Summary
Economies that rank high on the strength of investor protection index have extensive disclosure requirements and give shareholders broad access to information both before and during trials to determine director liability. New Zealand and Singapore, which top the rankings on the index with 29 and 28 of 30 possible points, both require immediate disclosure of a related-party transaction and of the conflict of interest (table 7.1). They require prior approval of the transaction by the other shareholders. They enable the shareholders to hold the directors liable and to have the transaction voided if it damages the company. And in New Zealand shareholders can inspect all internal documents before deciding whether to sue.
Twelve economies strengthened investor protections in 2007/08 (table 7.2). Albania was the top reformer. It adopted the Law on Entrepreneurs and Commercial Companies, which regulates conflicts of interest by requiring shareholder approval of related-party transactions involving more than 5% of company assets. The law also provides for extensive disclosure requirements and makes it easier for minority investors to sue directors. And minority shareholders can now request compensation from directors for harm resulting from a related-party transaction, including repayment of all profits from the transaction. With the new law, Albanian company directors have strong incentives to be responsive to investor interests.Azerbaijan reformed its civil code, and its State Securities Commission adopted new rules regulating related-party transactions. The new law defines what is meant by "related transactions between interested parties" and requires shareholder approval when such transactions exceed 5% of company assets. However, interested parties are allowed to vote at the shareholders meeting. The law also includes requirements for disclosure both to the market regulator and through the company's annual reports. As in Albania, minority shareholders can now request compensation for damages to the company resulting from related-party transactions.The Egyptian Capital Market Authority made improving disclosure requirements a priority when it amended the listing rules of the Cairo Stock Exchange. The amendments are aimed at increasing transparency both before and after related-party transactions are concluded. Such transactions now have to be assessed by an independent financial adviser before they take place, ensuring that shareholders will be better informed. The amendments also clarify requirements for disclosure through companies' annual reports. In March 2008 Turkey undertook similar reforms. The listing rules of the Istanbul Stock Exchange now require an independent body to assess all related-party transactions before they are approved.See the full content of this document
Extract
Protecting Investors
Investing in Costa Rica can be a risky business. Diego, a Costa Rican entrepreneur, is well aware of that: "Why would I buy shares in a company if I know its management can approve large transactions between interested parties without ever disclosing them to its shareholders?" In Costa Rica, as in many other countries around the world, minority investors are not protected against self-dealing- the use by company insiders of corporate assets for personal gain.
Companies grow by raising capital -either through a bank loan or by attracting equity investors. Selling shares allows companies to expand without the need to provide collateral and repay bank loans. But investors worry about getting their money back- and look for laws that protect them. A recent study finds that t...See the full content of this document
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