FIRST SOUTH EAST EUROPE CORPORATE GOVERNANCE ROUNDTABLE SHAREHOLDER

FIRST SOUTH EAST EUROPE CORPORATE GOVERNANCE ROUNDTABLE SHAREHOLDER RIGHTS AND EQUITABLE TREATMENT Bucharest, 20 -21 September 2001 ENFORCMENT OF SHAREHOLDERS RIGHTS Andrej Galogaža The Zagreb Stock Exchange Andrej Galogaza, ZSE Andrej Galogaža, The Zagreb Stock Exchange 12/14/2021 1

LAW • LAW ON THE BOOKS • EXTENT TO WHICH RULES ARE EFFECTIVELY ENFORCED – EFFECTIVENESS OF THE JUDICIARY – RULE OF LAW – THE ABSENCE OF CORRUPTION – LOW RISK OF CONTRACT REPUDIATION – LOW RISK OF GOVERNMENT EXPROPRIATION • LEGALITY – Effectiveness of institutions that enforce the law Andrej Galogaza, ZSE 12/14/2021 2

EXAMPLE FROM CROATIA Croatian Securities Act requires reporting on large shareholdings (i. e. passing thresholds of 10%, 20%, 1/3, 50%, 2/3, 75% of votes must report to issuer and CROSEC). Issuer must publish that information in national newspapers. Largely unobserved but no enforcement. Andrej Galogaza, ZSE 12/14/2021 3

LEGAL TRANSPLANTATION • Many SEE countries made an active decision to copy the formal legal system of another country (voluntary transplantation) • However, practice developed in these countries on basis of such legislation often differs substantially from practice in county of origin Andrej Galogaza, ZSE 12/14/2021 4

EXAMPLE FROM CROATIA (2) Vinculatio - transfer of shares limited by consent by Issuer (usually management board) – copied from German legislation In Croatia is was turned into powerful weapon through which managers exercise control of the company unproportional to their actual stake in it Andrej Galogaza, ZSE 12/14/2021 5

RULE OF LAW Securities Act presently in force imposed deadline for privatisation of Security Depository Agency (at request of WB who provided financing for the establishment of SDA) Deadline expired on January 1 st 2001 SDA is still not privatised Draft of new Securities Act imposes mandatory stake of State (min. 51%) One could hardly expect that government or state which itself does not respect it’s own legislation would 12/14/2021 do much to enforce. Andrej laws that protest others. 6 Galogaza, ZSE

COURTS OF LAW • Inefficient and slow • Lack of expertise • Problems with understanding and application of transplanted laws • Corruption Andrej Galogaza, ZSE 12/14/2021 7

ADMINISTRATION • To certain extent same problems as judiciary • May be faster • Lack of credibility due to past experiences – Misuse of discretionary powers – Non-transparency in performing their duties – Lack of control Andrej Galogaza, ZSE 12/14/2021 8

ADMINISTRATION (2) In order to develop confidence of investors and market participants administrative bodies must themselves transform and: – Adopt more transparent procedures in decision making – Publish their rulings – Develop closer ties with industry – Staff must refrain from certain activities or make them public (such as investing) Administrative bodies which aspire to enforce or otherwise promote CG practices must provide example an act themselves in a transparent and responsible manner which includes public oversight and liability of members of such bodies. 12/14/2021 Andrej Galogaza, ZSE 9

EXCHANGE • May be powerful tool in development of Corporate Governance – Main obstacle: too few listings – Possible remedy: State should provide for incentives (such as tax benefits) to fully listed companies and therefore encourage end promote listing • Listed companies that attract investment from international institutional investors are further stimulated to expand refine their CG rules, transparency etc. Andrej Galogaza, ZSE 12/14/2021 10

OTHER ENTITIES High risk of liability must be imposed on certain professions that may influence decisions made by investors – Auditors – Accountants – Lawyers – Bankers – Managers that provide false disclosures Andrej Galogaza, ZSE 12/14/2021 11

Croatian Corporate Governance Council (CCGC) CCGC is established under auspice of Croatian Employers Association. Members of CEA are managers and large shareholders. CG is about protecting minority shareholders from abuse by managers and big shareholders. We may conclude that Managers and large shareholders in Croatia are – very altruistic group of people, or – perhaps want to have close control over application of CG principles Andrej Galogaza, ZSE 12/14/2021 12

INFORMAL INSTITUTIONS “Almost every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of economic backwardness in the world can be explained by the lack of mutual confidence. ”* *K. Arrow (1975), "Gifts and Exchanges", Altruism, Morality and Economic Theory, E. S. Phelps, New York, Russell Sage Foundation: 24. Andrej Galogaza, ZSE 12/14/2021 13

Problems arising out of mass privatisation Transitional Economies are characterised by mass privatisation process and in many cases privatisation funds or PIF-s are used as privatisation vehicle. In such cases, investors are even further away from companies they invest than in the case of direct shareholding. Bearing in mind misuse of PIF-s some countries have already experienced, CG rules should be further developed and more stringent apply to such funds. Andrej Galogaza, ZSE 12/14/2021 14

CLASIC STRUCTURE Andrej Galogaza, ZSE 12/14/2021 15

PIF-s SHAREHOLDERS 1 2 FUND MANAGEMENT COMPANY PIF 3 Companies A Andrej Galogaza, ZSE B C D 12/14/2021 16

WHY SHOULD GOVERNMENT HAVE INTEREST IN PROMOTING GOOD CG? Government should be interested in maintaining healthy economy Imposing god CG standards transfers incentives to monitor and improve performance of individual companies to shareholders and stakeholders Recent empirical research reports on: – “. . . striking relationship between corporate governance and stock returns” – “. . . weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures and higher amount of corporate acquisitions. ” Andrej Galogaza, ZSE 12/14/2021 17

IMPORTANT CASES OF ENFORCEMENT OF MINORITY SHAREHOLDERS RIGHTS IN CROATIA (1) Andrej Galogaza, ZSE 12/14/2021 18

IMPORTANT CASES OF ENFORCEMENT OF MINORITY SHAREHOLDERS RIGHTS IN CROATIA (2) Andrej Galogaza, ZSE 12/14/2021 19

As you have noticed, last two slides were unfortunately empty. I sincerely hope that we shall be able to fill them for next SEE CG Roundtable. Thank you very much for your patience. Andrej Galogaza, ZSE 12/14/2021 20