DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

PROTECTING INVESTORS 35Enterprises, the number of listed firmsclimbed from 41 in 2005 to 193 today—and 107 of these are listed on the Ho ChiMinh Stock Exchange. Despite the recentdifficulties in the Vietnamese securitiesmarkets, market capitalization increasedfrom less than $1 billion in 2005 to morethan $13 billion today.Across regions, Latin America regulatesrelated-party transactions the least,imposing the weakest requirements fordisclosure and approval. Many LatinAmerican economies have commerciallaws that have not been reformed sincethe 1920s. Economies in Eastern Europeand Central Asia have stronger requirementsfor disclosure and approval. Butonce a transaction is approved and disclosed,the company directors are notliable for any damage resulting from it.Economies in the Middle East andNorth Africa, such as Djibouti and Oman,limit access to information. That makes itdifficult for minority shareholders to obtainthe evidence needed to prove theircase in court.Who reformed in 2007/08?Twelve economies strengthened investorprotections in 2007/08 (table 7.2).Albania was the top reformer. It adoptedthe Law on Entrepreneurs and CommercialCompanies, which regulates conflictsof interest by requiring shareholderapproval of related-party transactionsinvolving more than 5% of company assets.The law also provides for extensivedisclosure requirements and makes iteasier for minority investors to sue directors.And minority shareholders can nowrequest compensation from directorsfor harm resulting from a related-partytransaction, including repayment of allprofits from the transaction. With thenew law, Albanian company directorshave strong incentives to be responsiveto investor interests.The runner-up reformer was Thailand.After being the top reformer inprotecting investors 3 years ago, Thailandmade new efforts to strengthen minorityshareholder rights, particularly inTable 7.2Greater disclosure—the most popular reform feature in 2007/08Increased disclosure requirementsMade it easier to sue directorsAllowed derivative or direct suitsRegulated approval of related-party transactionsPassed a new company lawRequired an external body to review related-partytransactions before they take placeAllowed rescission of prejudicial related-partytransactionsSource: Doing Business database.the area of director liability. Directorsdamaging the company’s interests canno longer rely on having obtained shareholderapproval of a transaction to avoidliability. If they are held liable, sanctionswill be harsh. They will have to compensatethe company for all damages, payback all profits made from the transactionand pay fines to the state. They evenrisk jail time.Central Asian economies alsostrengthened minority shareholderrights. Tajikistan, Azerbaijan and theKyrgyz Republic brought their companylaws into line with modern regulationsand corporate governance principles.Tajikistan adopted a new joint stockcompanies act. The law defines “interestedparties” and requires shareholderapproval of transactions between suchparties. It also requires interested partiesto immediately disclose conflicts of interestto the board of directors. In addition,derivative suits are now possible: shareholderswith at least 10% of shares canfile a lawsuit on behalf of the companyagainst company directors.Azerbaijan reformed its civil code,and its State Securities Commission adoptednew rules regulating related-partytransactions. The new law defines what ismeant by “related transactions betweeninterested parties” and requires shareholderapproval when such transactionsexceed 5% of company assets. However,interested parties are allowed to voteat the shareholders meeting. The lawalso includes requirements for disclosureAlbania, Azerbaijan, Egypt, Saudi Arabia,TajikistanAlbania, Botswana, Kyrgyz Republic, ThailandGreece, Kyrgyz Republic, SloveniaAlbania, Azerbaijan, TajikistanAlbania, Botswana, TajikistanEgypt, TurkeyTunisiaboth to the market regulator and throughthe company’s annual reports. As in Albania,minority shareholders can nowrequest compensation for damages to thecompany resulting from related-partytransactions.The Kyrgyz Republic reformed itsjoint stock companies act. From now on,shareholders can sue in their own namethe directors who damaged shareholders’interests and request compensationfrom them.Botswana defined related-partytransactions and clarified disclosure provisionsin its Companies Act of 2004,which came into force in July 2007. Establishingthe liability of directors is noweasier: shareholders can file suit againstthem if the transaction proves prejudicialto the company. If directors are held liable,they not only have to cover damages butalso have to pay back all profits made—agood reason to think twice before attemptingto misuse company assets.The Egyptian Capital Market Authoritymade improving disclosure requirementsa priority when it amendedthe listing rules of the Cairo Stock Exchange.The amendments are aimed atincreasing transparency both before andafter related-party transactions are concluded.Such transactions now have tobe assessed by an independent financialadviser before they take place, ensuringthat shareholders will be better informed.The amendments also clarify requirementsfor disclosure through companies’annual reports. In March 2008 Turkey(c) The International Bank for Reconstruction and Development / The World Bank