bc8G2-7

DATA NOTES
131
from the company. A score of 0
is assigned if no; 1 if plaintiffs can
recover their legal expenses from
the company only upon a successful
outcome of their legal action
or if payment of their attorney
fees is contingent on a successful
outcome; 2 if plaintiffs can recover
their legal expenses from the company
regardless of the outcome of
their legal action. 12
The index ranges from 0 to 10, with
higher values indicating greater powers
of shareholders to challenge the
transaction. In Croatia, for example,
the plaintiff can access documents
that the defendant intends to rely on
for his defense (a score of 1). The plaintiff
can examine the defendant and
witnesses during trial, without prior
approval of the questions by the court
(a score of 2). The plaintiff must specifically
identify the documents being
sought (for example, the Buyer-Seller
purchase agreement of July 15, 2006)
and cannot simply request categories
(for example, all documents related
to the transaction) (a score of 0). A
shareholder holding 10% of Buyer’s
shares can request that a government
inspector review suspected mismanagement
by Mr. James and the CEO
without filing suit in court (a score of
1). The standard of proof for civil suits
is the same as that for a criminal case
(a score of 0). The plaintiff can recover
legal expenses from the company only
upon a successful outcome of the legal
action (a score of 1). Adding these
numbers gives Croatia a score of 5 on
the ease of shareholder suits index.
Extent of conflict of interest
regulation index
The extent of conflict of interest
regulation index is the sum of the
extent of disclosure index, the extent
of director liability index and the ease
of shareholder suits index. The index is
divided by 3 so that it ranges from 0
to 10. Higher values indicate stronger
regulation of conflicts of interest.
Shareholders’ rights in
corporate governance
The extent of shareholder governance
index measures shareholders’ rights in
corporate governance by distinguishing
3 dimensions of good governance:
shareholders’ rights and role in major
corporate decisions (extent of shareholder
rights index), governance safeguards
protecting shareholders from
undue board control and entrenchment
(strength of governance structure
index) and corporate transparency
on ownership stakes, compensation,
audits and financial prospects (extent
of corporate transparency index). 13
Extent of shareholder rights
index
For each component of the extent of
shareholder rights index, a score of 0
is assigned if the answer is no; 1 if it
is yes; and 1.5 if it would also apply if
Buyer were a privately held joint stock
company not listed on any stock exchange.
The index has 7 components:
• Whether shareholders have the
right to amend Buyer’s bylaws or
statutes with a simple majority.
• Whether shareholders owning 10%
of Buyer’s share capital have the
right to call for an extraordinary
meeting of shareholders.
• Whether shareholders have the
right to remove members of Buyer’s
board of directors before the end of
their term.
• Whether Buyer must obtain its
shareholders’ approval every time it
issues new shares.
• Whether shareholders are automatically
granted preemption or
subscription rights every time Buyer
issues new shares.
• Whether shareholders are required
by law to approve the election and
dismissal of the external auditor.
• Whether shareholders have the
right to freely trade shares prior to a
major corporate action or meeting of
shareholders.
Strength of governance
structure index
For each component of the strength
of governance structure index, a score
of 0 is assigned if the answer is no; 1
if it is yes; and 1.5 if it would also apply
if Buyer were a privately held joint
stock company not listed on any stock
exchange. The index has 7 components:
• Whether the CEO is barred from
also being chair of the board of
directors.
• Whether the board of directors must
include independent board members.
• Whether Buyer must have a separate
audit committee.
• Whether changes to the voting
rights of a series or class of shares
must be approved only by the holders
of the affected shares.
• Whether a potential acquirer must
make a tender offer to all shareholders
upon acquiring 50% of Buyer.
• Whether cross-shareholding between
2 independent companies is
limited to 10% of outstanding shares.
• Whether a subsidiary is barred from
acquiring shares issued by its parent
company.
Extent of corporate
transparency index
For each component of the extent of
corporate transparency index, a score
of 0 is assigned if the answer is no; 1 if
it is yes; and 1.5 if it would also apply if
Buyer were a privately held joint stock
company not listed on any stock exchange.
The index has 6 components:
• Whether Buyer must disclose ownership
stakes representing 10%.
• Whether Buyer must disclose information
about board members’
other directorships as well as
basic information on their primary
employment.
• Whether Buyer must disclose
the compensation of individual
managers.
• Whether Buyer must have its annual
financial statements audited
by an external auditor.