Doing Business Reforms
PROTECTING THE RIGHTS OF MINORITY SHAREHOLDERS
Djibouti made the most noteworthy improvements to minority investor protections in 2016/17. A new law, Law No. 191/AN/17/7, which modified the Code of Commerce, takes significant steps to mitigate the risk of prejudicial conflicts of interest in companies. The law requires directors to inform their board in detail of any conflict of interest they may have on a proposed transaction. If they decide to proceed, they must also include the terms of the transaction and the extent of the conflict of interest in the annual report. Even after these precautions, shareholders can file in court to cancel the transaction and recover any profits made by the interested parties if the transaction was prejudicial to the company. Shareholders can also inspect transaction documents before filing a suit and seek reimbursement of their legal expenses. In addition, the law stipulates that transactions representing 51% of a company’s assets must be authorized by its shareholders and that the notice of meeting should be sent 21 days in advance. As a result of these and other amendments, Djibouti improved its score on all six indices of the indicator set, resulting in a 21.67-percentage point increase in its distance to frontier score for minority investor protections.
Twenty other economies also strengthened minority shareholder protections in 2016/17.(1) Costa Rica enacted Law No. 9392 in October 2016 which provides specific protections for minority investors and strengthens safeguards against conflicts of interest. The board of directors now must vote on transactions with interested parties and board members who have a personal interest must clearly disclose their interest and abstain from voting in this case. Should shareholders choose to file a claim against the transaction, the law also increases their access to evidence both before and during court proceedings. As a result, Costa Rica’s score improved significantly on both the extent of disclosure index and the ease of shareholder suits index, resulting in a 10 percentage point increase in its distance to frontier score for minority investor protections.
Thirteen economies—Azerbaijan, Brunei Darussalam, Djibouti, Arab Republic of Egypt, France, Indonesia, Kazakhstan, Lithuania, Malaysia, Nepal, Rwanda, Saudi Arabia and Uzbekistan—passed legislation in 2016/17 that increased corporate transparency requirements. These laws give more agenda-setting power to shareholders and disclose board member activities in other companies, executive compensation and audit reports. As a result, all of these economies improved their scores on the extent of corporate transparency index. Azerbaijan, Bhutan, Brunei Darussalam, Djibouti, Georgia, Kazakhstan, Rwanda, Saudi Arabia and Thailand took steps to clarify corporate governance, ownership and control structures by, for example, enacting legislation that requires companies to nominate independent board members and set up an audit committee. These changes resulted in improvements in the scores of these nine economies on the extent of ownership and control index. Finally, 11 economies enacted regulation in 2016/17 enhancing approval and disclosure requirements for related-party transactions. Among them, Luxembourg made it easier for shareholders representing 10% of the share capital of their company to get access to corporate information and to sue directors in cases of prejudicial third-party transactions. These 11 economies—Costa Rica, Djibouti, Georgia, India, Kazakhstan, Luxembourg, Pakistan, Rwanda, Saudi Arabia, Thailand and Ukraine—improved on the extent of approval, extent of director liability and ease of shareholder suits indices.
1. The economies that strengthened minority shareholder rights in 2016/17 are Azerbaijan, Bhutan, Brunei Darussalam, Costa Rica, Djibouti, Egypt, France, Georgia, India, Indonesia, Kazakhstan, Lithuania, Luxembourg, Malaysia, Nepal, Pakistan, Rwanda, Saudi Arabia, Thailand, Ukraine and Uzbekistan.
PROTECTING INVESTORS REFORMS BY ECONOMY DB2008-DB2018