FOURTH SUTH EASTERN EUROPE CORPORATE GOVERNANCE ROUNDTABLE 6-7 March 2003, Sarajevo LEGAL FRAMEWORK FOR CORPORATE GOVERNANCE IN BOSNIA AND HERZEGOVINA A BRIEF OVERVIEW Mr. Mihret Dizdar, Company and Securities Law Consultant Revicon LLC, Business Consulting Services, Sarajevo

BACKGROUND The Dayton Peace Accord (1995) The state of Bosnia and Herzegovina Two constitutional entities: Federation of Bosnia and Herzegovina (FBiH) Republic of Srpska (RS) Single administrative unit of local self-government: Brcko District

BASIC LEGAL FRAMEWORK FBiH Law on Business Companies of 1999 (LBC) RS Law on Enterprises of 1998 (LoE) Entity-level laws: securities, accounting and audit, contracts, company register, etc. Entity-level regulatory and market institutions: securities commission, securities registrar, securities exchange

CORPORATE GOVERNANCE STRUCTURES FBiH joint stock company The shareholders’ meeting elects the supervisory board and the audit committee The supervisory board appoints the management: chief executive named as director, and executive directors, occasionally RS joint stock company (over 50 shareholders and/or 100 employees) The shareholders’ meeting elects the management board and the supervisory board The management board appoints the chief executive named as director, and the board of executive directors, occasionally FBiH supervisory board=RS management board FBiH audit committee=RS supervisory board

FINANCIAL REPORTING, AUDIT AND DISCLOSURE Supervising the process of accounting and financial reporting and auditing of financial statements FBiH:the audit committee RS:the supervisory board Elected by shareholders Composed entirely separated from FBiH supervisory board, i.e. RS management board “Public company” Any issuer of securities issued through public offer and/or traded on a securities exchange or other regulated public market An independent outside audit and disclosure of financial statements

CHANGES AND IMPROVEMENTS RS Law on Enterprises – enacted, September 2002 FBiH Law on Business Companies - proposed, October 2002 The initiative and basis: –Action Plan for the removal of administrative barriers to investments –FIAS Report Forum on Corporate Governance, May 2002 –A public-private sector dialogue and partnership to enhance the business environment in BiH –

RS LAW ON ENTERPRISES CHANGES ENACTED Company founding act –The company type, duration and share capital Company governing bodies – Over 50 shareholders and/or 100 employees: the management board and the supervisory board; the chief executive and the board of executive directors, occasionally Company register – Data and documents to be entered and/or filed with the court register; the third party protection where the data inaccurately published Business letters - The contents of business letters delivered to third parties Founding cash contributions – Raised to 50,000 KM and to 100,000 KM Share nominal value - Reduced from 5 KM to 1 KM Shareholder book - Central Securities Registrar Profit distribution – The conditions complied with the Second EU Directive Quorum – Over 50% for the first convening, allowing votes to be mailed; quorum is not required for the reconvened shareholder meeting Proxy - Certified by the relevant state authority or by the company Company reorganization – Compliance with the Third and the Sixth EU Directive Creating corporate governance standards - The Securities Commission

FBiH BUSINESS COMPANIES LAW CHANGES PROPOSED Company register and business letters – To comply with the First EU Directive, international practices and local experiences Company reorganization –The Third and the Sixth EU Directive Payment for shares by transfer of items and/or rights – Should be allowed for shares issued through private placement, including debt-equity swap Pre-emptive right to a new share issue – Should be appllied to all issues Subscribed capital decrease by the withdrawal of own shares – Shareholder meeting decision for all cases should be required Share class – To clarify interdependence of the nominal value and rights attached, as well as possibility and characteristics of shares of different classes Shareholder book - Maintained only electronically at the Securities Registrar Quorum – To reduce at 30% for the first and 10% for the reconvened meeting Proxy - To remove the shareholder`s signature certification and allow a proxy and voting ballots delivered by mail, fax or , all subject to the SEC regs LBC comprehensive application – To bind companies with partial or total state capital still remaining not to wait for privatization completion, but to comply with the LBC provisions within reasonable shorter time period

CORPORATE GOVERNANCE IN COMPLEMENTARY LAWS Forum on Corporate Governance, October 2002 Comments and recommendations: The term “capital” in laws and practice of BiH Financial reporting and corporate income taxation Accounting and audit Corporate governance in "special" laws