Commercial Company Law

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The Corporate Governance Initiative
Middle East Partnership Initiative
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The Corporate Governance Initiative
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• White paper
• Public Debate
  CG
  committee
• United States Department of Commerce
• CLDP Commercial Law Development Program

Corporate Governance Code
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What has been achieved

• Established a Corporate Governance Initiative
  together with the Central Bank
• Invited position papers from audit and law firms
• Invited public response to a questionnaire
• Developed posters for stakeholder use
• Produced a series of booklets for Directors
• Contracted InCite to complete and analyze the
  market survey

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What has been achieved

• Formed a Steering Committee
• Conducted a Workshop for the Steering Committee
  and support team
• Nearly all respondents believe that Bahrain needs
  a standardized code

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What has been achieved

• A White Paper has been developed based on the
  survey results
• Steering Committee met to discuss White Paper
• Responses were invited to the White Paper from
  various interested groups
• A Draft Code has been developed with the help of
  United States Department of Commerce Commercial
  Law Development Program (CLDP)

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NEW BAHRAIN CORPORATE GOVERNANCE CODE NUTS AND
BOLTS OF DRAFTING IT

• When work began on a Bahrain Corporate Governance
  Code it was immediately discovered that the new
  Bahrain company law already had many provisions
  which, in some countries, are contained in their
  CG Codes or in separate stock exchange codes,
  private group codes, or individual companies
  codes.
• For this reason the drafting of a new Code in
  Bahrain has been closely coordinated with
  drafting of the company law. The two go together
  with the Code supplementing and adding to the
  rules in the company law.
• The relationship, and some of the issues
  discussed, can be seen in the following materials
  which begin at the fifth page following
• (1) a list of corporate governance provisions
  which are already in the new Bahrain law,
• (2) the table of contents of the current draft
  of the new Bahrain Corporate Governance Code (a
  full draft is not yet ready), with notes
  indicating some of the contents themselves, and
• (3) a list of major issues which were
  discussed at the last meeting of the Steering
  Committee for the new Code.

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Provisions in the Law Relating to a Corporate
Governance Code

• Every listed company must adopt and publish its
  own corporate governance code. This is not
  required for non-listed companies
• The required contents for the code are fairly
  detailed also, they must be consistent with any
  later-adopted national code
• A public company must comply or explain annually
  regarding its code
• No formal mechanism for enforcement is provided

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Provisions in the Law Relating to the Board of
Directors

• The role of board vs. shareholders vs. officers
  is detailed
• Director compensation is subject to shareholder
  approval
• Shareholders may nominate board candidates
• Three independent directors are required in
  public companies and independent is defined
  in detail
• Three-year maximum term for directors with no
  limit on reelection

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Provisions in the Law Relating to the Board of
Directors

• The Chairman may also be the CEO
• Detailed procedures for meetings, notice, voting
• Three board committees required audit,
  nominating and remuneration, with independent
  director membership
• Cumulative voting for board is specifically
  permitted but not required

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Provisions in the Law Relating to Shareholder
Meetings and Rights

• Certain listed actions may be decided only by
  shareholders
• AGM is required its agenda must include director
  election and remuneration, auditor approval,
  financial statement review Corporate Governance
  Code comply or explain review in listed
  companies others
• 10 of shareholder votes can call an
  extraordinary shareholder meeting a court or the
   Ministry can also call one if the company does
  not do so in response to the request

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Provisions in the Law Relating to Shareholder
Meetings and Rights

• Detailed rules for notice, agenda, record date,
  voting, secret ballot, quorum, proxies for all
  meetings
• 5 of shareholder votes may propose two agenda
  items for AGM
• Certain major actions (charter amendment, 
  increase in authorized shares, etc). require 2/3
  vote unless charter reduces this to not less than
  a simple majority    

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Provisions in the Law Relating to Shares

• Two types common and preferred
• One share one vote. Preferred voting is
  restricted
• Shareholders must be registered 
• No bearer shares
• Preemptive rights unless the companys charter
  provides otherwise
• Options, warrants, bonds, convertibles, Islamic
  securities and other securities are all
  specifically permitted

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Fiduciary Duties and Remedies

• The duties of care and  loyalty, and the business
  judgment rule,  are stated in detail similar to
  US/UK case law
• The duties apply to directors, officers,
  controlling shareholders (in some cases), LLC
  managers, and partners in all forms of company.
• Disclosure of conflicts of interest is required

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Fiduciary Duties and Remedies

• There are specific rules for approval/ratification
  of conflict transactions by disinterested
  directors/shareholders/members reporting of this
  to shareholders is  required in public company
• Unapproved transactions may still be valid if
  they are proven fair to the company, but the
  conflicted person has burden of proof
• Derivative litigation is permitted and the
  procedures are detailed similar to US/UK

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Application of the proposed Code

• It is being proposed that the Code would be
  applicable to all companies, both public and
  private
• The application will be on the basis of comply
  or explain, similar to the UK model.
• Public listed and private joint stock companies
  would be required to comply immediately on
  adoption of the Code
• Private limited liability companies would be
  given a a period of time to adapt, before the
  Code becomes mandatory

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• (2) Table of Contents of the Current Working
  Draft of the Bahrain Corporate Governance Code
• THE CORPORATE GOVERNANCE CODE
• OF THE KINGDOM OF BAHRAIN
• TABLE OF CONTENTS
• Note material in italics below describes some
  (not all) of the comply and explain rules in
  the draft. It also describes a few of the
  mandatory rules, which are marked and shown in
  brackets.
• INTRODUCTION
• Purpose of this Code
• Companies to Which this Code Applies
• This Code and the Company Law
• The Comply or Explain Principle
• Monitoring and Enforcement of this Code
• Effective Date of this Code
• CORPORATE GOVERNANCE PRINCIPLES
• PRINCIPLE 1 THE COMPANY SHALL BE HEADED BY AN
  EFFECTIVE, COLLEGIAL AND INFORMED BOARD

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• PRINCIPLE 2 THE DIRECTORS AND OFFICERS SHALL
  HAVE FULL LOYALTY TO THE COMPANY
• formal procedures for disclosure, updating, and
  advance approval by disinterested directors or
  shareholders of all conflict transactions.
• PRINCIPLE 3 THE BOARD SHALL HAVE RIGOROUS
  CONTROLS FOR FINANCIAL AUDIT, INTERNAL CONTROL
  AND COMPLIANCE WITH LAW
• audit committee to be all independent directors
• all members to have financial qualifications
• establish whistleblower procedures
• mandatory CEO of CFO to certify certain
  financial statements
• PRINCIPLE 4 THE COMPANY SHALL HAVE RIGOROUS
  PROCEDURES FOR APPOINTMENT, TRAINING AND
  EVALUATION OF THE BOARD
• nominating committee should also review the
  companys corporate governance guidelines and be
  called the nominating and corporate governance
  committee
• mandatory rules for information to
  shareholders on director candidates
• mandatory rules for induction and then regular
  training of directors
• rules for the regular evaluation of the board and
  each committee which itself is mandatory

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• PRINCIPLE 5 THE COMPANY SHALL REMUNERATE
  DIRECTORS AND OFFICERS FAIRLY AND RESPONSIBLY
• remuneration committee to be all independent or
  non-exec with an independent chair
• mandatory all director remuneration is subject
  to shareholder approval
• mandatory remuneration includes everything,
  cash or non-cash
• mandatory no stock options for directors
• mandatory officer remuneration should include
  performance-base incentives
• PRINCIPLE 6 THE BOARD SHALL ESTABLISH A CLEAR
  AND EFFICIENT MANAGEMENT STRUCTURE
• mandatory rules for appointing, titling, and
  assigning responsibilities to officers including
  corporate secretary
• rules for corporate secretary duties
• rules for succession plan for the CEO both
  short-term (death) and long-term
• PRINCIPLE 7 THE BOARD SHALL COMMUNICATE WITH
  SHAREHOLDERS AND ENCOURAGE THEIR PARTICIPATION
• numerous rules for conducting shareholder
  meetings notice, information, minutes, director
  and auditor attendance, website some mandatory
• rules for regular direct shareholder
  communication

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• APPENDICES
• Appendix A Independent Director
• meeting the formal rules in the law not enough
  the board must also make a formal good faith
  finding of independence after discussion
• Appendix B Audit Committee
• states purposes -- membership and qualifications
  -- duties and responsibilities which include
  initial selection, oversight, determination of
  independence, etc. of outside auditor
  supervision etc. of internal audit function
  overseeing compliance with law, etc.
• Appendix C Nominating/Corporate Governance
  Committee
• similar detail
• Appendix D Remuneration Committee
• similar detail
• TERMS USED IN THIS CODE
• Terms Already Used in the Company Law
• CEO

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• List of Major Issues Currently under Discussion
• 1. What companies are covered by the Code? The
  present draft is mandatory only for
  stock-exchange listed companies for others it is
  merely recommended. Most other countries
  Codes are the same. Question Should the
  Bahrain Code be mandatory for all companies,
  large, small, LLC, partnership, etc.? Is that
  practical, given the large number of unlisted
  companies and the amount of detail in the Code
  that applies only to companies with wide
  shareholding? (Small or closely-held companies
  could comply or explain that the detailed Code
  provisions dont apply to them. They could do
  this in an annual filing with the MOIC.)
• Decision in November 2006 Apply only to listed
  companies now. Others to come in Wave 2.
• 2. Enforcement. What happens if a company
  violates a mandatory principle in the Code or
  does not explain why it does not follow a
  non-mandatory principle? Note that the Code
  unlike the company law itself has many rules
  that are not objectively measurable (examples
  the company must have an effective and informed
  board or must remunerate directors fairly and
  responsibly).

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• Following are some monitoring and enforcement
  devices would they be effective?
• Monitoring by the board, particularly by its
  independent directors
• Monitoring by shareholders, particularly larger
  and institutional shareholders who should be
  encouraged to consider explanations and discuss
  with the board if they do not accept the
  companys position
• The Ministrys present powers of inspection and
  supervision it can demand information, attend
  board meetings, etc.
• Issue a public reprimand letter or announcement
  of violation this could adversely affect a
  listed company and its stock price, but is less
  drastic than suspension of trading or delisting
• Give the Ministry and/or the courts specific
  power to issue cease and desist orders that are
  enforceable in court
• Expand the monetary penalties now in the company
  to cover Code violations also
• Lawsuits by shareholders against directors under
  the company law lawsuits by the Ministry or the
  BMA against the company
• Add Code compliance to the stock exchange listing
  rules and provide for suspension of trading or
  delisting of companies violating the Code

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• What does Explain mean? Under the draft Code a
  company must comply or explain why it does not
  or cannot comply. The new company law requires a
  listed company to explain at its annual
  shareholder meeting but does not require that
  this be in writing or be posted on the website.
  On this point the company law should be expanded.
  In some countries, companies publish detailed
  multi-page explanations on their websites.
• Questions
• Should the Ministry review the companies
  explanations and decide if they are adequate?
• What detail should the law require for the
  explanation (annual report, website, etc.) (note
  that the Code has some of this)
• If the Code applies to unlisted companies, what
  method and detail should it require?

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Thanks