Doing Business reforms

Protecting the rights of minority shareholders

A record number of 32 economies strengthened minority investor protections in 2019/20. Cabo Verde and Tunisia made the most noteworthy legislative improvements to minority investor protections this year. Cabo Verde passed two legislative decrees that made significant headway toward mitigating the risks of prejudicial conflicts of interest in companies. Specifically, the new provision require shareholder approval of transactions with interested parties and exclude the interested parties from voting. Furthermore, interested parties must fully disclose all material facts regarding his or her interest in the transaction to the Board of directors. The company must also periodically disclose information on the terms of these transactions and details of the interested director’s conflict in the management report. Furthermore, the amendments require companies to call a general meeting of shareholders by sending a detailed notice at least 21 days prior to the meeting. Tunisia adopted a law aimed at improving the investment climate and also modified the general rules of the stock market of Tunis. The new provisions require the board of directors to commission a report on proposed related-party transactions before it can deliberate. They also mandate shareholder approval of significant divestments and payment of dividends within three months of their declaration. Furthermore, they strengthen shareholder governance for listed companies by requiring these companies to have at least two independent board members, to separate the chairperson and the chief executive officer, and send a detailed notice of annual meetings at least 21 days in advance.

This year, eleven reforms among member states of the European Union are the result of the implementation of the Shareholder Rights Directive II (EU Directive 2017/828). Croatia, the Czech Republic, Denmark, Finland, Germany, Hungary, Latvia, Luxembourg, Malta, the Netherlands, and the Slovak Republic transposed the EU Directive 2017/828 and increased their scores on the extent of disclosure index and/or the extent of corporate transparency index. For example, in Malta, the Financial Services Authority required listed companies to publish a detailed company announcement on the terms and extent of the conflict of interest, immediately upon approval of material related-party transactions and periodically in the companies’ annual financial report. In addition, listed companies must prepare and publish a remuneration report that includes information on the compensation perceived by directors on an individual basis.

Other ten economies—the Bahamas, Cabo Verde, Kenya, Mauritius, Oman, Pakistan, Paraguay, the Philippines, Suriname, and Tunisia, —passed legislation that increased corporate transparency requirements. For example, these initiatives gave more agenda-setting power to shareholders and required disclosure of board member activities in other companies as well as executive compensation. As a result, these economies improved their scores on the extent of corporate transparency index.

Eight economies – Armenia, the Bahamas, Bangladesh, Ghana, the Islamic Republic of Iran, Mauritius, Tunisia, and Zimbabwe took steps to clarify ownership and control structures. Three of these economies—Armenia, Bangladesh and Zimbabwe— required listed companies to form an audit committee exclusively composed by board members. As a result, these economies increased their scores on the extent of ownership and control index.

Six economies—Bangladesh, Belgium, Oman, the Philippines, Tunisia, and Ukraine—enhanced the role of minority shareholders in listed companies by, for example, enacting legislation that allows shareholders to approve a major sale of assets or appoint external auditors. These changes resulted in improvements in the scores of these economies on the extent of shareholder rights index.

Finally, ten economies enacted regulation to mitigate potentially abusive or prejudicial transactions with interested parties. Among them, Kuwait amended its law to require interested parties to disclose the conflict of interest and abstain from voting. These economies—the Bahamas, Bangladesh, Benin, Cabo Verde, China, the Arab Republic of Egypt, Kuwait, Mauritius, Tunisia, and Ukraine—improved on the extent of disclosure, extent of director liability and ease of shareholder suits indexes.

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Reforms implemented in 2019/20 are available here.

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Summaries of reforms by economy, since DB2008: