CORPORATE GOVERNANCE GUIDELINES

SOFIA, 2001

The present action plan contains practical measures and proposals for the improvement of the corporate governance in Bulgaria. It was prepared by the expert group, working on projects within the Corporate Governance Initiative in Bulgaria. A substantial part of the proposals were induced by the results and analyses presented in the Corporate Governance Assessment Report:2000, other expert opinions have also been used for the regulatory changes and improvement of the practice in that aspect.

The practical steps are grouped in the following problematic fields, in which the attention of the professional community should be focused in order the corporate governance in Bulgaria to improve considerably and get closer to the global standards.

1 Equitable treatment of the shareholders and protection of the minority shareholders rights

1.1. "Issue 200,000" - the possibility projected with the LPOS for delisting of the companies from the registrar of the publicly traded companies ("delisting"), in case their registered capital is less than BGN 200,000 upon a resolution of the general meeting - in the second wave of the mass privatization only, there were 400 companies with registered capital below BGN 200,000, over 30 out of them have been delisted already and the process continues its acceleration, and according to the data of the SSC around 300 companies have filed applications for delisting, two former privatization funds have also been delisted - a fraud against the participants of the second wave of the mass privatization (which are already over 1.1 million) and a danger of the process discrediting, lack of protection of their interests, inadequate liquidity for the shares acquired, limitation of the pension funds participation in the process.

Proposal: To prepare a list of: all quoted companies with registered capital below BGN 200,000; all already delisted companies, and all companies that have filed an application for delisting, and that list to be made widely available to the public with the cooperation of the Centre for Mass Privatisation and BSE-Sofia.

1.2. The persisting possibility under the LPOS (§10, para.3) for increase of the authorized capital in divergence of the pro-rata rule, in the cases when such action is envisaged in the privatization agreements. In addition, it is a common practice not follow the requirement to submit a notification to the SSE and BSE-Sofia for the availability of such an agreement within fourteen days of the LPOS coming into effect.

Proposal: To explore the possibilities the buyers to apply a pro-rata increase in the registered capital, allowing the remaining shareholders also to participate in execution of the investment plan, while the controlling shareholder still follows the privatization arrangements for investment amounts on his/her behalf and expense. To allow the buyers when interested to sign supplementary arrangements with the privatisation authorities with which the definition "on behalf of the buyer and at the expense of the buyer" to be discarded. The SSC to sanction the companies that failed to meet the 14-day notification period, and to prepare in cooperation with BSE-Sofia and the Centre for Mass Privatisation a list of those companies for wide dissemination.

1.3. The Sopharma AD case and the lack of legal regulation for determining the share subscription date for new issues, which practically hindered the sale of the residuary stake held by the state. Placing the shareholders into an inequitable position as for the procedure for subscription of the remaining shares by non-admission of a certain part of them to the building hosting the subscription before its opening.

Proposal: A legal regulation of the method for determining the shareholder membership as at a particular date in relation to the right of subscribing shares from a new issue while exercising the preferential rights granted to the shareholders under the Commercial Act, as well as the equitable treatment of the shareholders during the process.

1.4. With the LPOS important steps have been taken in limiting the possibility for changes of the listed companies' authorized capital in dilution of the minority stakes by the controlling shareholders. Despite the amendments the practice of minority stakes dilution in capital increases persisted. The practice reveals, that within the underdeveloped corporate environment and culture, this right /and not obligation/ is not able to perform its regulatory functions.

The interest on behalf of the public in individual investing is still very suppressed as a result of the poor efficiency of the protection of their rights in the environment of a very limited solvency.

Proposal: Legislative provision for the right of the shareholders under Art. 194, para. 1 and 2. of the Commercial Act granting advantage in subscription of new issue shares to be separable from the shares themselves and to be available for trading.

1.5. One of the core shareholder rights - the right of vote in the general meeting is not exericised in an adequate extent by the minority shareholders. The compulsory physical presence is an obstacle for a large part of the minority shareholders to give their vote at resolving over some of the most important for the company issues. Without the exercising of this right the election of minority shareholders representatives in the managing or supervisory bodies may not be expected.

The practical minority shareholders participation in the decision-taking process of the general meeting should be facilitated, which should facilitate also the election and participation of minority shareholders representatives in the managing bodies.

Proposal: To introduce the cumulative right in voting for the general meetings of the listed companies.

To prepare proposals for legislative amendments in relation to the minimum of a mandatory information /standardized form/ to be sent to all shareholders for proxy voting /example USA/.

2. Responsibilities and motivation of the board

The board of the public limited (joint stock) companies is responsible and should be therefore motivated to ensure the strategic guidance of the company in the best interest of the company and its shareholders and to monitor the executive management performance. However, as a result of the dramatic changes in the ownership structure and the institutional environment of Bulgaria's economy, the efficient work of these bodies is often limited by poor organization, obscure authority and responsibilities, lack of information and experience in the new environment. In that relation it is recommended the interested institutions to stimulate the preparation of a Best Practice Code, considering the particular conditions and environment in the country. This code should include, but not necessarily limited only to, the following principles:

2.1. Division and specification of the responsibilities of the board members

Particular scope of competence, authority and responsibilities of the listed companies' board members should be determined. These responsibilities should be binding for each board member (whether entitled with representative authority or not) and to include at least:

• An obligation to declare before the other board members the possible existence of a conflict of interest;
• A restriction from voting in taking a decision for transactions in which a conflict of interest might arise;
• An obligation to provide guidance for the business in a way to minimize the investors' risk of loss /e.g. to determine the parameters of the definitions "management on best efforts basis" and "loyalty".

2.2. Conditions for appropriate board motivation

The code should validate the practice of creating a modern system for remuneration of the listed companies' board members, which to be applied by a remunerations committee in consideration of strict and clear criteria for evaluation of the contribution of each of the board members. The system should bind the board remuneration with the direct results of the company's activities and provide incentives for efficient use of the company's resources in the best interest of its shareholders.

2.3. Presonal requirements for the board members

The code should provide firm and clearly defined basic requirements for the qualification, knowledge and experience of the internal and outside /independent/ board members.

Specialized training programmes to be held communicating basic knowledge in the filed of law (commercial, civil, penal), finance and accounting, marketing for the members of managing and executive bodies. Minimum educational requirements (as type and level) should be introduced for the candidates for the two groups of positions mentioned, and a testing system for evaluation of their knowledge and expertise might be developed.

2.4. Establishment of specialized internal committees

The good corporate governance practice should involve the creation of specialized supporting committees at the managing bodies. Such committees could substantially assist the functioning of the managing bodies or, alternatively, be used as an instrument for the monitoring of their activities. The global practice confirms the benefit from the existence of an auditing committee and of a technical committee.

2.5. Collaboration with outside experts

The present tendency reveals that Bulgarian companies collaborate with outside experts to a small extent. In many cases this leads to unfounded resolutions by the managing bodies. Along with that the collaboration with outside experts cannot be imposed as a requirement, as it depends on the specifics of each company. But the Code can recommend that under specific circumstances the managing bodies should consult outside experts.

2.6. Division of responsibilities

The Code should recommend the division of responsibilities of the executive members of the managing body and the board chairman. Along with that there should be a clear division of the authorities and responsibilities between the managing body's members, including the statute of inside and outside directors.

2.7 Regulated procedures for approving resolutions

An important part of the Code should be attributed to the resolution approval procedures. They should be clear, unambiguous, easily applicable in the practice and should include at least:

• Meetings scheduling and quorum checks procedure
• Procedure for informational and organizational assurance of resolutions
• Voting procedure
• Protocol preparation and archive storing procedure

3. Disclosure and transparency

3.1. The quality of the disclosed financial and accounting information is still very low which results in the subdued attractiveness of the listed stock both for the local and foreign portfolio investors.

Proposal: Introduction of mandatory application of the international accounting standards by the listed companies and independent auditing of their activities.

3.2. It is necessary to improve the quality of the information disclosed by the Bulgarian listed companies and overcome formalism.

Proposal: The Best Practice Code to prescribe the listed companies' managing bodies to discuss with shareholders at the general meetings the annual and semi-annual reports for the company's activities. This will contribute for increasing the interest and better understanding of the reports by the shareholders. This will also provide an impetus for a feedback to managing bodies.