro(le#/ the reviewer needs to ta$e a nu#(er of principles into

account. rinciple III.C covers declaration of interest in a

transaction/ while principle MI.E.; advocates a #a4or role for the

(oard to control self5dealing! The (oard should ful0l certain $ey


41/43

functions including #onitoring and #anaging potential con,icts of

interest of #anage#ent/ (oard #e#(ers and shareholders/

including #isuse of corporate assets and a(use in related party

transactions. rinciple III.7.2 co#ple#ents the duty of the (oard

with a #ore general protection of #inority shareholders fro# a(use

(y controlling shareholders. thical policies adopted (y co#panies

often include principles to deal with self5dealing -principle MI.C. 7n

assess#ent as to whether principle III.+ is i#ple#ented will

therefore need to (e consistent with a nu#(er of individual

principles and involve a 4udge#ent a(out whether they constitute/

as a whole/ an e3ective safeguard for investors against a(usive

insider self5dealing. In this case/ the criterion can (e classi0ed as

fully i#ple#ented even though the principle calls for prohi(ition.

Such practices/ the IOSCO standard and the intent of the

principle suggest the following essential criteria!

2. IOSCO rinciple 2.6

1. The corporate governance fra#ewor$ prohi(its i#proper insider

trading and si#ilar a(usive conduct (y insiders such as #ar$et

#anipulation. The de0nition of insider trading is not so narrow as to

(e easily evaded. There is an e3ective enforce#ent regi#e to deter

and detect insider trading and si#ilar a(usive conduct and the

regi#e i#poses e3ective/ proportionate and dissuasive sanctions

for violators.

2. The corporate governance fra#ewor$ provides for continuous

collection and analysis of trading data -e.g. (y the stoc$ e%change/

the regulator and ti#ely reporting (y insiders -including (oard

#e#(ers/ senior o)cers and signi0cant shareholders of

transactions -either direct or indirect in listed co#panies

securities. There is e3ective enforce#ent of these re*uire#ents.

6. The corporate governance fra#ewor$ provides e3ective

protection for investors against a(usive self5dealing (y insiders.

There are e3ective transparency standards covering di3erent types

of self5dealing including signi0cant private (ene0ts not included in

co#pensation.


42/43

6.6.6 rinciple III.C

The principle states that #e#(ers of the (oard and $ey e%ecutives

should (e re*uired to disclose to the (oard whether they/ directly/

indirectly or on (ehalf of third parties/ have a #aterial interest in anytransaction or #atter directly a3ecting the corporation. >hereas principle

III.+ is concerned with actions which can (e regarded as a(usive/ principle

III.C covers a #ore general situation that could (e a(used and therefore

needs to (e underpinned (y strong standards of transparency. It should

also (e evaluated in con4unction with the e3ective e%ercise of duties (y

the (oard.

here a #aterial interest has (een declared/ the annotation to the

principle notes that it is good practice for that person not to (e involved in

any decision involving the transaction or #atter.

ractices vary considera(ly (oth (etween 4urisdictions and

co#panies. There are cases where thresholds are set rather high for

disclosure there (y under#ining the intention of the principle. In other

docu#ented cases/ a #a4ority vote (y shareholders #ay decide to e%clude

a wide variety of transactions fro# disclosure/ e3ectively under#ining

i#ple#entation of the principle. In #any other docu#ented cases/ it is

also nor#al for the (oard to use its delegated powers and not to e%clude

con,icted persons fro# (eing involved in the decision #a$ing process.

The interaction of controlling shareholders with a per#issive co#pany law

and 0nancial regulatory syste# appears to (e a co##on cause in the

a(ove #entioned cases. In so#e 4urisdictions/ the practice of having such

issues decided (y the #a4ority of the #inority appears to (e e3ective and

the reviewer #ight want to #ore closely e%a#ine the situation in a given

4urisdiction.


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essential criteria!

1.

chapter ii & iii oecd.docx

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