Middle East Partnership Initiative The Corporate Governance Initiative

White paper Public Debate CG committee United States Department of Commerce CLDP Commercial Law Development Program Corporate Governance Code

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 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 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) What has been achieved…

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. NEW BAHRAIN CORPORATE GOVERNANCE CODE – NUTS AND BOLTS OF DRAFTING IT

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 Provisions in the Law Relating to a Corporate Governance Code…

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 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 Provisions in the Law Relating to the Board of Directors

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 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 Provisions in the Law Relating to Shareholder Meetings and Rights

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 Provisions in the Law Relating to Shares

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 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 Fiduciary Duties and Remedies

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 Application of the proposed Code

(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 induction review with all new directors of the boards role and responsibilities, with legal counsel written appointment agreement for directors, with contents and responsibilities detailed rules for notice, agenda and information sent to directors for board meetings one director may not serve on more than three boards of public companies at least 50% to be non-executive and at least three of those independent if chairman not independent, have a lead director with stated powers chair and CEO to be different independent directors meet separately in controlled companies: at least 1/3 independent plus rules for serving all shareholders interests directors to seek independent legal advice when concerns rules for regular contact with management

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

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 PRINCIPLE 8 THE COMPANY SHALL DISCLOSE ITS CORPORATE GOVERNANCE [mandatory: numerous rules for explain and other disclosures to shareholders]

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 Executive director Nonexecutive director Remuneration [[[add others needed]]]

(3) 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 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).

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

3. 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?

Thanks ……