Corporations Act

General Comments: As the OECD suggests, corporate laws and governance codes should be
“developed with a view to its impact on overall economic performances, market integrity and
the incentives it creates for market participants and the promotion of transparent and efficient
markets.”1 Therefore, it is important to keep in mind that attracting investors to invest requires
establishing adequate and comprehensive protections for them. At the same time, however,
Competence must be careful not to establish overly stringent set of regulations as to prvent
corporations from establishing their businesses on the island. With this in mind, the task of
revising this legislation will be a balancing act, which we hope will maximize the number of
investors, while providing a suitable business enviornment for the companies.

As a guideline, we will refer to La Porta et al’s ground breaking study on ways to enhance
shareholder protections. For example, we will incorporate into this Act, mechanisms such as:
“(1) proxy by mail, (2) non-blocking of shares before the shareholders’ meeting, (3) cumulative
voting or proportional representation for designating members of the board of directors, (4)
oppressed minority protection, (5) preemptive right to new issues, and (6) a relatively low
percentage of shareholders required to call an extraordinary meeting” 2 amongst other protective
measures.

Before getting into the specifics, however, it is of crucial importance to take into consideration
the existing legal, regulatory and institutional foundation of Competence and whether or not
market participants can rely on them.3 For the purposes of this exam, we will assume that the
island of Competence is a developing economy, which does not have a long tradition of good
corporate practice, nor a set of recognized non-legal mechanisms. Therefore, it is our general
suggestion that Competence take a more regulation oriented approach rather than a market-
theory approach to corporate governance. This distinction will be elaborated in more detail
throughout the revision and the Corporate Governance Code section below.

1
OECD, OECD Principles of Corporate Governance, (2004), p. 29..
2
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, Law
and Finance, Journal of Political Economy Vol. 106(6) (1998) at p. 113-115.
3
OECD, OECD Principles of Corporate Governance, (2004), p. 29..
Part A. General Issues

Article 1. This Act applies to all limited liability corporations registered in accordance with
Competence law, unless otherwise provided in this Act or some other Act. A limited liability
corporation may be private (private corporation) or public (public corporation). Only public
entities can be listed.

Article 2. a. A limited liability corporation shall be a legal person distinct from its
shareholders, established through registration.

b. A corporation shall be incorporated by way of a written Memorandum of

Association signed by all shareholders.

Add: Discretion of Shareholder Article.

For example, it could state “the shareholders may include provisions on company operations in the
Articles of Association.”

c. The Memorandum of Association shall always contain the following

information:
(1) the date of the contract;
(2)a. all shareholders and the quantity of shares subscribed for by each of
them;
b. the total share capital;
(3) the price to be paid to the corporation for each share (subscription price);
(4) the time when the shares are to be paid;
(5) the Members of the Board of Directors of the corporation; and
(6) the auditors of the corporation.
(7) the name of the corporation
(8) the registered office

Article 3. The shareholders shall have no personal liability for the obligations of the
corporation. However, provisions may be included in the Articles of Association
on the liability of a shareholder to make specific payments to the corporation.
Article 4. A corporation shall have share capital. The minimum share capital of a public or
private corporation shall be EUR 2,500 and that of a public company EUR 50,000.

Add: Subscription Price & Payment of Shares Section

Add: Transferability of Shares Article:

“a share may be transferred and acquired without restrictions, unless otherwise provided in the
Articles of Association.”

Contributions can be in cash or in kind. In case of a contribution in kind the assets shall at the
time of conveyance have a financial value to the corporation at least equal to the price thus paid.

Article 5. The purpose of a corporation is to generate profits for the shareholders, unless
otherwise provided in the Articles of Association.

Add: Duty of the Management:

“The management of the company shall act with due care and promote the interests of the
company.” Also, explicit language permitting derivative lawsuits for any of the violations should
could be beneficial as well.

Part B. General meeting of The Rights of sShareholders and Key Ownership Functions

Add: Competence Section

Article 6. The shareholders shall exercise their power of decision at the General Meeting.

Article 7: Meeting of Shareholders.

a. Decisions shall be made at the Ordinary General Meeting on the following:

(1) adoption of the financial statements, which in a parent corporation means
also the adoption of the consolidated financial statements;
(2) the use of the profit shown on the balance sheet;
(3) the discharge of the Members of the Board of Directors from liability;
(4) the appointment of the Members of the Board of Directors and their term; and
(5) the other matters that according to the Articles of Association are to be
decided by the Ordinary General Meeting.
Add: Notice Requirement:
For example, the article can specify that “the Articles of Association must require companies to
give advance notice of the General Meeting to the shareholders no later than ten days before the
meeting, but no sooner than a month prior to the meeting.”

“The General Meeting may decide only matters that have been mentioned in the notice of the
General Meeting.

b. An Extraordinary General Meeting shall be held, if:

(1) it is so provided in the Articles of Association;
(2) the Board of Directors considers it necessary;
(3) a shareholder or an auditor demands the same in accordance with article 7 d.

c. Restrictions of the transfer or acquisition of shares may be included in the Articles of

Association

d. The Board of Directors shall convene the General Meeting. An Extraordinary General
Meeting shall be held, if an auditor or shareholders with a total of one tenth one fifth of all
shares so demand in writing in order for a given matter to be dealt with.

Article 8. Shares shall belong to different classes where they differ from each other as regards
the voting rights they carry or the rights that they carry in the distribution of the assets of the
corporation. The a cquirer of a share shall have no right to exercise shareholder rights in the
corporation before the acquirer has been entered into the share register

Add: Equality of All Shares Clause:

Article 9. Every shareholder shall have the right to participate in a General Meeting. In order to
participate the shareholder shall deposit its shares with the corporation, at least five days before
the meeting as determined in the articles of association.

Article 10. A shareholder may exercise the rights of a shareholder at a General Meeting by way
of proxy representation. The representative shall be a member of the board of directors.

Add: Proxy Selection Requirement

Add: Protections for Minority and Foreign Shareholders.
Article 11. The General Meeting shall be held in the place where the registered office of the
corporation is located, unless otherwise provided by the Articles of Association.

Article 12. The proposals of the Board of Directors and, if the General Meeting is to deal with
the financial statements, the financial statements, the annual report and
the auditor’s report shall be kept available to the shareholders in the head
office of the corporation for at least one week before the meeting; they shall without delay be
sent to a shareholder who requests the same, as well as kept available at the meeting venue.

Article 13. A proposal that has been supported by more than half the votes cast shall constitute
the decision of the General Meeting, unless it is otherwise provided
in this Act. In an election, the person receiving the most votes shall have been
elected. The General Meeting may decide before the election that the person
receiving more than half the votes cast shall have been elected. Add: Tie-breaking
mechanism.

Article 14. If a decision must be made by qualified majority, a proposal that has been
supported by at least four fifths (4/5) two thirds (2/3) of the votes cast and the shares
represented at the meeting shall constitute the decision.
Unless it is otherwise provided in this Act or the Articles of Association, the
following decisions shall be made by qualified majority:
(1) the amendment of the Articles of Association;
(2) a share issue and the suppression of preemptive rights
(3) the issue of option rights and other special rights entitling to shares;
(4) the acquisition and redemption of own shares in a public corporation;
(5) the acquisition of own shares;
(6) a merger;
(7) a demerger; and
(8) going into liquidation and the termination of liquidation.

Part C. Board of directors

Article 15. a. A corporation shall have a Board of Directors. The Board of Directors shall see to
the administration of the corporation and the appropriate organisation of its operations (general
competence). The Board of Directors shall be responsible for the appropriate arrangement of the
control of the corporation accounts and finances.

Add: Quorum requirement.

For example, “The board shall have a quorum when more than half of the members of the board
of directors are present, unless larger portions are required in the Articles of Association.”

Add: Board of Director Election Process/Board Composition Article

Add: Board of Director Disqualification.

Add: Minutes Requirement.

b. The board elects the auditor. In a public corporation, the term shall end with the conclusion of
the Ordinary General Meeting following the appointment of the auditor.Add: “In a private
company, the term of an auditor shall be indefinite.”

c. The Board of Directors shall represent the corporation. Board of Directors may grant a
Member of the Board of Directors or some other designated person the right to represent the
corporation. The Board may revoke the right thus granted at any time.

d. The opinion of the majority shall constitute the decision of the Board of
Directors, unless a qualified majority is required in the Articles of Association. The Chairperson
of the Board of Directors shall see to it that the Board of Directors meets when necessary. A
meeting shall be convened if a Member of the Board of Directors requests.

e. A Member of the Board of Directors is elected for a maximum term of ten years and may be
dismissed by the general meeting without any cause and at any time.

f. A Member of the Board of Directors shall be liable in damages for the loss that he
or she, in violation of the provisions of this Act or the Articles of Association,
has in office deliberately or negligently caused to the corporation, a shareholder
or a third party.

Article . A shareholder shall be liable in damages for the loss that he or she, by
contributing to a violation of this Act or the Articles of Association, has
deliberately or negligently caused to the corporation, another shareholder or a third party.
Add: Section on Redemption, Remuneration, and other Share Specific Issues:
For example,
(1) Equality of shares: “All shares carry equal rights in the company, unless otherwise stated in
the Articles of Association. One share shall carry one vote in all matters dealt with by the
General Meeting, unless otherwise stated in the Articles of Association.”
(2) Redemption Clause: “It may be provided in the Articles of Association that a shareholder,
the company, or another person has the right to redeem shares due to be transferred to a third
party by a shareholder other than the company.
(3) Pre-emptive rights.

Part D. Reporting

Article 16. The annual report shall always contain the information required in this Act and the
financial statements in accordance to the national GAAP and if applicable IAS/IFRS.
However, corresponding information may be supplied in the notes to the
financial statements instead of an annual report, in so far as not otherwise
provided in the Accounting Act.
The annual report shall contain a proposal of the Board of Directors for the
use of the profits of the corporation, as well as a proposal, where appropriate, for
the distribution of other unrestricted equity.
The annual report shall contain the following information:
(1) the number of outstanding shares, broken down by share class, as well
as the main provisions of the Articles of Association relating to each of
the share classes; as well as
(2) for a capital loan, the main terms of the loan and the interest accruing on
the loan and not entered into the accounts as a cost.
(3)
Add: Information in Annual Report on Debt concerning Related Parties Section
(1)The annual report shall contain separate information on loans, liabilities and
commitments to related partie-s and on the main terms thereof, if the sum total
of the loans, liabilities and commitments exceeds EUR 20,000 or five per cent
of the equity of the corporation, as it appears on the balance sheet.
(2) The corporation and another person shall be considered related parties if one controls the
other or if one otherwise has significant influence in the financial and business decision-making
of the other.
Add: Dispute Resolution Mechanism
For example, an arbitration clause may require Articles of Associations to mandate companies
to arbitrate any disputes.

Add: Settlement of investment disputes that have international character

Any disputes arising out of or in relation to an investment from a national of a foreign country
shall be settled by ICSID4 arbitration. Awards of ICSID will be final and directly enforcable on
both parties.

Part E. Miscellaneous

Article 17. The corporation and another person shall be considered related parties if one controls
the other or if one otherwise has significant influence in the financial and business decision-
making of the other.

Article 18. The assets of the corporation may be distributed to the shareholders only as provided
in this Act on:
(1) the distribution of profits (dividend) and the distribution of assets from reserves of
unrestricted equity;
Add:
(2) the reduction of the shares capital,
(3) the acquisition and redemption of own shares,
(4) the dissolution and degregisteration of the company

Add also: “Other transactions that reduce the assets of the company or increase its liabilities
without a sound business reason shall contribute unlawful distribution of assets.”

The creditors of the corporation whose receivables have arisen before the issue of
the public notice shall have the right to object to the reduction of the share capital.

4
ICSID is an autonomous international institution established under the Convention on the
Settlement of Investment Disputes between States and Nationals of Other States. Over one
hundred and forty States have signed and became a party to this convention. This mechanism is
specifically designed to facilitate the settlement of disputes between States and foreign
investors. See e.g. World Bank on ICSID. Available at http://www.worldbank.org/icsid
However, they shall not have this right if the amount of the reduction is to be used for loss
coverage or if the share capital is at the same time increased at least by the amount of the
reduction.

Article 19. A shareholder with more than nine tenths (9/10) of all shares and votes in the
corporation (redeemer) shall have the right to redeem the shares of the other
shareholders at the fair price.

Article 20. A shareholder shall be liable in damages for the loss that he or she, by
contributing to a violation of this Act or the Articles of Association, has
deliberately or negligently caused to the corporation, another shareholder or a third party.

Add: Entry into Force Article.

THERE ARE ALSO PROVISIONS ON MERGERS AND DIVISIONS, CHANGE OF

BUSINESS FORM, DISSOLUTION OF THE CORPORATION, ETC. BUT THEY DO
NOT HAVE TO BE TAKEN INTO ACCOUNT FOR THE TAKE HOME EXAM
 --------------
There is a very short corporate governance code which is of voluntary nature. The code is of
general nature and contains the following principles:

General Comments: There are two competing models of corporate governance: a market-
oriented model and a mandatory model. Competence’s current corporate governance code,
being voluntary in nature, is more of the former than the latter. In other words, corporate
governance does not rely on strict rules or mandatory requirements, but it is left to market forces
to self-regulate.

We advise a shift away from this current approach to the mandatory model for Competence. As
previously noted, shareholders are more willing to invest when their rights are protected by
clearly defined set of rules that assign them specific rights5. Although the market-oriented
approach may work for already established economies such as the US or the UK, for a
“developing economy” such as the one in Competence, a more rule oriented approach may
secure more investors.6 Because we do not know whether there are strong non-legal
mechanisms or norms of good practice in Competence, we suggest that corporate governance
code in Competence take a more compulsory, regulatory approach. In other words, the
corporate governance code ought to be more mandatory in nature, at least for all listed
companies in Competence. We recommend that Competence, at the very least adopt a “comply
or explain” mechanism similar to that of the United Kingdom so that the listed companies will
be more inclined to comply with this code.

Add: Definition Section

1. Board of directors
a. The board must act in the interest of the shareholders and define the strategy of
the company. Add: Fiduciary Duty Requirements.
b. The board must develop a market communications policy.
c. the board must be composed of executive, non-executive and independent
board members.

5
See e.g. Troy A. Paredes, Corporate Governance and Economic Development, Corporate
Governance, (Spring, 2005) at p. 34.
6
Ibid., at p. 34. (arguing that “developing countries generally should turn to a mandatory model
of corporate law instead of market-oriented corporate governance system.”)
 d. the role of chairman and chief executive officer must be separated.

Add: Restrictions.
For example, “No company shall grant any loans, guarantees or the like to the Management of
the board.” It can also be something more broad such as “the board

Add: Board Composition and Election Section

For example, the code could state that “the board shall be composed of at least five but no more
than 15 members, where at least 2 of them must be an independent director, etc.”

Add: Grounds for Disqualification/Dismissal

For example, grounds for dismissal can be for violation of fiduciary duties or any misconduct.

2. Committees
The board must establish a remuneration, and audit, and a nomination committee. All
committees must be exclusively composed of independent directors. The board of directors
determines the duties of each committee.

3. Remuneration
The board of directors should develop a remuneration policy to be approved by the general
meeting of shareholders. The remuneration of directors must always be related to the
performance of the company. Add: Shareholders should be able to make their views known on
the remuneration policy for board members and key executives.7

Add: Stockholder’s Rights8

(1) Voting Right
(2) Pre-emptive Right
(3) Power of Inspection
(4) Right to Information
(5) Right to Dividends
(6) Appraisal Rights

4. Shareholders

7
See e.g. OECD, OECD Principles of Corporate Governance, (2004), p. 18.
8
See e.g. OECD, OECD Principles of Corporate Governance, (2004), pp. 18-19.
Shareholders must make use of their voting rights in a diligent way.

5. Transparency

The board of directors must disclose a corporate governance statement.

Add: For example, other material information, including, but not limited to, financial and
operating results of the company, related party transactions, foreseeable risk factors, and
remuneration policy for the board and key executives.9

Add: Internal Control Requirement Section

-----------------------

9
See e.g. OECD, OECD Principles of Corporate Governance, (2004), p. 22.