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Spectacular business failures such as the infamous Bank of Credit and Commerce International scanda, the United States savings and loan crisis, and the gap between executive compensation and corporate performance drove the demand for change in developed countries. More recentl , high profile scandals, financial crises and!or institutional failures in "ussia, #sia and real estate and credit crisis in the United States have brought corporate governance issues to the fore in developing countries, transitional economies, and emerging markets. DEFINITION: $Corporate governance is the s stem b which business corporations are directed and controlled. %he corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. B doing this, it also provides the structure through which the compan ob&ectives are set, and the means of attaining those ob&ectives and monitoring performance.$ AIM: The aim is to align as nearly as possible the interests of in i!i "als# $orporations an so$iety% In this chapter we will outline issues concerning compan organs and the organi'ation of the compan (s management &'$orporate go!ernan$e'(. %he issues addressed are mainl a conse)uence of centrali'ed management &or the i!ision of o)nership an $ontrol(. *e limit to +SCs and ,,Cs

*entrali+e Management , the division of ownership and control

The -"estion.
whether all members &sharehol ers( of the $ompany sho"l be in!ol!e in the decision making process or

if the power to act on the compan (s behalf should be elegate to a spe$iali+e management bod whose members need not be shareholders at all. A !antages of $entrali+e management /s"ally the e$isions in b"siness ha!e to be ma e in a short time# if all the sharehol ers ha to be informe this )o"l $reate problems0%$osts by hol ing ea$h time meetings0% -mplo ing centrali'ed management therefore

reduces transaction costs and improves the efficienc of the compan (s management b reducing time. .ermits the compan to be managed b a professional, more expert group independent of its shareholder structure. It permits companies to raise e)uit capital from people who do not have an expertise in the compan (s business. Information costs to be kept at a minimum level and allocated evenl .

Albanian law provides for centralized management structures in LLCs and JCSs. In contrast to the provisions regulating general partnerships and limited partnerships, members of the management organs (the administrators) are not required to be members (shareholders) of the company.

The Prin$ipal,Agent *onfli$t , Disa !antage %he decision/making to a bod , whose members are not 0necessaril shareholders of the compan obviousl creates the ris1 that the management2s interests $olli e )ith those of the sharehol ers% %his potential conflict of interests is referred to as the $.rincipal/agent conflict$. Prin$ipal,agent $onfli$t / the ris1 that the management2s interests $olli e )ith those of the sharehol ers *hile it is in shareholder(s interest to maximi'e the compan (s profits

the management often seeks to maximi'e its remuneration and power 1 two aims that do not necessaril lead to the same business conduct. That is )hy. Compan law should also enable shareholders effectivel monitor the conduct of the management and restrict dealings which seem especiall dangerous, such as transactions between members of the management bod and the compan , from the outset. In addition where decisions t picall have a substantial impact on the shareholders(( interests 0e.g. changes of the constitution, capital increase mergers2 the costs of the decision making b the shareholders can be considered a pa off, compan law should re)uire shareholder in!ol!ement in e$ision ma1ing.

A% 3imite 3iability *ompany

-ver ,,C has to appoint at least one a ministrator 1 "-S.34SI4B,- 53" C3M.#46 M#4#7-M-4% #48 "-."-S-4%%#%I34 Must be natural persons %he do not need to be members of the compan only to restri$tions


Art 78 092#C, prevents persons who have been convicted under #rt 9:; of the Criminal Code from managing a compan for "up to five ears after conviction.

7enerali'ed third part protection / #ble to represent the compan vis/a/vis third parties, as #rt 9< 0=2 #C, provides. -xceptions onl appl if the third part had knowledge of the irregularit or could, in view of evident ob&ective circumstances, not have been unaware of it. a person ma not act as an administrator of a parent compan and of one of its subsidiaries at the same time


%he administrators are appointed b a resolution of the general meeting. %he election re)uires an or inary ma9ority of !otes> the compan (s Statute can, however, provide for a higher )uorum %he appointment of administrators becomes effective onl after registration with the 4"C.


%he general meeting can at an time dismiss administrators of an ,,C. %he dismissal re)uires a vote with ordinar ma&orit . 0Cannot be limited b the Statute2 %he #C, allows for a removal of the administrator without cause.

REM/NERATION: t)o iss"es



%he right to establish the remuneration of the administrators lies in the general meeting 0simple ma&orit 2 <. Rem"neration #rt @A #C, contains the provisions concerning the remuneration of the administrators. It distinguishes between the administrator(s remuneration and 0other2 supplementar benefits granted to him, whereas salar refers to the $fixed$ part of the administrator(s remuneration and the benefits form a performance/linked part of the remuneration. #s far as the salar is concerned, #lt @A 0<2 onl states that?

it must be ade)uate and in accordance with the duties of the administrator the financial situation of the compan .

#rt @A #C, provides for a shareholder approval of all benefits granted to the administrators.

An a e-"ate rem"neration system# espe$ially )ith regar to performan$e,lin1e benefits# is an important tool of $orporate go!ernan$e% ,inking the managers( remuneration to the profits of the compan helps to align the managers2 interests an the interests of sharehol ers# and therefore re "$es the prin$ipal,agent $onfli$t res"lting from the separation of o)nership an $ontrol% #nother important issue addressed in #rt @A 0;2 #C, is the general meeting(s right to reduce the remuneration granted to the administrators if the financial situation of the compan is seriousl deteriorating. %his unilateral right to reduce benefits granted under a valid contract is !ery problemati$% In our view, the exercise of the general meeting(s right under #rt @A 0;2 #C, should in general be limited to situations, where the deterioration of the compan (s financial situation renders previousl grante benefits $learly ina e-"ate. %his will normall onl be the case if the deterioration of the compan (s financial situation is a conse)uence of highly "nli1ely &or e!en "nforeseeable( e!ents> in our view, this can onl be evaluated from an e ante/perspective. Rights an


R"nning the 33* 6"siness %o represent the compan to manage its business

1 this obligation includes all acts and decisions that need to be made in the course of the compan (s activities, unless the are assigned to another compan organ.

accounting and book/keeping inform the shareholders about the compan (s performance.

In our view, the general meeting has no po)er to gi!e legally bin ing instr"$tions to the administrators with respect to specific business transactions, unless the Statute explicitl provides so.

D"ty of management

%he duties imposed on administrators of an ,,C are i enti$al to the duties of members of the Board of #dministration, administrators and supervisor board members of a +SC. *e will, therefore, discuss these duties for ,,Cs and +SCs together in this chapter. A( The D"ty of 3oyalty %he must "perform their duties established b! law or Statute in good faith and in the best interests of the compan! as a whole".

%hus, the dut of lo alt obliges the management to act in good faith 0bona fide2, which primaril means that the manager must reasonabl believe to be acting in the compan (s best interest when taking management decisions. 1 ;highly s"b9e$ti!e< = iffi$"lt to pro!e #rt @B 092 0a2 #C, and #rt 9:; 092 0a2 #C, explicitl state that acting in the best interest of the compan also implies taking into account the en!ironmental impa$t of its operations% In addition, #rt 9= 092 #C, seems to make a distinction between the compan (s interests and the interests of the shareholders and the reference to the interests of $the compan as a whole$ obviousl seeks to integrate a concept of '$orporate so$ial responsibility' b( The D"ty of *are an S1ill "e ercise due diligence "#u$des% and care in the performance of their $unctions" %he persons in charge of managing the compan owe the compan to fulfill their function with such competence as can be expected b a reasonable a ministrator% In contrast to the dut of lo alt , the dut of care and skill therefore introduces an $ob&ective$ standard b which the administrators( actions have to be assessed. 3IA6I3IT> #ccording to #rt @B 0<2/0=2 #C,, an administrator ma be held liable?

if he fails to compl with the duties imposed on him by the la) / this means that the administrator has to compensate the compan for an damage resulting from his violation of duties or standards of diligence. In case the violation has been committed b several administrators, the are all &ointl and severall liable. #rt @B 0;2 #C, confers the b"r en of proof on the a ministrator > it is the administrator, therefore, who has to prove that he complied with his duties owed to the compan .

#rt @B 0=2 #C, enumerates certain especiall important transactions, which / if carried out contrar to the law / render the administrator liable. #s a result of the ob&ective standard of diligence mentioned above, the liabilit cannot be avoided b the proof of 'a$ting in goo faith'% %he transactions mentioned in #rt @B 0=2 #C, are? a2 "eturning contributions to members> b2 .a ing interests or dividends to members>

c2 8istributing the compan (s assets> C2 ,etting the compan continue to do business when according to its financial situation it is foreseeable that it will not be able to pa its debts> d2 7ranting credit. Enfor$ement of his liability?

B the simple ma&orit of the general meeting Ma not exercise his voting rights if the general meeting decides whether to pursue an claim against him. %he claims have to be brought )ithin three years after the discover of the breach of dut . If the general meeting refuses to pursue claims against administrators, shareholders with at least ?@ of the !otes as well as creditors of the compan ma still initiate court proceedings. Minority shareholders protection right

Shareholders and creditors can also re)uest the court to initiate proceedings if the general meeting does not render a decision )ithin AB ays at all.

#s a safeguard against abusive creditor re)uests, #9t @9 0:2 #C, provides for a criminal liabilit of creditors who file re)uests pursuing to #rt @< 0<2 #C, in bad faith 0i.e. knowing that a legall valid claim against the administrator does not exist2. It still seems problemati$ that e!ery $re itor, irrespective of the amount of debt owed to him, can bring claims against the compan (s management according to #rt @< 0<2 #C,.

ADMINISTRATION OF CS* ,,Cs are primaril designed for companies running small/ or medium si'ed businesses with onl few shareholders.

+SCs, in contrast, offer a suitable organi'ational framework for companies running especiall large businesses and! or having a large number of shareholders. 3ne core feature of the +SC is the possibility to offer its shares to the p"bli$ and thus raise e-"ity finan$e from a broa in!estor basis. The spe$ifi$ r"les regar ing p"bli$ offerings of shares are not $ontaine in the A*3# b"t in the 3a) on Se$"rities%

T)o systems:
%he one tier and the two/tier structure

As state abo!e# the fi "$iary "ties of a ministrators# boar members an members of the s"per!isory boar of a CS*2 are in essen$e i enti$al to the 33* a ministrators &hat wh! we will focus on the organizational structure' One tier mo el:
a. b.

%he central administrative organ is the 6oar of A ministration managing and supervisor functions composed of managing 0executive2 and non/executive members.


#ppointment? / are elected b the general meeting

%he election re)uires an or inary ma9ority of !otes> the compan (s Statute can, however, provide for a higher ma&orit .
d. e.

consists of at least three natural persons and must not consist of more than <9 members #ccording to #rt 9DB 092 #C,, the ma&orit of the board has to consist of independent, non/executive members.

Moreover, #rt 9D: 0<2 0b2 #C, prevents a person from serving as a board member if he is an administrator of a parent or a subsidiar of the compan .

%he general meeting ma at any time ismiss members of the Board of #dministration b simple ma&orit .

Rights and Duties of the Board whereas it is the participation of the Board of #dministration in the management which constitutes the decisive difference between the one/tier and the two/tier model. %he task of the Board of #dministration as the central organ of a one/tier +SC ma be divided into two aspects?

%he participation in managerial decision/making the supervision of the administrators. managerial e$ision,ma1ing


%his provision authori'es the Board of #dministration to "give the administrators directives on the implementation of business policies of a compan!" which are defined b! the general meeting legally bin ing instr"$tions . *ith respect to the wording of #rt 9D= 092 0a2 #C,, we believe, however Only for the implementation of strategi$ $ompany b"siness poli$ies that there is no right 0and no dut 2 to give instructions concerning 'or inary' ay,to, ay business decisions with no special relevance to compan (s business policies> these decisions lie within the competence of administrators.

#rt 9D= 092 #C, a decision b the Board of #dministration is re)uired if the administrators want to take up ebt finan$eE amounting to more than DF of the compan (s assets. #rt 9D= 092 0k2 #CI. confers on the Board of #dministration the competence to "decide upon the establishment of long(term business and polic! proposals for the foundation of new companies or groupings.

In particular, the consent of the Board of #dministration respect of the following transactions? ac)uisition of a controlling share in another compan the exercise of a decisive influence on another compan the participation in the foundation of a new compan ? even if the subscription of capital does not lead to a controlling stake in this compan , the establishment of long/term business arrangements? in our view, this competence onl concerns $business arrangements which have an impact on the overall strategic orientation of the compan G

The s"per!isory f"n$tion =

The main tas1 is to s"per!ise the a ministrators

has to monitor and supervise the implementation of the compan Hs business policies b the administrators appoint and dismiss the administrators and to propose the benefit/schemes granted to them. the general responsibilit to ensure the compan (s compliance with the applicable laws and accounting standards. approve the annual statement of accounts and the report regarding the performance before the are presented to the general meeting. -nsure that the annual audit of the compan (s books is carried out b an Independent auditor.

#ccording to #rt 9:<, decisions b the Board of #dministration are effective if more than half of its members are present. 8ecisions are made b ma&orit vote of the attending members> the Statute ma provide for a different rule and therefore re)uire a higher ma&orit as well. %he board has to elect a chairman and a vice chairman.

%he chairman of the Board of #dministration must not be an administrator at the same time. Iowever, it is not necessar that the chairman is an independent member of the Board of #dministration. %he supervisor dut also includes the general responsibilit to ensure he holds a casting vote in case of a tie. ADMINISTRATORS:

In the one/tier s stem, administrators are appointed b the Board of #dministration 3nl natural persons ma be appointed as administrators ma be members of the Board of #dministration at the same time, but this is not a necessar re)uirement. -ach +SC must appoint at least one administrator %he length of the term for administrators is to be set b the Statute, it must, however, not exceed three ears. %he Board of #dministration ma dismiss administrators at an time. It is, therefore, the administrator(s main task to represent the compan as well as to manage its business

T)o tier system , ifferen$es %he administrative functions of a two/tier +SC are distributed between two different organs,
9. <.

the administrators the supervisor board.

#ccording to #rt 9:: 0<2 #C,, the rules concerning the supervisor functions of the Board of #dministration also appl to the supervisor board. S"per!isory boar the supervisor board are elected b the general meeting.

%he election re)uires an ordinar ma&orit of votes %he supervisor board must consist of at least three 0natural2 persons, and the total number of members of the supervisor board must not exceed <9

A ministrators $annot# at the same time# be members of the s"per!isory boar # )hi$h "n erlines the separation of managerial an s"per!isory f"n$tions in the t)o,tier mo el
%he general meeting ma at an time dismiss members of the supervisor board b simple ma&orit

Appointment an remo!al of a ministrators *ithin the two/tier structure, the #C, provides for t)o ifferent )ays b which the administrators are appointed. %he choice between the two s stems has to be made in the compan (s Statute. In the 'Derman mo el'# the administrators are appointed and dismissed b the supervisor board. In this respect, the 7erman. model is similar to the one/tier s stem, where the administrators are appointed and dismissed b the Board of #dministration. In contrast, the so called 'Italian mo el'2 provides for an election of the administrators b the general meeting. In this case, both administrative organs are elected and dismissed directl b the shareholders, which clearl strengthens the role of the general meeting. PO4ERS

the administrators lead the compan and decide on the manner of implementation of the business polic the supervisor board supervises the implementation of these policies and their compliance with the law and the Statute. oes not# ho)e!er# parti$ipate in the managerial e$ision,ma1ing% oes not ha!e the a"thority to gi!e legally bin ing

The s"per!isory boar

*onse-"ently# the s"per!isory boar instr"$tions to the a ministrators

b"t is limite to the monitoring an s"per!ision of the implementation of b"siness poli$ies set by the general meeting

3iability E same as 33*

Employee parti$ipation
#ccording to #rt <9 #C,, the legal representative of the +SC and the -mplo ee Council ma agree that the -mplo ee Council ma nominate persons to represent the emplo ees at Board level. Surprisingl and according to #rt <9, the decision about whether such representatives ma be nominated does not lie with the shareholders, b"t )ith the a ministrators. %hat grants the administrators wide discretion. %his is aggravated b the fact that the la) oes not $ontain any "pper n"mber for such representatives. Sharehol er $ontrol?

#s pointed out, the centrali'ation of management in ,,Cs and +SCs leads to a delegation of powers from the shareholders 0(principals(2 to the management 0(agents(2 from an economic point of view. 8ecision/making b the shareholders primaril means the exercise of voting rights in the general meeting. %he general meeting is the assembl of all shareholders of a compan 0,,C or +SC2. It is sometimes referred to as the compan (s (highest organ( 4evertheless, the #C, generall assigns a strong position to the general Meeting # general meeting must be held at least once a ear 0ordinar general meeting2. 5urthermore, a general meeting has to be convened in cases established b law, the Statute and if it is necessar to safeguard the compan (s interests.


In ,,Cs, the administrators are responsible for convening the general meeting. the general meeting has to be announced b letter to all shareholders. not later than seven da s before the scheduled date of the meeting it also has to include an agenda for the general meeting.

If noti$e of the meeting has not been gi!en in $omplian$e )ith these r"les# the general meeting may not la)f"lly a opt any e$isions% #part from the annual ordinar general meeting, a general meeting must be convened in the following special cases? J If the annual or interim accounts suggest or indicate that there is a ris1 that the $ompany2s assets )ill not $o!er its mat"re liabilities )ithin the neFt three months 0#rt B< 0;2 #C,2. In this case, the in!estment of the sharehol ers is en angere . %herefore, the have to be given the opportunit to decide which measures are to be taken 0e.g. capital increase, dissolution2. J If the administrators plan to dispose of assets with a value corresponding to more than DF of the compan (s assets according to the last certified financial accounts 0#rt B< 0=2 #C,2.

"e)uests b a Minorit of Members? #rt B= #C, contains a special right for minorit shareholders to re)uest the convening of a general meeting b the administrators. %o exercise this right, the sharehol ers m"st represent at least ?@ of the total !otes in the compan > the Statute ma provide for a lower threshold. %he re)uest has to be issued in writing and must contain the reasons and ob&ectives for the re)uest.


#s in the case of a ,,C, a +SC must convene an ordinar general meeting at least once a ear. %he administrators are primaril responsible for convening the general meeting. #rt 9;A 092 #C, re)uires the general meeting to be announced b shareholders, as for ,,Cs. letter to all

%he letter or e/mail must be delivered to all shareholders not later than <9 da s before the scheduled date of the meeting. #ccording to #rt 9;: 0;2 #C,, a special general meeting has to be convened if annual or interim accounts show or if it is clear that losses amo"nt to ?B@ of the basi$ $apital or if there is a danger that the compan (s assets will not cover its liabilities within the neFt 8 months% "e)uests b a Minorit of Members? DF of total votes ma re)uest meeting and Shareholder(s "ights 8irective, the law permits shareholders to s"bmit re-"ests to put certain issues on the agenda of the general meeting> such re)uests must, in accordance with the 8irective, be submitted not later than G ays before the meeting.


-ach shareholder has the right to participate in the general meeting and to exercise his voting rights. In general, shareholders ma exercise their voting rights at their free discretion. #rt BB 092 and #rt 9=A #C, both state that ea$h share $arries one !ote %his means that, unless another distribution of voting rights is chosen b the Statute, ea$h sharehol er has !oting rights $orrespon ing to the nominal !al"e of his share%

5irst, #rt B@ and #rt 9=B #C, define cases in which sharehol ers are by la) eF$l" e from the right to eFer$ise their !oting rights in ,,Cs and +SCs, respectivel > the rules are identical for ,,Cs and +SCs. #ccording to #rtt B@ 092 and 9=B 092 #C,, a shareholder ma not exercise his voting rights if the general meeting is deciding on? a2 the evaluation of his performance> b2 his release from an obligations> c2 the compan lodging a lawsuit against him> d2 granting him an new benefit. PO4ERS OF DM

the right to amend the Statute power to set the business policies of the compan distribution of the compan (s profits and on changes in the e)uit capital the general meeting also has the authorit to appoint and dismiss the members of the compan (s organs approve the remunerations of the members of the administrative organs adoption of the annual statement of accounts, the election and dismissal of the compan (s auditors, decisions concerning compan restructurings and the dissolution of the compan

Ma9ority an -"or"ms Denerally e$isions are ta1en )ith or inary ma9ority of !otes of parti$ipating sharehol ers% If stat"te oes not pro!i e other)ise

*ith regard to certain especiall important decisions, the #C, re)uires resolutions to be made b three,-"arter ma9ority J #mendments of the Statute J %he increase or reduction in subscribed capital> J .rofit distribution> J Compan restructuring and dissolution. "esolutions passed in the general meeting are onl valid if at least ;KF of the subscribed voting shares are represented at the meeting. In case of decisions re)uiring a )ualified ma&orit of the votes, the minimum level of attendance is set at DKF. Spe$ial in!estigation #ccording to #rt @9 and #rt 9DK #C,, the general meeting ma decide to initiate a special investigation with respect to irreg"larities "ring the $ompany2s formation or in the $on "$t of ongoing b"siness. %he general meeting decides on the initiation of a special investigation b ordinar ma&orit L$ %he special investigation is to be carried out b an independent auditor, who is appointed b the general meeting. %he rule primaril aims at identif ing claims for compensation against members of the administrative organs and shareholders. 3n the grounds that there is a serious suspicion of breach of law or Statute, the initiation of special investigations and the nomination of a special auditor ma also be re)uested b minorit shareholders representing at least DF of the votes, as well as b creditors of the compan . If the. general meeting refuses to initiate a special investigation, the re)uesting shareholders or creditors ma still re)uest the court to initiate investigation> the same applies If the general meeting does not render a decision within :K da s. %he Statute must not limit.