Action Plan
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CONTENTS
Introduction
Action Line 1.
Guaranteeing Equal Treatment of All Shareholders
Action Line 2.
Protection of Minority Shareholders' Rights
Action Line
2.1.
Protection of Minority Shareholders' Rights to Convene a General
Meeting
and Determine Its Agenda
Action Line
2.2.
Protection of Shareholders' Right to Self-Organization
Action Line
2.3.
Expanding the Minority Shareholders' Possibility to Nominate
Their
Representatives in the Boards of Publicly Held Companies
Action Line
2.4.
Obligatory Offer for Buyout by Majority Shareholders
Action Line
2.5.
Protection of Minority Shareholders from Dilution of Value of
Their Shares
Action Line
2.6.
Providing for Real Possibilities for Shareholders to Attend
General Meetings
Action Line
2.7.
Strengthening the Responsibility of the Audit before
Shareholders
Action Line
2.8.
Establishing an Institution for Intermediation and Nonjudicial
Settlement of Disputes
Action Line 3.
Disclosure of Information and Transparency
Action Line
3.1.
Disclosure of Information and Transparency
Action Line
3.2.
Providing for Observance of Legal Requirements for Disclosure of
Information
by Publicly Held Companies
Action Line
3.3.
Providing for Access to Information Disclosed
Action Line 4.
Responsibilities and Motivation of Boards
Action Line
4.1.
Differentiating and Specifying the Responsibilities of Boards
Action Line
4.2.
Implementing the Responsibility of Boards
Action Line
4.3.
Creating Conditions for Better Motivation of Boards and
Remuneration Policy
Action Line
4.4.
Personal Requirements to Boards
Action Line 5.
Significance of Judicial System and Improvement of Judicial
Practice
Action Line 6.
Significance of Capital Market
Action Line
6.1.
Creating Possibilities for Stock Buyout by Potential
Investors
Action Line
6.2.
Establishing a Regulatory Framework for Capital Market - Corporate
Governance Interaction
Action Line
6.3.
Elucidating the Significance of Capital Market for Efficient
Functioning of Publicly Held Companies
Action Line 7.
Management of Residual Share of State Ownership and Conduct of
State in its Capacity of a Shareholder
Action Line
7.1.
Liquidating State Participation to a Maximum Extent
Action Line
7.2.
Clear Regulation of State Policy With Regard to State
Participation in Stock Companies
Action Line
7.3.
Equal Treatment of State in Its Capacity of a Shareholder
Action Line
7.4.
Providing for Fresh Resources for Restructuring the Companies
Action Line
7.5.
Activating the Participation of State Authorities Representatives
in Enterprise Restructuring and Introducing the Principles of
Contemporary Corporate Governance
Action Line 8.
Nonregulatory Mechanisms for Improving Corporate Governance
POLICY FOR CORPORATE
GOVERNANCE DEVELOPMENT IN JOINT-STOCK COMPANIES IN
BULGARIA
Policy Recommendation
Paper
Introduction
The Policy Paper is aimed to
assist the efforts of state institutions and market participants to
analyze and improve the economic and legal conditions for
development of corporate governance in Bulgaria. It proposes
guidelines and specific recommendations for investors, joint-stock
companies, stock exchange and all other organizations concerned
with corporate governance.
Corporate governance is an
attribute inherent in market economies with developed capital
markets. This is governance implemented on behalf of shareholders
through governing, supervisory and operational managing bodies
elected by shareholders with a view of guaranteeing profits of
shareholders. investment. In the present situation it is taken as a
guarantee for efficient functioning of publicly held companies and
a measure for the competitiveness of the national economic system.
The strategic purpose and role of corporate governance determine
the special attention paid to it by the state. From a national and
international point of view, conditions are created by the
legislative, executive and judicial power for implementing the
principles and objectives of corporate governance.
Corporate governance is
manifested in relationships between shareholders, governing and
supervisory bodies and operational management, on the one hand, and
interaction with economic, social and political environment, on the
other one. It relies upon the principles of equal treatment of
shareholders regardless of the amount of their ownership, upon
representative nature and teamwork of management. It follows the
requirements for transparency and responsibility of boards. It
rests on the balance of interaction between inside and outside
directors. Independence and impartiality provided by outside
directors guarantee operational management and behavior of inside
directors oriented to satisfying shareholders. requirements and
expectations. Corporate governance introduces conditions and
mechanisms both for the efficient utilization of stock capital in
the company and efficient functioning of national economies. The
unanimous opinion is that the Asian crisis was caused by
inefficient corporate governance as well. Its social dimension is
an indisputable fact.
The structural reform of the
Bulgarian economy and stock ownership presented in publicly held
and close companies require the gradual approval of corporate
governance. The democratic nature and equal treatment of business
entities at the time of transition towards market economy are
inconceivable without a proper managerial scheme. At the same time,
corporate governance should be perceived as an element of Bulgarian
economy attractiveness to the foreign strategic and portfolio
investor. Transparency of economic activity, efficient use of stock
ownership and guaranteeing of profit for the shareholders as well
as rational structure of governance are only part of the
requirements and expectations of this individual or institutional
investor towards the economy. Reintegration of the national
economic system into the world economic structures calls for
adequate corporate governance. The international significance of
corporate governance is also supported by the attention paid by
OECD and the International Organization of Securities Commissions
(IOSCO) to the approval of its format.
The very significance and
possibilities of corporate governance are the factors mandating the
undertaking of measures to foster its approval. Under the
conditions of today in Bulgaria it could be developed successfully
through combined and one-way efforts of the state and business as
well as of associations of interested parties. The Policy Paper is
materializing these efforts. It is based on the achievements in
economic practice and regulatory mechanisms within the country. The
specific guidelines are compared to the corporate governance format
in the countries with developed market economies and capital
markets. The plan is targeted at corporate governance that will be
approved gradually in the public companies. The specific place and
role of state ownership and the existence of mixed, state and
private ownership necessitate the undertaking of specific action
lines.
The Policy Paper contains
formulations of recommendations for both legislative and
information and educational amendments. The interdisciplinary
nature of corporate governance and understanding of necessity of
systematic and not only one-sided measures related to its gradual
introduction into the Bulgarian publicly held companies are
determining the approach followed up.
Action Line 1.
Guaranteeing Equal Treatment of All
Shareholders
The issue of the balance of
interests of majority and minority shareholders is of a very
delicate nature since "staggers" to the two extremes are
continuously observed. On the one hand, the majority shareholder
takes much greater responsibilities so it is in order to be granted
more rights. On the other hand, there are a number of occasions
where he imposes actions to the company, protecting his/her own
interests only but not the interests of the remaining shareholders,
and even, not the interests of the company itself.
Background
The Bulgarian legislation does not stipulate in details the
principle of equal treatment of shareholders in individual
companies. The Comercial Law contains provisions targeted at
guaranteeing equal treatment of all shareholders, which, however,
are not sufficiently clear and specific. A typical example is the
protection of shareholders. property rights both immediately upon
the incorporation of the company and on increase of its capital.
Art. 72, para 2 of the Comercial Law stipulates that by the time of
incorporating a company the rights in the form of a non-monetary
contribution into the capital shall be assessed by three experts
appointed by the court of company. s registration.
Objectives
Prevent the evasion of regulations concerning the assessment of
non-monetary contributions by concluding deals with related parties
at a time following the incorporation, and protecting the
shareholders. property rights.
Recommendations
It is reasonable to introduce into the Comercial Law a regulation
stipulating the so-called "re-incorporation" of company, based on
the model of Directive No. 1 of the European Community in the field
of company law. Such a regulation should rule that in the cases
where a joint-stock company acquires, within two years from its
incorporation, rights at a price exceeding 10 per cent of the
capital, from a person who subscribed shares upon company. s
incorporation, assigned rights shall be governed by Art. 72, para 2
of the Comercial Law, and acquisition is to be approved by the
general meeting of shareholders.
The Comercial Law should also provide for a boards. obligation to
convene a general meeting of shareholders, in case the losses
exceed ? of capital, not later than three months from ascertaining
the losses.
The issue of buying back ownership shares by the company should be
improved and regulated in details.
Amendments in the Comercial Law concerning the capital increase
should be effected as well. It is inadmissible for the managing
body to increase the capital without being empowered to this
purpose by the general meeting as well as to take decisions for
increasing the capital before the company registered capital is
entirely subscribed. It is also mandatory to enter amendments in
the Comercial Law stipulating that in the case of capital increase
by the Managing Board, the Board of Directors respectively, where
the bylaws allow this, it is obligatory to enforce the regulations
concerning the right of each shareholder to acquire a portion of
the new shares, that corresponds to his/her share in the capital
prior to the increase. It should be provided for that the Managing
Board, the Board of Directors respectively, may exclude or limit
this shareholders. right only in case it is empowered by the bylaws
or a resolution of the general meeting taken by the relevant
majority of votes. In this case only the capital increase should be
effected provided that the shares are to be purchased by certain
persons at a certain price or against a non-monetary
contribution.
These recommendations concern all joint-stock companies, both
publicly held and close ones, as far as the principle of equal
treatment should be enforced for any joint-stock company regardless
of the structure and method of raising its capital.
Action Line 2.
Protection of Minority Shareholders.
Rights
Ensuring the regulatory and
practical possibilities for the free exercise of shareholders.
rights will bring forth the improvement of social and economic
relations in this sphere and establishment of efficiently operating
practices for turning the shareholders into active agents for
system monitoring, control, sanctioning and evaluation of corporate
governance. The shareholders shall, by directly exercising their
rights and indirectly by "voting by their feet", turn into a
natural mobilizing environment for efficient corporate
governance.
Action Line 2.1
Protection of Minority Shareholders. Rights to
Convene a General Meeting and Determine Its Agenda
Background
At present, a general meeting of a joint-stock company may be
convened by a request of shareholders holding at least 10 per cent
of capital (Art. 223, para 1 of the Comercial Law). This regulation
provides for equal treatment of all joint-stock companies
regardless of whether publicly held or not. Particularly for the
publicly held companies this gives an advantage to the major
shareholders and impedes the possibility for minority shareholders
to protect their rights. This regulation would impede the
possibility for protection of rights not only of individual
shareholders but also of institutional shareholders, such as
investment companies, pension and insurance companies which, in
principle, are portfolio investors and possess comparatively small
holdings.
Objectives
Guarantee the possibility for minority shareholders to participate
in taking decisions being significant for the company and, control
its governance.
Recommendations
Discuss the expediency of introducing proper legislative
amendments regulating the possibility for shareholders holding a
minor share of capital in publicly held companies to convene a
general meeting and determine its agenda. It is possible to specify
a 5 per cent share, as in Germany and Austria, or even a smaller
percentage in the case of very big companies with many
shareholders.
Contribute to the adoption of the legal possibility proposed into
the draft of a Law on Securities, for persons holding 5 per cent
and more of a publicly held company capital to raise company. s
claims before the court against third parties in case of inaction
of boards, as well as of the proposed permission for such persons
to raise a claim before the district court for indemnification of
substantial damages caused deliberately to the company by action or
inaction of members of the boards.
Action Line 2.2.
Protection of Shareholders. Right to
Self-Organization
Background
In accordance with Regulation 19 dt. August 12,1996 issued by the
Minister of Finance and BNB for the Central Securities Depository,
each investor is granted access to the Central Depository registry
concerning information only related to the securities held by
himself/herself. At the same time, no regulation obliges the
management of a publicly held company to submit information about
the list of its shareholders. In view of that one or several
shareholders of a publicly held company, willing to discuss with
the remaining shareholders on problems of company business or
governance have no possibility to do this in practice, since they
are not in a position to organize a meeting with the remaining
shareholders. Most often, this is not a problem for the majority
shareholders since they are usually represented in the boards. This
is, however, a real impediment for the minority shareholders.
possibility to have influence on the processes running at the
company.
Objectives
Create a wide range of prerequisites and possibilities for the
shareholders to self-organize when necessary. Thus, they will be
able to protect their rights themselves, to have more information
and control to a greater extent the company governance.
Recommendations
Foster and support educational measures among the shareholders
with a view of their awareness concerning the possibilities for
self-organization, incl. by making use of mass communication media
services. The gradual approval of the role and significance of
institutional investors (e.g. the pension funds) will bring forth a
higher degree of good organization among minority
shareholders.
Action Line 2.3
Expanding the Minority Shareholders.
Possibility to Nominate Their Representatives in the Boards of
Publicly Held Companies
Background
The present regulatory enactments concerning the voting rights
allow for a shareholder holding 50 per cent of capital (or even
less) to dominate in fact over the election of the boards by the
joint-stock company General Meeting. Thus, such a majority
shareholder may pass through a type of governance that is for
his/her benefit and that might do harm to the other
shareholders.
Objectives
Strengthening the influence of minority shareholders on the
election of public company boards. This will provide a better
protection of their rights and avoid the eventual possibilities for
abuses by the majority shareholders for the account of minority
shareholders.
Recommendations
Adopt amendments in the legislation, e.g. in the draft of a Law on
Securities, regulating the possibility for cumulative voting when
electing the public company boards.
Action Line 2.4
Obligatory Offer for Buyout by Majority
Shareholders
Background
Where a shareholder buys out a significant share of capital of a
public company, he will have the possibility to dominate over the
remaining shareholders. Thus, he/she might eventually make benefits
for himself/herself in prejudice of the remaining shareholders.
Therefore, it is necessary for a shareholder (or a group of related
shareholders) acquiring a critically great share of capital (e.g.
over 66% or over 75%) of a publicly held company, to be obligated
to make an offer for buying out the remaining shares. The share of
capital should be determined depending on economic arguments for
expediency.
Objectives
Provide for a possibility for shareholders who do not agree with
the majority shareholder and do not approve his/her policy for
development of the company to liquidate their investment under fair
market conditions. Thus, the minority shareholders will have the
exit right where the control on the company passes effectively into
the hands of a single shareholder or a group of related
shareholders. This will provide for a better protection of minority
shareholders.
Recommendations
Streamline the adoption of the legislative amendments regulating
the obligation of a shareholder who has acquired a share of a
public company capital over a specified limit, to duly announce the
fact and make an official offer to the remaining shareholders for
buying out their shares at a price corresponding to the usual
market conditions. Such amendments would be in conformity with the
present practice of the EU member countries.
On the other hand, it is desirable to streamline the adoption of a
regulation stipulating the "closing" of a public company. Thus,
Art. 149 of the draft of the Law on Securities provides for a
person who has acquired, either directly or through related
persons, over 95 per cent of the votes cast at the publicly held
company general meeting, to be entitled to publish a tender offer
to the remaining shareholders to acquire their shares against
reimbursement. The expediency of decreasing this percentage to 75%,
for example, might be discussed with a view of relieving the
ownership consolidation process.
Action Line 2.5.
Protection of Minority Shareholders from
Dilution of Value of Their Shares
Background
The eventual increase of capital at an issue price which does not
correspond to the value of shares might cause damage to minority
shareholders through dilution of value of their shareholding. The
effective Law on Securities, Stock Exchanges and Investment
Companies (Art. 83, c) makes a provision for preventing this
possibility by ruling a determined qualified majority for taking
decisions for increase of public company capital. This majority
equals ? of the capital represented, and it is required that the
meeting has to be attended by at least ? of the capital, or at
least ? of the capital if the meeting is held under the provisions
of Art. 227 of the Comercial Law. The quorum requirements are
impeding to some extent the possibility for dilution of value of
minority shares but do not eliminate it entirely. With the
present-day prevailing ownership structure in the Bulgarian
publicly held companies and the established practice of convening
and holding general meetings, a single or several majority
shareholders could make the required quorum comparatively
easy.
Objectives
Protection of minority shareholders from dilution of value of
their shares. This will ensure better protection of minority
shareholders rights, the risk of their investment will be reduced
and the confidence in capital market will be increased.
Recommendations
Streamline the adoption of legislative amendments in the sense
that the public company shareholders. right to participate pro rata
in capital increase cannot be waived (Art. 112 of the draft of the
Law on Securities). When taking a decision for capital increase,
all shareholders should be duly notified and given a possibility to
redeem their rights. Thus, a legal prerequisite is established for
preventing unfair actions by majority shareholders.
Further, it is necessary to make a provision in the Comercial Law
that in cases where shares of various classes are present, the
shareholders. right to participate pro rata in the capital increase
is valid for the shareholders of the corresponding class. The
remaining shareholders should exercise their privilege after the
shareholders of the class of the newly issued shares.
Besides, it is reasonable to, with a view of preventing the
possibility for dilution of value of existing shareholders. shares,
pass a regulation into the Comercial Law stipulating that it is
necessary to pay the difference between the nominal and issue value
of the new shares in order to enter the capital increase into the
commercial register.
This proposal should concern both the publicly held companies and
closed companies.
Action Line 2.6
Providing for Real Possibilities for
Shareholders to Attend General Meetings
Background
The effective regulatory enactments do not explicitly regulate the
place and time of holding general meetings of shareholders. The
result is that they are appointed by the boards. This creates a
possibility for the boards to appoint a place and time of holding
the general meetings, which impede the attendance of part of
shareholders. As a result of such actions the boards may manipulate
the resolutions of general meetings. This hypothesis is not valid
just in theory. There are occurrences of general meetings held at
places where public transportation even is not
available.
Objectives
Provide for holding the general meetings of publicly held
companies at places of real access for all shareholders. This is to
ensure in practice the right of all shareholders to attend the
general meetings, make proposals and cast their votes on the agenda
resolutions.
Recommendations
The legislative amendments provided for in the draft of the Law on
Securities (Art. 115, para 1), regulating the holding of
shareholders. general meetings of publicly held company will allow
to avoid the irregularities as ascertained above.
Action Line 2.7.
Strengthening the Responsibility of the Audit
before Shareholders
Background
The issue of the role and responsibility of the auditors of a
publicly held company before its shareholders is both significant
and not regulated at the same time. The auditors. reports are the
most important source of independent and specific information, and,
hence, of evaluation of the company. s state. The shareholders
elect the auditors with a view of obtaining an independent
expertise. At the same time, the responsibility of auditors before
the shareholders concerning the audits performed and evaluations
presented as well as the guarantees that they are performing their
liabilities in due diligence, are insufficiently well regulated.
This might result in incomplete or inaccurate information for the
shareholders and lead to weak control of shareholders on the
boards. Thus, conditions for abuses might be generated. Weak points
are ascertained in the performance of individual
auditors.
Objectives
Provide for accurate, complete and independent information for the
shareholders through the auditing procedure. Thus, corporate
governance will be improved as a result of strengthening the
shareholders. control on the boards. Transparency of company. s
activity is the other measure for qualitative and impartial
audit.
Recommendations
Creation of adequate regulatory enactments allowing the
shareholders to obtain guarantees for performance of auditors.
liabilities in due diligence and allowing the shareholders to
practically pursue their rights in cases where the auditors are
consciously or unconsciously misleading the shareholders. Extending
the shareholders. possibilities to control the process of
appointing an auditor. With this regard, it should be recommended
to structure internal auditors. committees. In their capacity of a
group giving assistance to the supervisory boards and boards of
directors of the publicly held company, they will boost the
shareholders. participation in corporate governance.
Strengthen the role of professional associations in the sphere of
audit, and reevaluate, if necessary, the national auditors.
standards related to quality and their comparability to
international practice.
Action Line 2.8.
Establishing an Institution for Intermediation
and Nonjudicial Settlement of Disputes
Background
Transformation of legal and by-law rules into an efficient
regulator of relationships depends on the good knowledge and
exercise by all interested parties. The unequal treatment of
various participants in capital market relative to investment
culture and possibilities for making use of qualified legal
assistance raises a number of problems related to consummation of
rights of different groups of shareholders, stipulated by law:
minority shareholders are lacking sufficient funds to bring
actions before the court and a possibility to make use of qualified
legal remedy; another real danger is the eventual abuse of rights
by professional institutional minority investors that will impede
the public company governance. Objectives
Assist the transformation of legal rules regulating the relations
of capital market in well functioning practices. Provide for a
possibility for the shareholders through efficient consummation of
their rights to perform their role of a corrective agent of
corporate governance and control.
Recommendations
Establish an institution for intermediation and nonjudicial
settlement of disputes with representatives of all interested
parties that should ensure confidentiality, free access, speed,
quality and economies of the process.
Action Line 3.
Disclosure of Information and
Transparency
The institutional and legal
framework of corporate governance and control should guarantee the
timely and accurate disclosure of information concerning the
ownership structure, governance principles, financial status and
operational results from the joint-stock company activity. These
issues are significant for the possibility for the shareholders to
exercise their rights and taking correct investment decisions, for
attracting capital and maintaining the confidence in the capital
market.
Action Line 3.1.
Disclosure of Information and
Transparency
Background
The effective Comercial Law stipulates that the resolutions of the
general meeting of shareholders for amendment and addition of the
bylaws should be entered into the commercial register and published
with a view of giving rise to a legal act. On the other hand, there
is no requirement for deposition of updated bylaws containing all
approved amendments and additions into the commercial register
after any proper amendment of the bylaws. The Comercial Law
provides for specified rules for the balance sheets of companies
related to the approval and publication of the annual report in the
State Gazette.
Objectives
Guaranteeing and adhering to the principle of transparency not
only in the sphere of publicly held companies and securities market
but for the common or "close" companies in the sense of the
Comercial Law.
Recommendations
Transparency is obtained through adequate regulations for the
commercial register functioning and announcing of data by entering
into the commercial register. The judicial practice in the country
is oriented to the requirement to deposit the updated bylaws into
the commercial register after any proper amendment of the company.
s bylaws, but this should be ruled on a regulatory level as well.
This provides for transparency of the company. s fundamental
document, thus eliminating the necessity for the interested persons
to achieve alone its actual contents and compare the previous
versions with the regulations for amendment and addition adopted by
a resolution of the general meeting of shareholders.
With a view of providing for wider transparency, it is reasonable
to enter a regulation into the Comercial Law for mandatory
submission in the commercial register, upon incorporation of a
joint-stock company, of the Memorandum of Association and a list of
persons who subscribed shares upon the incorporation, certified by
the company. s managing body.
It is necessary to make an amendment in the Comercial Law,
requiring that the report certified by a chartered public
accountant should be also deposited into the commercial register at
the company. s registered office. Thus, the report will be
accessible to any interested person.
The recommendations concern both the publicly held and
"nonpublic", close companies.
Action Line 3.2.
Providing for Observance of Legal Requirements
for Disclosure of Information by Publicly Held Companies
Background
The Law on Securities, Stock Exchanges and Investment Companies
(Chapter seven) and particularly the draft of the Law on Securities
contain formal requirements for disclosure of information by
publicly held companies before the Securities and Exchanges
Commission and the stock exchange. It is provided that information
shall be disclosed in the form of annual reports, six-months
reports and reports to be presented in shorter terms in case the
Securities and Stock Exchange Commission requires so. In spite of
that most of the publicly held companies do not observe these
requirements in practice. The necessity and significance of
disclosure of information and its timely disseminating to
shareholders, potential investors, etc. are still not perceived to
a full extent.
The effective legislation does not regulate sufficiently clear and
explicitly the scope of information included in the reports.
contents. Apart from accounting and financial data, the reports
should contain information about the current commercial activity
and related risks, about the major shareholders in the company, the
members of the managing body, their remuneration, their
shareholding in the company capital, the availability of
interconnection with other companies running similar activity,
etc.
Objectives
Observance of legal requirements for disclosure of information. As
a result of that the shareholders and potential investors in the
publicly held companies will be granted guaranteed access to
credible information about the companies. state. Access will be
independent on companies. boards.
Recommendations
With a view of improving the disclosure of information mechanisms,
proceed to timely adoption of the bill on securities, stipulating
in section 4 the order and method of disclosure of information by
publicly held companies, incl. ad hoc information concerning
price-level sensitive changes in the company activity. Along these
lines, it is recommended to undertake steps for systematizing and
publishing an order with detailed conditions for disclosure of ad
hoc information with a purpose of preventing the possibilities for
price manipulation.
Undertaking specific steps by the Securities and Stock Exchanges
Commission, aiming at regular performance of legal obligations for
disclosure of information on the part of publicly held companies.
These steps should comprise two activities. On the one hand, the
administrative means and sanctions for nonsubmission of information
according to the requirements or submission after the terms set. At
the same time, it is necessary to continue the information and
training activity among the boards of publicly held companies about
the role and significance of disclosure of information.
The Securities and Stock Exchanges Commission needs to proceed
with the steps undertaken in facilitating the access to information
by extending its operation with representatives of publicly held
companies or with investment intermediaries authorized by the
companies.
Of significance is the issue of the responsibility of members of
the managing body where the reports contain misinformation,
incomplete or misleading information and cause harm to investors
and shareholders. Such losses are extremely difficult to be
ascertained and proved.
Nongovernmental organizations should cooperate with the state
institutions and market participants in undertaking systematic
actions for clarifying among publicly held companies and investors
the necessity, potential advantages and benefits related to
disclosure of information.
Action Line 3.3.
Providing for Access to Information
Disclosed
Background
Disclosure of information is exerting disciplining effect on
corporate governance provided that the information disclosed is
available to investors in a fast, easy and inexpensive way. At
present, access to the available information at the Securities and
Stock Exchanges Commission and the Bulgarian Stock Exchange, Sofia
does not fully meet these requirements. Access is rendered
difficult due to a number of reasons:
information is not unified; the most part of information is not
submitted on electronic media; there are still technical
difficulties in using the information because of its incomplete
electronic processing; the shareholders themselves and the
potential investors are not aware of the institutionalized
capabilities for access to public information; as a whole, the wide
public is not informed about the free access to public
information. This has a negative impact on professional
institutional investors and has a particularly unfavorable impact
on nonprofessional, small investors.
Objectives
Providing for a fast, easy and inexpensive access to information
disclosed. This is the only way to make the disclosure of
information play its significant role as one of the mechanisms for
control on the management and optimum allocation of capital market
resources.
Recommendations
The information disclosed should be stored and accessible on
electronic media in standard form allowing its processing by
standard software products. The Securities and Stock Exchanges
Commission should expand the activity of its documentation center
and submit the available information on media being suitable for
both professional investors and small investors. The Commission
should proceed with its efforts for rendering a wide access to the
available public information, incl. via Internet. This will
guarantee the possibility for the institutional and small investors
to follow and be aware of the activity of individual companies. The
improved conditions for transparency realization will have a
reverse disciplining effect on the companies themselves.
Foster publicly held companies and the major ones, in particular,
through proper information and elucidation measures, to maintain in
Internet standardized and updated information about their financial
results, general meeting resolutions, reports on management,
auditors. reports, etc. Thus, the shareholders, potential investors
and regulating authorities will have a maximum fast access to
public information. The present-day advancement of communications
technologies makes a similar approach feasible, convenient and
inexpensive both for publicly held companies and information
users.
It is reasonable to regulate the information that is considered to
be "public". It is very important that the Securities and Stock
Exchanges Commission has clear criteria about the information -
which of the information gathered by or submitted to it is public;
otherwise, the establishment and maintenance of public registers
would not be feasible. Analogous liabilities should be put forward
to the Bulgarian Stock Exchange, the Central Depository and
self-regulating organizations. A compromise version is to recommend
a legal obligation for the concerned institutions and organizations
to adopt their in-house criteria for transparency of information
possessed by them, and render it to the general public. These
institutions and organizations should be legally bound to,
immediately or within specified short terms, submit the public
information possessed by them (either gathered or obtained through
the obligatory accountability) to all parties interested.
Undertake information and elucidation measures for using the
information by nonprofessional investors with a view of taking
adequate decisions by the latter.
Action Line 4.
Responsibilities and Motivation of
Boards
The boards of joint-stock
companies should be responsible and properly motivated to take the
most important strategic decisions in the interest of the company
and its shareholders as well as to follow the performance of
operational management liabilities.
The practice experienced two examples of bad governance. In the
first case, managers manifest behaviorof sole owners, and in the
other one, the director is closely tied with one of the
shareholders only.
Action Line 4.1.
Differentiating and Specifying the
Responsibilities of Boards
Background
In case the responsibility is not of a punishable nature, i.e. it
is within the framework of the Comercial Law, it should be treated
from a point of view of the efficient business management and
protection of investors. interests. This aspect of responsibility
is underdeveloped in the effective Comercial Law. In accordance
with Art. 240, para 2 of the Comercial Law the board members are
jointly responsible for damages caused to the company. Besides, it
is required that the board members should be obliged to submit a
guarantee for their activity amounting to a sum specified by the
general meeting, but not less that their 3-month gross
remuneration. In practice, this guarantee is a small sum that could
not reimburse the eventual damages caused by bad governance. It is
necessarily to adopt detailed regulations on managers.
responsibility with regard to the efficient business management in
the interest of all shareholders.
The Bulgarian legal framework does not regulate in details the
fundamental rights and responsibilities of boards (one-tier and
two-tier system) with regard to the management of publicly held
companies. Corporate governance in the person of Board of Directors
or Supervisory and Managing Board is implemented not in its well
known Western models. Often the experience and errors are the
factors passing through the public companies governance. Lacking
are explicit rules and criteria to the individuals participating in
corporate governance. There are no explicit regulations with regard
to the balance inherent to corporate governance: inside-outside
directors. The Bulgarian practice is not familiar with the inside
auxiliary groups: committees on remuneration, election, finance,
etc. Lacking are well-chosen incentives that are dependent on
management contribution to implementation of the target
"shareholder. s value". The announcement of inside and outside
directors. remunerations is belittled.
Objectives
Issue regulations for explicit and specific responsibilities of
publicly held companies. management with regard to efficient
business management in interest of all shareholders. Thus, the
responsibility of members of boards will acquire practical
measures, and the degree of shareholders. control on boards will
increase, that will bring forth more efficient
governance.
Recommendations
Amendment in the Comercial Law regulating specific competence,
rights and responsibilities of members of public companies. boards
as well as sanctions to be imposed upon their nonobservance. These
responsibilities should be mandatory for any member of boards
(either representing the company or not) and include at least:
an obligation to declare an eventual conflict of interests before
the other members of boards; an obligation not to vote on decisions
for deals where conflict of interest might exist; an obligation to
manage the business with a view of minimizing the loss-of-investors
risks. Streamline the adoption of the bill on securities, that sets
forth certain requirements towards the members of boards with
regard to disclosure of shareholding and trade with inside
information.
Action Line 4.2.
Implementing the Responsibility of
Boards
Background
The legal liability of boards is implemented through mechanisms of
their liability towards the company and penalties that should be
imposed by court upon nonobservance of requirements for announcing
certain circumstances to be entered into the commercial register.
Provided is administrative liability for the public companies.
boards upon nonobservance of certain regulatory requirements, that
is realized as a rule by the Securities and Stock Exchanges
Commission by means of penalty and compulsory measures.
Objectives
Create an environment of higher requirements to the members of the
joint-stock companies. boards and efficient implementation of their
legal liability.
Recommendations
Amend the legal framework of possibilities for implementing the
boards. liability on the part of the companies. It is necessary to
make a clear distinction of legal powers among the individual
boards - chief executive officer, Board of Directors, Supervisory
Board, General Meeting of Shareholders.
The entire change in the business climate will affect the managers
behavior as well. However, the possibilities for pressure on
managers on the part of shareholders should not be pushed too far,
and the lack of sufficiently trained staff and some shareholders.
aptitude for abuses with the rights granted to them should not be
neglected. Initially, the decisions should be sought through
education and information activity related to the allocation of
liabilities in a company.
Action Line 4.3.
Creating Conditions for Better Motivation of
Boards and Remuneration Policy
Background
In a number of publicly held companies, a lack of binding of
direct results of company. s performance with the management
remunerations is ascertained. Data evidences of another
manifestation of this "unbinding": a number of members of Boards of
Directors, Managing and Supervisory Boards do not hold stock in the
companies managed by them. There are a number of evidences of
unpopularity of the concept "shareholder. s value" being inherent
to corporate governance. The amount of management remuneration is
not disclosed as well. Restricted are the possibilities for control
on the part of shareholders.
Objectives
Create an up-to-date system of remuneration of public companies.
management, guaranteeing efficient resource utilization being also
to shareholders. benefit. Generate conditions for public disclosure
and control on remunerations of members of Boards of Directors,
Managing and Supervisory Boards.
Recommendations
The associations of interested parties should undertake
information and education measures for shareholders. rights to
exercise control on directors. remunerations and requirements for
public disclosure of their remunerations. Approve the practice of
creating remuneration committees at the public company
boards.
Action Line 4.4.
Personal Requirements to Boards
Background
The contemporary world practice of corporate governance comprises
a system of principal requirements to the qualification, experience
and skills of members of public company boards. They are
materialized in codes of corporate governance, adopted on national
and international level. The established standards are also
recommended by the professional associations. The shareholders and
managerial market (corporate control market) exercise on the
observance of these standards. The Bulgarian business practice
suffers from deficiency with regard to the personal requirements to
boards. This leads inevitably to diminishing the effect from the
boards activity. The shareholders do not have at their disposal
clear and exact criteria for evaluating the contribution of
individual managers.
Objectives
The increase of corporate governance quality requires high
qualification level of the members of company management bodies.
Approval of clearly and exactly formulated requirements on the part
of shareholders and professional associations towards knowledge,
experience and skills of inside and outside directors is part of
the line for establishing up-to-date corporate governance. This
will allow to restrict the possibilities for incompetent and
subjective actions of the public company managers.
Recommendations
The associations of concerned parties as well as the public
authorities should foster the formulation of a system of
requirements to public company boards. They should be disclosed to
shareholders and potential investors through information and
elucidation undertakings. Conducting qualification initiatives for
company directors. Give an incentive for undertaking an initiative
for elaboration and establishment of a corporate governance code
including the personal requirements to public company
boards.
Action Line 5.
Significance of Judicial System and Improvement
of Judicial Practice
The role of judicial system
with regard to joint-stock company functioning is mainly displayed
on the occasion of entries of circumstances into the commercial
register.
Background
A common emerging problem for transitional economies is the lack
of an adequate judicial infrastructure for sufficiently efficient
settlement of complicated business disputes. The problems of
corporate governance make no exception. Entries into court
registers, protection of shareholders. rights, management
responsibilities are only part of the issues that experience rather
contradictory judicial practice.
Objectives
Clear regulation of circumstances subject to entry and exact
formulation of the grounds for executing an entry.
Recommendations
The abovemade proposals with regard to the prerequisites for
incorporation and entering the joint-stock company incorporation,
for increase of its capital, for evaluation of nonmonetary
contributions as well as for deposition of documents into the
commercial register are related to the issue of precisely outlining
the scope of control exercised by the judicial system, and hence,
for clarifying its role.
Elaboration by the Ministry of Justice of an ad hoc program of
work with the courts on problems related to corporate governance.
This plan should focus on problems being of court competence in
this field, propose possible solutions of these problems, unify
opinions and approaches, consider cases that have really occurred
in practice.
Action Line 6.
Significance of Capital Market
Regardless of the type of
corporate governance (either market or bank-controlled) the
influence and interaction with the capital market is a significant
element of corporate governance problems. Capital market is a
source of financial resource and important disciplining factor for
publicly held companies and, more generally, for corporate
governance.
Present is a feedback whose manifestation will be realized in the
Bulgarian practice from now on. Good corporate governance and
control contributes to the development of capital market and its
liquidity.
Action Line 6.1.
Creating Possibilities for Stock Buyout by
Potential Investors
Background
Capital market should be one of the important outside mechanisms
for efficient corporate governance. It may perform this function if
a takeover of a company, i.e. buyout of considerable share holdings
with subsequent change of management, is effected through its
operation. A similar threat is in force in case of realistic
possibilities for its realization. The present framework of tender
offer for stock buyout and substitution has proved to be very
clumsy and bureaucratic and could not find practical
application.
Objectives
Providing a possibility for potential investors to place a tender
offer to shareholders of a publicly held company for buying out
their shares. This would bring forth a real possibility for
substituting inefficient management with a more efficient one upon
change of the ownership structure.
Recommendations
Amendments and additions should be made in the existing legal
framework, especially in the field of stock tender offer. Adequate
mechanisms should be introduced for guaranteeing the real adherence
to the requirement laid down in the Law on Securities, Stock
Exchanges and Investment Companies, stating that where a person
wishes to acquire above 25% (perhaps, it should be amended to 33%)
of a public company stock through a series of deals for small
shareholding acquisition, such a person should submit a tender
offer to all shareholders for buying out their shares at an equal
and fair price within a specified period. Thus, the importance of
forms for protection of shareholders will be perceived, which will
contribute to the entire improvement of shareholders. and
investors. capability to make use of the existing mechanisms of
corporate governance.
Action Line 6.2.
Establishing a Regulatory Framework for Capital
Market - Corporate Governance Interaction
Background
The significance of capital market for improving the corporate
governance style is also manifested through deep concern about
investors. interest. The effective enforcement of the lawful forms
of investors. protection granted also by means of investment
intermediaries requirements, will contribute to the entire
improvement of shareholders. and investors. capability to make use
of the existing mechanisms of corporate governance.
Objectives
Guarantee by law the possibility for interaction and introduction
of contemporary corporate governance standards into the Bulgarian
practice.
Recommendations
Streamline the adoption of the bill on securities.
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