Identificating Beneficial Ownership Disclosure and enforcement Paulo Câmara, Director CMVM Moscow, Russian Corporate Governance Roundtable, 3 October 2003

Page 2 Diversification of proprietary structures in companies Control over a company does not involve necessarily direct acquisition of shares. Corporate proprietary landscape has changed dramatically over the recent years due to: trust arrangements shareholders agreements complex structure of some groups of companies or other forms of legal persons (inter alia foundations and partnerships) All these schemes are commonly used in Russia.

Page 3 A need for further transparency This situation has claimed for increased transparency over ownership structure of companies. This is a universal question - and has been significantly pointed out as one of the Russian corporate governance weaknesses. White Paper (2002): it is essential that ownership and control structure remains fully transparent to all shareholders under all circumstances.

Page 4 Why transparency of ownership structures matters Ownership structure affects management of companies - and therefore affects pricing of securities. Hence, transparency is this respect: Increases investors’ confidence Promotes market efficiency Helps market integration Such is the justification for the first EC intervention in this field (1988).

Page 5 Why transparency of ownership structures matters Prophylactic effect Disclosure of ownership structure helps to detect and prevent: illicit use of corporate vehicles (e.g. tax evasion, money laundering, financing terrorism, infringement of competition law) or irregular corporate practices (related-party transactions).

Page 6 Why transparency of ownership structures matters: takeover law Special concerns under takeover law Transparency of ownership structures is important for a correct functioning of market for corporate control. All concert parties have to be described in the offer documents. Some authors (e.g. Guido Ferrarini) argue that there are implications in the degree of contestability of control of listed companies. In countries with mandatory bids, this point is crucial.

Page 7 Why transparency of ownership structures matters: takeover law Special concerns under takeover law Here the problem also lies on the prospective ownership structure. Offeror has to disclose real name of person under which instructions takeover bid is being presented (i.e. beneficial owner of shares to be acquired through the bid process). Some jurisdictions impose disclosure of sources of financing.

Page 8 How to detect beneficial ownership: attribution of voting rights What matters is holding of voting rights, and not of shares. Important to elaborate a list of situations where holding of voting rights is deemed to exist (fictio juris). New Proposed Transparency EC Directive presents us the following comprehensive approach: EC regime is currently under revision.

Page 9 Attribution of voting rights: Proposed EC Directive (a)voting rights held by a third party with whom that person or entity has concluded an effective agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question; (b)voting rights held by a third party under an effective agreement concluded with that person or entity providing for the temporary transfer for consideration of the voting rights in question; (c)voting rights attaching to shares which are lodged as collateral with that person or entity, provided the latter controls the voting rights and declares its intention of exercising them; (d)voting rights attaching to shares in which that person or entity has the life interest; (e)voting rights which are held, or which may be exercised within the meaning of points (a) to (d), by an undertaking controlled by that person or entity; (f)voting rights attaching to shares deposited with that person or entity which the latter can exercise at its discretion in the absence of specific instructions from the security holders; (g)voting rights which that person or entity or one of the parties mentioned in points (a) to (e) is required to sell, on the sole initiative of a third person, or is entitled to acquire, on his own initiative, under a formal agreement; (h)voting rights which that person or entity may exercise as a proxy according to common instructions from securities holders.

Page 10 How to enforce rules on transparent ownership structure The Portuguese solution Duty to disclose shareholder agreements whose percentage of votes involved is higher than 2% of publicly-held companies. Such duty is binding to all parties in the agreement. Besides administrative fines for non-compliance, a company’s decision can be declared as void if majority is obtained due to votes of shareholders that entered into a non-disclosed agreement. Enforcement is also decisive in terms of transparency of ownership structures.

Page 11 How to enforce rules on transparent ownership structure The Portuguese solution In Portugal, a 2001 reform has brought up interesting changes in this respect. If beneficial ownership is not disclosed, the market authority can issue a public declaration qualifying some shareholding as not transparent. Consequently, voting rights therein attached become suspended. This solution has proved to be very effective. Enforcement is also decisive in terms of transparency of ownership structures.

Page 12 Conclusion Disclosure system should: Be coherent and easily understandable by shareholders; Encompass adequate articulation with takeover law; Imply a catalogue of situations where beneficial ownership is deemed to exist; Involve the Internet as a means of disseminating accessible and timely information; Provide the necessary powers to market authorities; Be enforced effectively (i) through administrative fines and (ii) through rules that affect shareholders rights if disclosure duties are not complied.