REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC) CORPORATE GOVERNANCE COUNTRY ASSESSMENT REPUBLIC OF CROATIA September 2001 This Corporate Governance Assessment of Croatia has been completed as part of the joint World Bank-IMF program of Reports on the Observance of Standards and Codes, (ROSC) which are designed to strengthen the international financial architecture. This ROSC is based upon a template structured around the OECD Principles of Corporate Governance completed by the World Bank team, and the Croatian Securities Commission, based on a review of relevant legislation and discussions with the Croatian Securities Commission, the Ministry of Finance, the Zagreb Stock Exchange, the Varazdin Over-The-Counter Market, the Croatian Privatization Fund, the Central Depository Agency, the Commercial Court of Zagreb, the Croatian Association of Accountants and Financial Experts, the Croatian Employers' Association, Expandia Privatization Investment Fund, the Law Faculty of Zagreb, Croatian Chamber of Economy, and Zagrebacka banka. The assessment was conducted March through May 2001 by the Europe and Central Asia Regional Department of the World Bank in collaboration with the Corporate Governance Unit of the Private Sector Advisory Services Department of the World Bank. REPORT ON THE OBSERVANCE OF STANDARDS AND CODES Corporate Governance Assessment Republic of Croatia Contents I. EXECUTIVE SUMMARY II. DESCRIPTION OF PRACTICE A Capital Market Overview A1 Capital market structure A2 Ownership structure A3 Regulatory framework and professional/best practice bodies A4 Registration and listing requirements B Shareholder Protections B1 Shareholder rights and share registration B2 Shareholder meetings B3 Market for corporate control B4 Participation in fundamental corporate decisions B5 Equitable treatment and statutory remedies B6 Insider trading and self-dealing C The Role of Stakeholders in Corporate Governance C1 Legal rights and redress for violation of rights C2 Performance-enhancing mechanisms for stakeholder participation D Financial and Non-Financial Disclosure D1 Disclosure of material information D2 External audit D3 Major share ownership D4 Disclosures relating to corporate control and management E The Governing Body E1 Structure and independent oversight of management E2 Key functions III. SUMMARY NOTE ON POLICY RECOMMENDATIONS Annex: Policy Recommendations based on the OECD Principles ­ Assessment Matrix Table 1: Summary Fact Sheet Table 2: OECD Principles ­ Assessment Matrix Appendices ­ Acronyms, Contact Details and Information on ZSE and Varazdin Markets I EXECUTIVE SUMMARY 1.1 Croatia's corporate governance system is framed by civil law with regulation for traded companies in part based on London securities rules and international standards for accounting and auditing. 1.2 There are two public exchanges, which both have three tiers: one over the counter market, Varazdin, and the Zagreb Stock Market. The majority of companies are listed on the third tier, which has the lowest level of disclosure and listing requirements. The small number of companies on the first tiers (four companies at ZSE, two at Varazdin) has been reduced recently through the successful takeover of companies by strategic investors. 1.3 The corporate governance structure in Croatia reflects several important aspects of the recent history of Croatian enterprise, including: a history of social ownership; the transition to capitalism; the on-going legacy of privatization; recent economic distress; and, regional conflict. 1.4 Interest in corporate governance is rising with the potential for growth in the corporate sector being driven by privatization. Improvement in corporate governance is seen to have the potential for improving access to capital, and promoting efficient development of the new private sector. 1.5 This Report on the Observance of Standards and Codes benchmarks the Croatian corporate governance system against the OECD Principles of Corporate Governance, which have been recognized by the Financial Stability Forum as one of the core standards underpinning the international financial architecture. 1.6 This ROSC highlights a number of areas where Croatia's corporate governance system can be strengthened: these can be grouped initially under four headings: ˇ disclosure of ownership and control ˇ the role and effectiveness of shareholders meetings ˇ the business practices of supervisory boards ˇ the audit practices of external auditors. The recommendations for reform are set out briefly in Section IV and at greater length in the Annex 1.7 When completed, this ROSC will be publicly posted on the World Bank-IMF website (http://www.worldbank.org/ifa/rosc_cg.html). 1 II DESCRIPTION OF PRACTICE A Capital Market Overview A1 Capital market structure and legal framework The Croatian corporate legal structure is based on civil law. The primary legal framework for publicly traded companies consists of the 1993 Company Law, the 1995 Law on Issuance and Sale of Securities (amended in 1998) and the 1997 Law for the Takeover of Joint Stock Companies. All traded securities must be in the legal form of shares in joint stock companies, which are governed by the Company Law. The Company Law is based on the German Stock Corporations Act, while the Securities Law and Takeover Law largely reflect Anglo-American securities market legislation. While moving towards integration with the European Union1, the legal reform necessary for that integration remains at an early stage. Croatia's laws have not yet been comprehensively reviewed for compliance with the Directives of the European Union. The Securities Law governs the securities markets and establishes the primary securities regulatory agencies: the Croatian Securities Commission (CroSec) and the Croatian Securities Depository Agency (SDA). The Securities Law also regulates the trading of securities and sets out the extent of civil and criminal liabilities. There are approximately 3,000 joint stock companies in Croatia, representing just over two percent of all enterprises. Under the 1993 Company Law, other legal forms are permitted but only joint stock companies may trade on the two organized exchanges: the Zagreb Stock Exchange (ZSE) founded in 1991 with three tiers; and, a smaller exchange, the Varazdin Over- the-Counter (OTC) Market, founded in 1993 which lists companies on three primary tiers (plus special trading for auctions and government certificates). (Please see appendices for information on both ZSE and Varazdin markets). On December 31, 2000 the market capitalization of ZSE was Kuna 22.2 billion (US$ 2.6 billion2) or 13.4 percent of GDP and Kuna 5.6 billion (US$ 652 million), for Varazdin, or 3.9 percent of GDP. Top tier companies at both ZSE and Varazdin must have at least 25 percent of shares in free float, however additional information on liquidity is not available. A2 Ownership Structure Current levels of disclosure do not allow the ownership structure of Croatian companies to be clearly identified. Information provided is based on estimates by market participants. Ongoing 3 discussions regarding privatization of the state pension funds could create a domestic institutional investor industry.4 There are an estimated 350,000 individual retail investors,5 1In May 2001, Croatia signed the Stabilisation Association Agreement as a preliminary move toward joining the European Union. The European Commission has set up a Community Assistance for Reconstruction, Development and Stability (CARDS) programme, through which Croatia will be qualified to discuss ascension after 2006. 2Based upon an exchange rate of 8.6 Kuna to the USD, as of 8 June 2001, http://www.bloomberg.com/markets/currency/currcalc.html 3Notably, most of the Securities Commission's recent investigations relate to disclosure requirements during change of ownership. 4For January 2002, pension fund reform law is under consideration which would allow state pension funds to invest up to fifteen percent of assets in foreign equity, 35 percent of assets in domestic equity (with a maximum of fifteen percent of assets invested in ZSE's TN Tier) and at least 50 percent of assets in Croatian bonds (and other long term securities). As of May 2001, the state pension funds could invest up to twenty percent of their value in domestic equity. Actual investment in domestic equity is much lower. (Interviews with the Ministry of Finance, May 17 2001) 5Interviews with CroSec and SDA, May 15th and May 18th 2001. 2 virtually all of whom received their shares as part of voucher privatization. Approximately 230,000 people (including veterans, families of the deceased, casualties, dispossessed, captured, families of those missing) received their voucher shares as compensation from the government following the regional conflict.6 An estimated 100,000 small shareholders have bought shares, often on a deferred payment plan.7 In total it is estimated that "small shareholders" hold about Kuna 5 billion (US$ 582 million) in shares. The investment funds are regulated by the 1997 Law on Privatization Investment Funds and the 1995 Law on Investment Funds, in addition to the Securities Law and other securities-related institutions. The seven privatization investment funds (PIFs) are listed on the Varazdin OTC Market and in 2000, represented over twenty percent of the trading. Approximately 480 other companies are occasionally traded there. Many have been publicly traded as a result of privatizations by the Croatian Privatization Fund. The number of companies listed on ZSE or Varazdin in which the government is a shareholder is difficult to ascertain as complete ownership disclosure is not mandatory. During 2000, two companies listed on ZSE's top tier were removed due to their acquisition by strategic investors. 31 companies representing Kuna 145 million (US$ 17 million) were subject to the Law on the Takeover of Joint Stock Companies (see below), a three-fold increase from 1999. These takeovers were driven by restructuring following the privatization programs of the 1990s, three-year economic recession and a 1999-2000 banking crisis in Croatia. A3 Regulatory framework and professional/best practice bodies The Croatian Securities Depository Agency (SDA) was created in April 1997.8 The mandate of the SDA is to operate as the Croatian Central Registry/Depository for all forms of securities and to contribute to the competitiveness of the Croatian capital markets through providing electronic clearing, settlement and depository services. The SDA received its operating license from the Croatian Securities Regulator in April 1999 and began to introduce its services on a gradual basis starting in July 1999. The SDA was fully operational by November 1999. By March 31, 2001 it had completed registration of about 150 of the most-actively traded companies, which represent close to 100 percent of trading. When fully complete, the Depository Agency expects to have registration for about 1,500 companies. The SDA is in compliance with most of the ISSA/G30 recommendations. There are projects currently underway to achieve full compliance by the end of 2001. Full compliance requires a move to T+3 settlement from T+4 settlement and the introduction of an automated securities borrowing and lending facility. The SDA holds securities in dematerialized form. The SDA clears and settles all trades executed on the Zagreb Stock Exchange and the Varazdin OTC market. Trade settlement takes place on either a netting basis for those trades that are at or under one million HRK (US$ 117,000) or on a trade-for-trade basis for trades valued one million HRK. The SDA has a complete Fails Management system in place that includes a Guarantee Fund combined with buy-in and sell-out procedures. The SDA has been formally acknowledged by one Global Custodian Bank to be in compliance with the requirements of the U.S. Securities and Exchange Commission Rule 17f-7. Having been accepted by one Global Custodian Bank, the 6Interviews with Expandia PIF (May 17, 2001) 7These shares may be paid for over a twenty year period 8Article 84 of the Issuing and Trading of Securities Act (Narodne novine no. 107/95) and Article 177 of the Companies Act (Narodne novine no. 111/93) 3 SDA expects in due course to receive formal confirmation of compliance with SEC Rule 17f-7 from the other Global Custodian Banks.9 Less than one percent of SDA accounts are managed by custodian banks. The total market value held in these accounts represents 29 percent of the total market capitalization.10 The accounts that are not managed by custodian banks are beneficial owner accounts. These accounts represent close to 100 percent of the total number of accounts held by the SDA. In market value terms, these accounts contain over 71 percent of the total market capitalization. An analysis of the beneficial owner accounts indicates that domestic companies contain 38 percent of total market value while representing under two percent of the total number of accounts opened. The market value held by foreign companies is fourteen percent of the total market value while representing less than one percent of accounts opened. Domestic individuals have by far the largest number of accounts (more than 97 percent) and hold sixteen percent of the total market capitalization. Foreign individuals have very few accounts and represent a very small percentage of the value of holdings in market value terms. Companies holding treasury shares represent two percent of total market capitalization.11 Founded in 1996, the Croatian Securities Commission (CroSec) is the administrative body responsible for the licensing and monitoring of issuers, intermediaries, investment funds, portfolio managers, brokers and advisors as well as investors. Under the 1995 Securities Law, the Croatian Securities Commission is empowered to monitor and investigate all securities trading and, as appropriate, refer cases to the commercial courts or the prosecutor-general. The Commission is governed by a chairman, two deputy chairmen and three other members. Members of the Commission are nominated by the Government of Croatia and appointed by the Croatian Parliament (Sabor) for terms of six years, with the terms of two commissioners expiring every two years. The Chairman is chosen from among the Commissioners and he/she appoints the deputies. Commissioners must have appropriate professional expertise, abilities and work experience and be considered worthy of being a member of the Commission. The members of the Commission are prohibited from acting as members of the management, boards of directors, oversight committees or other bodies of issuers of securities. They may not perform any other service or function which might influence their independence, or diminish their public reputation. The Commission is funded by the state budget. It has a total staff of twenty-four, and in common with the Croatian public sector, its employees are paid significantly less than their private sector peers in the financial sector. The Commission issues brokers' licenses but is not currently empowered to revoke brokers' licenses. A proposed amendment to the Securities Act will establish this authority. The Commission can initiate investigation of its own accord or upon the notification of third parties. In cases of non-compliance or violation of the Securities Law by market participants, the Commission may give warnings, halt trading, and publicize cases of abuses practices. The Commission can only investigate violations directly related to securities trading. The Croatian Securities Commission does not have administrative powers to impose fines, but must refer the case to the commercial courts. Violations of the criminal code are referred to the prosecutor- 9SDA statistics and written statement, May 23, 2001. 10These numbers include the securities held by custodian banks in support of the GDR programs in place for Pliva and Zagrebacka Banka. 11SDA statistics and written statement, May 23, 2001. 4 general. Administrative decisions by the Securities Commission can be appealed to the administrative court. The Securities Commission has the ability to carry out electronic surveillance of all securities trading on the ZSE and on the Varazdin Market. The ZSE supervises the functioning of the stock market, establishes listing rules, defines the terms and conditions under which securities are admitted for trading on the exchange, and supervises the activities of securities brokers. The Exchange is a joint-stock company with 41 shareholders, which originally included 34 banks and industrial companies.12 In 2000, the ZSE harmonized its shareholders' structure with the Law on Securities. Its only shareholders now are brokerage houses, which are members of the ZSE. The ZSE is a corresponding member of the International and European Federations of Stock Exchanges and is a full member of the Eur- Asian Federation. ZSE has the authority to warn companies of possible violations of the securities laws, to de-list issuers and to refer cases for investigation by the Securities Commission. The Exchange maintains a separate department for market surveillance. In the past year, the Zagreb Exchange has referred three cases to the Commission for further review. In December 1997, the 23 individuals who founded Varazdin OTC were replaced by 36 brokerage houses, who became the Varazdin shareholders. Each new shareholder is the owner of an equal number of shares. In 2001, there were 34 active brokerage houses who were Varazdin shareholders. Varazdin is governed by a supervisory board consisting of brokerage representatives, who have the ability to suspend trading and otherwise impose disciplinary measures upon members who have not met financial obligations. CroSec is responsible for overseeing all trading on both ZSE and Varazdin. A4 Registration and listing requirements A company is required to obtain the approval of the Securities Commission prior to issuing new securities, although preparation of a standard, full prospectus is only required for Quotations I and II companies. Other traded companies are only obliged to prepare an abbreviated prospectus and follow the financial disclosure requirements of the Company Law with regard to joint stock companies. For listings on ZSE TN tier or Varazdin's "Supply and Demand" tier, companies must send the exchange in question basic data, such as the last annual financial report and provisions of the statute regulating the number, type and transfer of shares. The Securities Law establishes standards for minimum disclosure of information in the prospectus. The Law sets out the requirements for a prospectus and notes that it should contain all the information necessary for the investor to form a realistic picture of the `property and obligations', profit and loss, financial position, and prospects of the issuer and as well as the shareholders' rights in the securities (but not information on the broker). The prospectus must also provide the names of company management and the members of the supervisory board. For the issuance of shares, the prospectus must also disclose remuneration of the members of the boards as well as the names of shareholders who directly or indirectly have or could have prevailing influence on management of the issuer. If the prospectus pertains to shares, earnings which members of management and the board of directors receive from the issuer must be disclosed. Companies must also disclose any new information or revision of 12Shareholders with more than five percent ownership in the Zagreb Exchange were: Privredna banka, Rijecka banka, CAIB (investment bank), Croatia Lloyd and the state oil and gas company INA. 5 errors in the prospectus which could affect assessment of the security. No specific disclosure is required of the governance mechanisms of the issuer. Under Article 17 of the Securities Law, company management and the management board must also sign a statement that the information in the prospectus constitutes a full and truthful presentation. After receiving approval from the Securities Commission, an issuer may submit an application to the ZSE, if the shares are to be listed there. The application must include information concerning the type of securities to be listed, the ownership structure of the company, a copy of the founding act and the statutes, the prospectus, and any additional information on events which occurred after its publication. The supervisory board of the ZSE makes the final decision whether or not to admit the issuer's securities for trading on the exchange. The Listing Department of the ZSE monitors compliance with listing requirements. The Department has one staff member responsible for supervision of the four companies listed on the Quotation One tier. The minimum capital for issuers is DM 30,000 (US$ 13,000)13 and the minimum value of each share DM 10 (US$ 4).14 At least one-third of the issue price and all of the contributions in-kind must be paid- in to the company's share capital at the time of registration of the securities. Before registering a new joint stock company or increasing the capital of an existing company, it is necessary to pay at least one-quarter of the nominal value of each share in cash.15 Multiple-vote shares are prohibited. The ZSE has three market segments with different listing requirements (please see appendix for listing requirements). Quotation I follows the Rules of the London Stock Exchange. It requires publication of three years audited financial statements, a free float of at least 25 percent of the share capital and publication of a prospectus. Quotation II requires one year of audited financial statements, a minimum free float of ten percent and publication of a prospectus. Quotation TN requires only one year of audited statements and no prospectus. The Varazdin Market has different requirements on corporate disclosure and free float for its three primary tiers: Privatisation Investment Funds (PIFs) and the "Market Quotation" companies must be at least 25 percent publicly owned, publish a prospectus and provide two years of audited financial statements (PIFs excepted). Varazdin has no requirements on free float for the "Supply and Demand" tier, on which 478 of Varazdin's 487 companies list, however, these companies must provide one year of audited financial statements. Varazdin has six full time employees, one of which is responsible for surveillance. The Securities Law requires that new material information or corrections to inaccuracies be published in a supplement to the prospectus, which must be accessible to the public in the same manner as the original prospectus. To be admitted for trading on both ZSE and the Varazdin Market, in principle shares must be freely transferable. However in some cases the company management may refuse to register the transfer under the vinkulacija provisions of the Company Law.16 Restricted share transfer is permitted under the Company Law but prohibited under the 13Based upon an exchange rate of 2.3 DM to the USD, as of 8 June 2001, http://www.bloomberg.com/markets/currency/currcalc.html 14These amounts were set in German Marks (DM) in order to create a stable standard during a time of high inflation in Croatia. 15Article 179, Paragraph 3, Law on Companies 16Article 226 of the Company Law allows for a company's statutes to require the approval of the company prior to transfer of shares to a new owner. 6 Securities Law, therefore all companies registering at the SDA are not permitted to restrict share transfer. For companies listing on Varazdin, who refrain from registering at the SDA, restricted share transfer is still permissible. B Shareholder Protections B1 Shareholder rights and share registration The Company Law sets out the fundamental rights of shareholders and their treatment by the governing bodies. Two classes of shares may be issued: preferred and common. All common shares have voting rights. Preferred shares are non-voting, except in cases of non-payment of dividends. The total nominal amount of preferred shares may not exceed 50 percent of the company's capital.17 The Company Law indicates that voting rights are obtained only upon full payment for shares, but the company statutes may permit voting rights for lower levels of payment proportional to the amount of paid shares.18 The Company Law allows for company statutes to require that shares to be deposited with a bank ten days prior to the shareholders' meeting (bearer shares). Under the Company Law, responsibility for maintenance of the share register is held by each company, which may maintain the register themselves or have another company maintain the shareholder list. Only the person whose name is registered in the share register is considered to be the legal shareholder. Apart from the company management's responsibility to fulfill their duties in a conscientious and prudent manner in the interests of the company, there is no specific regulation of the company's share registration activities. In some cases, companies have been criticized for requiring high fees and extensive documentation for share registration but in general the administrative costs are considered low. Under the 1995 Securities Law, all securities issued to the public (which consists largely of privatized former state enterprises) must be registered with the SDA. The SDA is the only agency authorized to receive the deposit of dematerialized securities and to clear and settle the securities. The SDA marks a major improvement in corporate governance in Croatia, since prior to its creation, all share registries were held by the issuing companies or by companies designated by the issuers. Without effective regulations, share registries were sometimes incomplete or inaccurate. B2 Shareholder meetings Under Article 275 of the Company Law, the shareholders' meeting has sole authority to make decisions on: (1) changes in the company statutes, (2) increases and decreases in the company capital, (3) election and dismissal of members of the supervisory board, (4) the annual financial reports and the distribution of profits, (although there is no required formula for calculating dividends) (5) appointment of external auditors, (6) termination of the company, and (7) any other activities specified in the company statutes. Unless described in the company statutes or requested by the management board, the shareholders' meeting does not have the authority to make other decisions regarding the company or to invalidate decisions by the supervisory board or management board. Decisions by the shareholders' meeting are not valid unless properly 17Article 169 of the Company Law. 18 Although generally Company Law takes precedent over company statute, companies who pre-existed the introduction of the Company Law may continue to obey company statute on this matter. (Zoran Para, interview, May 16, 2001 ) 7 convened and recorded. Under Article 355 of the Company Law, decisions by the shareholders' meeting may also be invalidated if not "in conformity with the company's objectives" or if they are deemed "unethical".19 Companies are required to convene a general meeting at least once each year. Extraordinary general meetings may be convened by the company at the request of the holders of five percent of the shares. The Law on Companies does not stipulate a quorum necessary for holding a valid assembly, as this matter is decided in company statute. Under the Company Law, the shareholders' meeting and its agenda must be announced 30 days in advance. An announcement regarding the assembly, the proposed agenda and all decisions requiring a vote must be published in Narodne Novine, the official gazette: all other forms of convening a shareholders meeting is stipulated by company statute. Should shareholders wish to present counterproposals to items requiring a vote, the company also must publish the counterproposal in the official gazette. The Company Law permits shareholders' meetings to be held at the company headquarters or at the stock exchange if the company statutes allow it. Apart from the meeting agenda, there is no requirement for distribution of other materials specifically for the shareholders' meeting. The Company Law includes a provision that would allow shareholder to introduce items to the agenda of meetings. Within ten days after publishing the proposed agenda in the official gazette, shareholders may request amendments or present counterproposals to issues requiring a vote but these are not circulated to the other shareholders. Neither the company management board nor the supervisory board is required to respond to any questions submitted prior to the shareholders' meeting, but can do so during the meeting. The agendas for shareholders' meetings are set by the board. The shareholders may make decisions on issues not on the agenda, if all shareholders with votes agree to do so. Such items are presented during the course of the meeting, and are not circulated in advance. In addition, under Article 287 of the Company Law, the management board may refuse to provide information on taxes or the difference between the book and market value of assets. To be valid, decisions by the shareholders' meeting must be signed by the president of the meeting and notarized. After the shareholders' meeting, the management board must without delay submit a certified copy of the minutes and the relevant documents to the commercial court register. All information in the court register is publicly available although it is not available online. To obtain copies of the information one must visit the court register in person. B3 Market for corporate control The 1993 Company Law regulates substantial acquisitions of shares (25 percent or more of issued capital) by requiring that the purchasing company must without delay notify the acquiree. The purchasing company must publish the information in the company journal (or other corporate newsletter) and disclose under the seven days after an investor crosses any of several thresholds: ten percent, twenty percent, 1/3, 50 percent, 2/3 or 75 percent of all voting rights in a joint stock company. In addition the acquirer must publish the notification in Narodne Novine, the official gazette, within seven days upon receipt. However there are no requirements in the 19"Unethical" is not defined by law, and judicial practice understands it as fair trade practices. Because there has been no conscious infliction of damage on creditors, examples pertaining to abuse of power, violation of confidence or equal treatment principles have not been considered "unethical". 8 laws or in the Securities Commission's regulations that require disclosure of full beneficial ownership. In addition, according to the Takeover Law, after purchasing 25 percent or more of the voting shares of a company, the investor must within seven days notify the Securities Commission and publish a takeover offer in the newspapers for the balance of the shares. However, publication of tender offer is not required if the increase in share capital is done by a private placement and the share increase has been approved at a shareholders' meeting. Also the mechanism for setting the price for the tender offer is not specified by law or regulations, although the Securities Law does require that all regulated pubic markets publish in the daily newspapers offers to buy and sell securities and data on the price and quantity exchanged. Upon publication of a tender offer, the investor has the right to access the shareholder list. If fewer than 50 percent of the shareholders accept the offer the tender offer may be withdrawn. Within seven days of the publication of the tender offer, the supervisory board of the issuer must publish an opinion on the bid. Members of the supervisory and management boards of the issuer are prohibited from acting in any way that would prevent shareholders from deciding on the bid. Prior approval of the Agency for the Protection of Market Competition is not required prior to the purchase of shares. However under the 1995 Law on the Protection of Market Competition, companies must notify the Agency of proposed mergers whenever an affiliated group of companies has annual revenues of Kuna 700 million (US$ 85 million) or more prior to merger ­ or if before the merger two of the affiliated companies have combined revenues exceeding Kuna 90 million (US$ 11 million). B4 Participation in corporate decisions The Company Law provides the right for shareholders to vote at general meetings. The company statutes set out other provisions, such as the right of the certain shareholders to appoint up to one-third of the supervisory board. Decisions on key issues, such as amending the company statutes and increasing or decreasing share capital, must be made by 75 percent of the shares represented at the shareholders' meeting (rather than a minimum percentage of share capital). However company statutes may allow, if approved by 75 percent of the shares present and voting at the meeting, for the management board to be authorized to increase the company's authorized share capital for a period of up to five years and for an amount up to 50 percent of the company's share capital In addition the Law allows the management board to increase the company's share capital by converting company bonds into new shares up to the amount of the issued share capital of the company. It also permits company statutes to waive existing shareholders' pre-emptive rights on new share issues. In addition, the law provides for no requirement that the shareholders' meeting approve all transfers of substantial assets. There are no specific provisions for the procedure for counting of votes at the shareholders' meeting, although the Company Law requires that all decisions by the shareholders' meeting be recorded in the minutes prepared by a notary. The minutes must include the time and place of the meeting, the manner of voting, and the list of participants at the meeting. Without delay the management board must submit a certified copy of the minutes to the commercial court register, and the information is then publicly available. 9 The shareholders' meeting elects the members of the supervisory board for a period of up to four years. Supervisory boards must have at least three members. In addition the Company Law requires that the members of the supervisory board not include members of the management board, thus ensuring that 100 percent of the supervisory board is independent of company management. The supervisory board appoints management board for a maximum term of five years, although the terms may be renewed indefinitely. There are no requirements for citizenship to the members of the governing bodies. Appointment and removal of members of the supervisory board must be made by 75 percent of the shares present and voting at the meeting. In addition, shareholders with ten percent or more of shares may propose candidates for the supervisory board and the voting for such candidates must be conducted before votes for the individuals proposed by the supervisory board itself. There is no restriction against cumulative voting for electing members of supervisory boards, but neither is it a requirement by law. In practice, cumulative voting for supervisory board members is rarely incorporated into the company statutes. Shareholders have the right to vote by proxy (which need not be notarized). The proxy must be appointed in writing and the proxy card delivered to the company. There are no restrictions as to whom may be appointed proxy. Voting by mail is permitted only if authorized in the company statute. There are also provisions for financial institutions to be named as proxies and Article 292 allows for financial institutions to be given the right to vote for a shareholder, for a period of up to fifteen months. B5 Equitable treatment and statutory remedies Several remedies are available for shareholders in case of violation of their rights. They can initiate legal action either in the name of the company as derivative actions or in their own name. In cases where dividends on traded securities are due but have not been paid, shareholders may request the intervention of the Securities Commission. For non-traded securities, shareholders must sue the company in the commercial courts. Shareholders have the right to sue under the commercial court for violations of their rights, including for decisions taken by the company's management board. Under the Company Law, the company's management board has responsibility to conduct their affairs in a conscientious and prudent manner in the interests of the company and have liability under both the civil and criminal codes. In principle, shareholders may resort to court actions to protect their rights through temporary injunctions, under which courts would provide orders to temporarily ban actions until the time of final adjudication. Slow decision-making in the courts means that such actions are rarely requested, however, a May 1999 case (PZ1781/99) the High Commercial Court of Croatia decided in favor of the investor in case of vinkulacija and the Court confirmed the shareholders' right to sue the company's management board for damages. B6 Insider trading and self-dealing Under the Law on Securities, insider trading and market manipulation are prohibited and subject to both fines and imprisonment. The Securities Law prohibits insiders from taking advantage of 10 the information to trade securities and from divulging the information to third parties. Any trading by insiders must be reported to the Commission and the stock exchange within seven days. The restrictions against market manipulation include the prohibition against spreading false information to influence the price of securities. The Securities Commission maintains an enforcement department of four full-time staff members. In addition, the ZSE monitors suspicious trading and forwards cases to the Securities Commission. During 1999 and the first six months of 2000, the Securities Commission submitted 120 cases for review by the courts, or for criminal cases to the prosecutor-general. Of this number, five cases related to insider trading and two cases to price manipulation. Eighty of the cases related to failure to disclose changes in ownership under the Securities Law. 115 cases have been submitted to the commercial courts but no decisions have been taken to date. C The Role of Stakeholders in Corporate Governance C1 Legal rights and redress for violation of rights The Company Law requires that supervisory board members conduct their duties with proper attentiveness, with full responsibility, and with due care. In addition, the supervisory board (as well as the management board) is required to conduct the business operations of the company as conscientious and prudent managers. Such broad definition of is generally interpreted as indicating that board members have responsibilities to all stakeholders, although the responsibility is not specifically defined. Failure to conduct the operations in the manner of conscientious and prudent managers subjects board members to both civil and criminal penalties. Members of the management board are also personally responsible for actions that caused damage to the company, against which the test of a conscientious and prudent manager is to be applied. To date neither have been tested in court. There are no voluntary codes of best practice developed by business organizations or non- government organizations. Through the public reference facilities of the Securities Commission and the commercial court registers, the same financial information available to shareholders is also publicly available to other stakeholders. The Company Law requires that management boards act in a conscientious and prudent manner in the interests of the company. The Law provides for both civil and criminal sanctions in the event of failure to do so. However in the six years since the Company Law became effective, no cases have been presented to the courts. C2 Performance-enhancing mechanisms for stakeholder participation To encourage stakeholder participation, employees were generally offered discounted prices on shares for companies undergoing privatization. There is no clear evidence of whether this has proven to be a performance enhancing exercise. Some employee shareholder groups exist, however these function on an ad hoc basis. When the government announced the voucher privatization of 420 state owned enterprises in 1997, seven investment funds were formed in order for voucher recipients to invest in the newly privatized companies. Of the 230,000 individuals who received vouchers, 90 percent chose to swap their vouchers for shares in the newly created Privatization Investment Funds (PIFs). Because of the illiquid nature of many of the privatized enterprises, the PIFs have been consolidating their positions in these companies and taking a more active role as shareholders. 11 For example, Expandia (the second largest PIF) has representation on the supervisory boards of fifteen of the twenty companies in which they invest. The PIFs must either close down or become open money management funds after five years. D Financial and Non-Financial Disclosure D1 Disclosure of material information Rules concerning disclosure of financial information are included in the Company Law, the Securities Law (as amended) and the 1992 Law on Accounting. Under the 1998 amendments to the Securities Law, joint stock companies are not required to publish an annual report which includes a directors review, but must publish audited annual financial statements and quarterly unaudited statements if the company meets any of three criteria: (1) more than 100 shareholders, (2) an initial capital of Kuna 30 million (US$ 4 million) or more, or (3) are classified as large companies under the Accounting Law (i.e. if has more than 250 employees, annual income in excess of DM 16 million (US$ 7 million) or net assets in excess of DM 8 million (US$ 4 million).20 Under the Law on Accounting, all enterprises in Croatia are obliged to prepare their financial statements in accordance with International Accounting Standards, which are translated into Croatian by the Croatian Association of Accountants and Financial Experts as the standards are revised. Under Securities Law, the prospectus does not require disclosure of bankers or advisors apart from the managing underwriter, if the issuer is a syndicate. Financial information for traded companies is available online through subscription to a private service. It is also available for free (both in hard copy and electronic form) from the public reference facilities of the Croatian Securities Commission. Copies of the company statutes are generally available from the company ­they are often printed in the Official Gazette-- or from the regional commercial court register. For traded companies, shareholders may also request that Securities Commission obtain a copy of the statutes on behalf of the shareholder. The Securities Commission is responsible for ensuring disclosure of information required as part of the Securities Law, Law on Takeover of Joint Stock Companies, and legislation related to investment funds. Failure to disclose other information must be addressed to the commercial courts. D2 External audit The 1992 Law on Audit requires that an independent audit be prepared for all medium and large enterprises, that is, companies with more than 50 employees and revenues and net assets over certain limits. "Independence" is not specifically defined although the Audit Law specifies that an audit firm is not allowed to perform an audit of a company with whom it is related in terms of capital. There are no specific legal requirements for internal auditors nor any requirements that they report to the supervisory board or to the shareholders' meetings. There are no requirements that supervisory boards have audit committees. 20These amounts were set in German Marks (DM) in order to create a stable standard during a time of high inflation in Croatia. 12 The Law on Audit adopted International Standards on Auditing, which were directly translated into Croatian. The code of professional ethics is being translated into Croatian in 2001. The Law states that the audit firm owes a duty of care, honesty, and confidentiality with respect to information gathered during the audit. The Croatian Association of Auditors is responsible for auditing standards or practices, but has no authority to impose fines or other economic sanctions. The Audit Law limits the maximum fine to DM 50,000 (US$ 22,000) which can be applied for negligence by an auditor, although criminal penalties apply for intent to cause damage or personally profit from inaccurate financial statements. A draft revision to the Audit Law would increase the maximum fine that could be imposed on auditors. Currently there is no domestic market for liability insurance. To date, there have no court cases with regard to auditors' liability. D3 Major share ownership Under the 1995 Securities Law, all securities issued to the public (which consists largely of privatized former state enterprises) must be registered with the Securities Depository Agency. Under the Company Law, shareholders are entitled to receive the shareholder list from the company. However under the Securities Law, the Depository Agency must keep confidential the information regarding individual accounts and will therefore not release the full shareholder list to company shareholders. In principle, shareholders could request company management to obtain the shareholder list from the Depository Agency. Draft changes to the Securities Law would strengthen the ability of shareholders to obtain the full shareholder list. D4 Disclosures relating to corporate control and management An enterprise register is maintained by the eight regional commercial courts and covers over 120,000 enterprises, including partnerships and sole proprietorships. The commercial court registers includes the names of the company's members of the management and supervisory boards, the company's statutes and information regarding the total share capital of the company. The register also includes the names of the company's founders but not the names of the current major shareholders. Public information is not fully centralized. To obtain copies of a company's statutes one must visit the regional court register in person. Provision for online access is being discussed by the Ministry of Justice, which is responsible for the operation of the Commercial Register. The Securities Law requires that any trading of company shares by insiders (including company management) must be reported to the Commission and the stock exchange within seven days, but there are no periods during which company management or directors are prohibited from trading. Disclosure of related party transactions (i.e. commercial transactions among affiliated parties) is not directly regulated by the securities legislation although disclosure of material related party transactions is required under International Accounting Standards. In addition, there are no provisions in the Company Law that would require, that in event of conflict of interest between a company and members of the management board, spouse, or relatives, the director could not participate in the deliberations on such matters or that such non-participation be mentioned in the minutes of the board meetings. E The Governing Body E1 Structure and independent oversight of management 13 The Company Law provides for a two tier board structure comprising a supervisory board and a management board. The shareholders' meeting may also appoint special "revisers" to review the company's activities or actions taken related to changes in the share capital. Generally, the role of the revisers is limited to confirming the levels of inventory or fixed assets. If the shareholders' meeting declines to appoint the special revisers, shareholders with ten percent or more of the share capital may request that the court appoint the revisers, in cases where the company statutes have not been followed. The supervisory board does not approve the compensation for the management board beyond a review of the company's financial statements. The supervisory board has the right to access any company information bearing significance for business affairs and the position of the company. E2 Key functions According to the Company Law, the supervisory board has the following duties. It controls the conduct of the company's business and is authorized to inspect the company's books and internal documents. The supervisory board reports to the shareholders' meeting indicating if: (1) the company has complied with the law, (2) the company's annual reports are in agreement with the company's internal records and the company's true financial and business position and (3) the board agrees with the management's proposal on distribution of profits. The supervisory board must meet at least four times a year, but there is no requirement for disclosure of attendance records for supervisory board members. III SUMMARY NOTE ON POLICY RECOMMENDATIONS Based upon this ROSC which benchmarks Croatia's situation relative to the OECD Principles of Corporate Governance and the institutional capacity needed to make them effective, a number of areas warrant attention. The recommendations focus on strengthening four key areas: disclosure of ownership and control structures; role and effectiveness of the shareholders' meeting business practices for supervisory boards, and independent role of auditors. For full discussion of specific policy recommendations, please refer to the Annex. 14 Annex: Policy Recommendations based on the OECD Principles ­ Assessment Matrix The assessment that follows is based upon the OECD Principles of Corporate Governance (available at: http://www.oecd.org/daf/corporate-affairs/governance/). The OECD Principles are concerned primarily with corporations that are publicly traded, though many of the issues addressed by the OECD Principles are also of relevance to large non-traded corporations and state-owned companies. Each statement is benchmarked, based upon the country's level of observance of the principle (please also refer to Table 2: OECD Principles ­ Assessment Matrix). Observed means that all essential criteria are generally met without any significant deficiencies. Largely observed means that only minor shortcomings are observed, which do not raise any questions about the authorities' ability and intent to achieve full observance within a prescribed period of time. Materially not observed means that, despite progress, the shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance. Not observed means that no substantive progress toward observance has been achieved. Policy recommendations or comments may be offered when the principle is not fully observed. Additionally, pertinent notes and additional recommendations will be provided when applicable. Benchmarking throughout this matrix reflect several important aspects of the recent history of Croatian enterprise, including: a history of social ownership; the transition to capitalism and on- going privatization; recent economic distress; and, regional conflict. Section I: The Rights of Shareholders Principle 1. The corporate governance framework should protect shareholders' rights. Basic shareholder rights include the right to: (i) secure methods of ownership registration; (ii) convey or transfer shares; (iii) obtain relevant information on the corporation on a timely and regular basis; (iv) participate and vote in general shareholder meetings; (v) elect members of the (supervisory) board; and (vi) share in the profits of the corporation. A. Basic shareholders rights: (i) Secure methods of ownership registration Largely observed ­ With the introduction of the Central Depository Agency, ownership registration is becoming centralized and no longer resides within the company or local registrars. Potential for problems still exist with companies who choose not to register with the Central Depository Agency. 15 (ii) Share transfer Materially not observed ­ While shares of companies traded on the Zagreb Stock Exchange and/or registered with the Central Depository Agency are freely transferable, those of the Varazdin Over-the-Counter Market may or may not be transferable. Article 226 of the Company Law provides for vinkulacija which restricts transfer of shares pending the company's approval. Note that although the Central Depository has registered companies representing over 95% of all traded volume, several hundred traded companies have not been registered. Policy Recommendation: In order to ensure full transferability of the shares of traded companies, it is recommended that the Company Law be amended to remove the right of company management to block share transfers (vinkulacija) for all joint stock companies. (iii) Access to information Materially not observed - While financial information for companies listed on the ZSE is available, little ownership information is available to the public or to the shareholder. Ownership information disclosure does not currently require that the ultimate, beneficial owner be revealed. Policy Recommendation: Mandatory public disclosure of all ownership holdings in excess of ten percent of the company's shares for all joint stock companies is a common requirement in EU countries. Best practice within Europe would requires public disclosure of ownership holdings in excess of three percent. Additionally, allowing shareholders to request beneficial ownership lists from the Depository would accord with international best practice. Finally, providing online access to company information through the Depository's centralized database would ameliorate difficulties in obtaining information now available only in person. (iv) Participation and voting at AGM Largely observed ­ While all common shares bear the right to vote, some concern remains whether shareholders are fully aware of their rights. (v) Election of (supervisory) board Largely observed - Shareholders with ten percent or more of shares may propose candidates for the supervisory board and the voting for such candidates must be conducted before votes for the individuals proposed by the supervisory board itself. (vi) Share in the profit Largely observed - The shareholders' meeting approves payment of dividends or other profit distributions based on a recommendation from the management board. However, in practice, few companies are paying dividends currently as profits are low and formerly state-owned enterprises struggle with structural adjustments and solvency issues. 16 Principle 2. Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes, such as: (i) amendments to the governing documents of the company; (ii) the authorization of additional shares; and (iii) extraordinary transactions that in effect result in the sale of the company. B. The right to participate in decisions on fundamental corporate changes: (i) Amendments to the statutes Largely observed ­ Amendments to company statutes must be made with a minimum of 75 percent of the shares represented at the shareholders' meeting (rather than a minimum percentage of share capital). Policy Recommendation: Best practice would require that all fundamental corporate changes be put to a supermajority vote of all shares outstanding (not those represented at the meeting). Best practice would set the supermajority level necessary above the average holdings of controlling shareholders. For example, where mandatory free float is 25 percent, as in Croatia, the necessary supermajority would be over 75 percent in order to guarantee that the company must seek the votes of all shareholders. (ii) Authorization of additional shares Materially not observed ­ Currently, companies may receive authorization from shareholders at a shareholder's meeting (if approved by 75 percent of the shares at the meeting) to issue up to 50 percent of share capital for a period of up to five years. The law also allows the management board to increase the company's share capital by converting company bonds into new shares up to the amount of the share capital of the company. Finally, the law permits company statutes to waive existing shareholders' pre- emptive rights on new share issues. Policy Recommendation: Best practice would limit the duration of the authorization to one year and would cap the maximum value of share capital issued to five percent of the company's share capital. Best practice would amend the law in order to mandate that preemptive rights should be protected for all joint stock companies. Finally, as with all fundamental corporate changes, these issues should require a supermajority (75 percent of outstanding shares) vote by the shareholders. (iii) Extraordinary transactions (resulting in sale of the company) Materially not observed ­ The law provides for no requirement that the shareholders' meeting approve all transfers of substantial assets. Policy Recommendations: Best practice with the European Union would require that a supermajority of shareholders (75 percent of outstanding shares) vote to approve all of these extraordinary transactions. 17 "Substantial assets" are typically defined as 25 percent or more of the company assets and best practice would be for a supermajority of shareholders to vote on any transfer of assets representing 25 percent or more of the company. Principle 3. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings. C. The right to participate effectively and vote in general shareholder meetings and be informed of the rules, including voting procedures, that govern general shareholder meetings: (i) Sufficient and timely information about AGM Observed - With 30 day prior notification through a published announcement and agenda in the Official Gazette, shareholders are notified in a timely and sufficient manner. (ii) Opportunity to ask question and place items on agenda Materially not observed ­ Upon publication of the agenda, shareholders have ten days in which to introduce a counterproposal or offer a change to the agenda. The shareholders may make decisions on issues not on the agenda, if all shareholders with votes unanimously agree to do so. Company management is not required to respond to any questions submitted prior to the shareholders' meeting, but can do so during the meeting. In addition, under Article 287 of the Company Law, company management may refuse to provide information on two key issues: (1) taxes paid by the company and (2) the difference between the book value of assets, including real property, and their market value Policy Recommendations: Best practice would require that the company publish or distribute shareholder counterproposals and shareholder resolutions at the company's cost. (iii) Vote in person or in absentia Largely observed ­ Shareholders have the right to vote by proxy (which need not be notarized). The proxy must be appointed in writing and the proxy card delivered to the company for safe-keeping. There are no restrictions as to whom may be appointed proxy. Voting by mail is permitted only if authorized in the company statute. Principle 4. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. D. Disclosure of capital structures and arrangements enabling control disproportionate to equity ownership: 18 Largely observed - The company statutes describe the voting rights of shareholders, including provisions whereby certain shareholders have increased control (such as appointing up to one-third of the members of the supervisory board) or where their votes may be restricted to a maximum number. Principle 5. Markets for corporate control should be allowed to function in an efficient and transparent manner. E. Efficient and transparent functioning of market for corporate control: (i) Clearly articulated and disclosed rules and procedures, transparent prices and fair conditions Largely observed - Procedures for acquisition and mergers are clearly laid out in the Securities Law and the Law on Takeovers of Joint Stock Companies. The procedures are enforced by CroSec who, during 1999 and the first six months of 2000, initiated 50 cases (31 cases in 2000 alone) related to inadequate disclosures on takeovers. (ii) No use of anti-takeover devices to shield management from accountability Largely observed - While the laws and regulations on markets for corporate control are effective, the low level of liquidity on the stock exchanges preclude an active market for corporate control. Principle 6. Shareholders, including institutional investors, should consider the costs and benefits of exercising their voting rights. F. Requirement to weigh costs/benefits of exercising voting rights Materially not observed ­ While some investor groups, notably the PIFs have become active investors out of necessity, the domestic institutional investor industry is not yet in a developed enough position to undertake this cost-benefit analysis. With the introduction of the new pension reform law, this rating might change. Section II: Equitable Treatment of Shareholders Principle 1. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. All shareholders of the same class should be treated equally. 19 A. Equal treatment of shareholders within same class (i) Same voting rights for shareholders within each class. Ability to obtain information about voting rights attached to all classes before share acquisition. Changes in voting rights subject to shareholder vote. Largely observed - The Company Law and for traded securities, the Securities Law, do require disclosure of restrictions on voting rights and that changes in voting rights be subject to a vote of the shareholders' meeting. (ii) Vote by custodians or nominees in agreement with beneficial owner. Not observed ­ However, with the growth of the SDA, the depository will become capable of tracking beneficial owners and ensuring that their votes are cast in compliance with their wishes. Policy Recommendation: Best practice would suggest that the beneficial owner alone have voting rights and that nominee holders must solicit voting instructions from beneficial owners. (iii) AGM processes and procedures allow for equitable treatment. Avoidance of undue difficulties and expenses in relation to voting. Materially not observed ­ Shareholders with at least five percent of the shares may request that the management board call an extraordinary shareholders' meeting. The company statutes may require that shares be deposited up to ten days before the shareholders' meeting. There are no specific provisions requiring that company procedures not hinder casting votes. There are no specific provisions to protect minority shareholders. Policy Recommendations: Best practice would encourage a review of the provisions to strengthen minority rights, which might entail introducing cumulative voting, confidential voting, promotion of an organization to represent minority shareholders, a rule to mandate equitable treatment (to avoid oppression of minority shareholders by majorities) and effective forms of redress. Please note that these provisions will be more effective in coordination. Introducing only one provision is not sufficient to guarantee effective protection of minority rights. For example, cumulative voting has not been effective in markets where shareholder activism did not exist. Principle 2. Insider trading and abusive self-dealing should be prohibited. B. Prohibition of insider-trading and self-dealing Largely observed ­ Under the Securities Law, insider trading and market manipulation are prohibited and subject to both fines and imprisonment. 20 Principle 3. Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation. C. Disclosure by directors and managers of material interests in transactions or matters affecting the company. Largely observed - The Securities Law requires that company management and members of the management board notify CroSec and the stock exchange whenever they buy or sell (directly or indirectly) securities for which they have privileged information. . Section III: Role of Stakeholders in Corporate Governance Principle 1. The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected. A. Respect of legal stakeholder rights Largely observed ­ There is no well-defined legal requirement for consideration of the interests of all stakeholders. The Company Law requires that supervisory board members conduct their duties with proper attentiveness and with full responsibility, i.e. with due care. In addition, the supervisory board (as well as the management board) is required to conduct the business operations of the company as conscientious and prudent managers. Such broad definition is generally interpreted as indicating that board members have responsibilities to all stakeholders, although the responsibility is not specifically defined. Principle 2. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. B. Redress for violation of rights Materially not observed - The Company Law requires that management boards act in a conscientious and prudent manner in the interests of the company. The Law provides for both civil and criminal sanctions in the event of failure to do so. However in the six years since the Company Law became effective, not a single case has been presented to the courts and it is unclear how the courts would make such decisions. In addition the courts are generally considered to be slow and bureaucratic on issues related to commercial disputes. Stakeholders do not therefore have effective redress. A current example is the inability of employees to seek effective redress where wages are in arrears, which has been a problem in Croatia. 21 Principle 3. The corporate governance framework should permit performance-enhancement mechanisms for stakeholder participation. C. Performance-enhancing mechanisms for stakeholder participation Materially not observed - There is no performance-enhancing instrument (such as employee shares) to encourage stakeholder participation, although employees were generally offered discounted prices on shares for companies undergoing privatization. The PIFs, which technically could be described as performance-enhancing mechanisms for stakeholder participation, will exist as created until 2003 only. Principle 4. Where stakeholders participate in the corporate governance process, they should have access to relevant information. D. Access to relevant information Materially not observed ­ Stakeholders face issues similar to those of shareholders in the area of disclosure. Notably, company ownership information is significantly limited. Section IV: Disclosure and Transparency Principle 1. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and the governance of the company. Disclosure should include, but not be limited to, material information on the following sections. NOTE ON SECTION IV - While on paper the policies related to disclosure and transparency are fairly strong, serious problems exist in practice. The following list of "materially not observed" ratings for Section IV reflect this practical problem. Croatia has been a leader in the region with full adoption (without adaptation) of international standards on both accounting and auditing. However, weak auditing practices (encouraged by low levels of potential financial liability) deteriorate the quality of the audited financial statements. The Association of Auditors, working with the Ministry of Finance, plans to strengthen the legal liability of auditors. International best practice suggests that the liability should be set at a multiple of the auditing company's capital, although it may be necessary to phase-in the requirement of a period of time, perhaps several years. In addition, auditors should be required to provide financial assurance of their ability to pay claims, for example through an insurance policy. In addition, the ratings are weakened by current discussion to amend the Accounting Law to exempt all but large companies in Croatia from the application of International Accounting Standards and to develop Croatian-specific standards for those companies. In 22 light of the complexity of writing new accounting standards and the eventual need to comply with EU Directives on accounting, caution should be exercised in weakening an existing strength of corporate governance in Croatia ­ the adoption of full international accounting standards. Policy Recommendation: The primary problems exist with the capacity in Croatia to comply and enforce the laws. As a result of the scoring of this section of the assessment, the policy recommendation is that Croatia undertake an Accounting and Auditing ROSC, which is better suited to analyzing the situation with greater scope. A. Disclosure of material information (i) Financial and operating results Materially not observed - The Securities Law mandates minimum disclosure in the company prospectus. This includes the audited financial statements and auditor's opinion, names of the members of management and the management board and the respective remuneration, as well as possible extraordinary circumstances which have influenced or are influencing the company's activities. ZSE Quotation I companies and Varazdin "Market" tier companies must prepare a prospectus with disclosure requirements. Companies in the Quotation TN list as well those traded on the Varazdin "Supply and Demand" tier must publish their financial statements but are not required to publish a prospectus with additional disclosure information. Thus for non-listed but traded companies, there is no requirement for disclosure of major share ownership or voting rights, material issues regarding employees or other stakeholders or internal governance structures and policies. Policy Recommendation: Best practice would require an incentive system to encourage companies listed on tiers with limited disclosure requirements or unlisted companies to graduate to tiers with greater transparency. Incentive systems in other countries include: allowing (greater) domestic equity investment by state pension funds in tiers with higher disclosure requirements; reducing interest rates for higher disclosure tiers; educating company management on the benefits of graduating; and, assisting highest disclosure tier companies to seek international capital through GDRs. (ii) Company objectives Materially not observed (iii) Major share ownership and voting rights . Materially not observed (iv) (supervisory) board members, key executives and their remuneration Materially not observed 23 (v) Material foreseeable risk factors Materially not observed (vi) Material issues regarding employees and other stakeholders Materially not observed (vii) Governance structures and policies Materially not observed Principle 2. Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. B. Preparation of information, audit, and disclosure in accordance with high standards of accounting, disclosure, and audit Materially not observed - The Croatian Association of Auditors is responsible for auditing standards or practices, but has no authority to impose fines or other economic sanctions. Certified auditors must have Croatian citizenship. The Law limits the maximum fine to DM 50,000 for negligence by the auditor, although criminal penalties apply for intent to cause damage or personally profit from inaccurate financial statements. Principle 3. An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. C. Annual audit by independent auditor Materially not observed ­ The Law on Audit requires that an independent audit be prepared for all medium and large enterprises, that is, companies with more than 50 employees and revenues and net assets over certain limits. "Independence" is not specifically defined although the Audit Law specifies that an audit firm is not allowed to perform an audit of a company with whom it is related in terms of capital. Policy Recommendations: Best practice would require that the shareholders meeting vote upon the appointment of the auditor and the fees paid to the auditor. Additionally, increasing auditor liability might be considered as a means of increasing auditor accountability. 24 Principle 4. Channels for disseminating information should provide for fair, timely and cost- effective access to relevant information by users. D. Channels for disseminating information allow for fair, timely, and cost-efficient access to information by users Materially not observed Section V: Responsibilities of the (Supervisory) Board Principle 1. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. A. Act on an informed basis, in good faith, with due diligence and care, in the best interest of the company and shareholders Largely observed - The Company Law requires that supervisory board members conduct their duties with proper attentiveness and with full responsibility. Failure to do so subjects the board members to both civil and criminal penalties. However, the roles, responsibilities, qualifications, structure and operation of the members of the supervisory board are not otherwise defined in either the legislation or voluntary guidelines. In addition, there are no established training programs to assist supervisory board members in learning their roles and responsibilities. Principle 2. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. B. Fair treatment of each class of shareholders Largely observed ­ Board members appear to treat each class of shareholder in a fair manner. Principle 3. The board should ensure compliance with applicable law and take into account the interests of stakeholders. C. Compliance with law and taking into account stakeholders' interests Largely observed ­ Board members reportedly comply with the law, however, the current backlog in commercial court cases (due to the many post-privatization filings and an ongoing upgrade in the judicial knowledge management infrastructure) effectively impair the ability of stakeholders to take legal recourse. 25 Principle 4. The board should fulfill certain key functions, including the following: D. Key functions: NOTE ON SECTION V (D,E & F) - While the Company Law subjects supervisory board members to very high liability (including the possibility of imprisonment) the absence of guidance (or established training programs) regarding the roles, responsibilities, qualifications, operation and structure of supervisory boards reduces the rating. The following list of "materially not observed" ratings for Section V (subsections D, E, and F) reflect this practical problem. Policy Recommendation: To further define the roles and responsibilities of the members of the supervisory board, best practice guidelines suggest that guidance should be provided on several key issues: (1) definition of the roles, authorities and responsibilities of the supervisory boards, (2) description of the minimum professional qualifications for supervisory board members, (3) structure of the committees within the supervisory boards, including committees for audits and financial accounts (oversight of the internal auditor, nomination of the external auditor, review of financial statements and audit report), nomination of board members and a compensation review committee. The authorities might wish to encourage a formal body responsible for overseeing and promoting appropriate standards of corporate governance. Alternatively the authorities might wish to encourage other bodies to develop such standards. Importantly, development of such guidelines will over time provide a benchmark for industry practices. It may also be helpful to establish training programs for supervisory board members. Most developed capital markets also benefit from training programs for new members of supervisory boards. Training is often provided under the auspices of national institutes of directors (or supervisory board members). The training focuses on the work to be conducted by supervisory board members and the procedures and processes by which the supervisory boards operate. In addition, it would be helpful if all joint stock companies were required to annually publish their level of compliance with corporate governance rules or other guidelines. (i) Corporate strategy, risk policy, budgets, business plans, performance objectives, implementation and performance surveillance, major capital expenditures, acquisitions, divestitures Materially not observed (ii) Selection, monitoring, replacement of key management Materially not observed 26 (iii) Key executive and (supervisory) board remuneration, (supervisory) board nomination Materially not observed (iv) Monitoring of conflict of interest of management, (supervisory) board members, and shareholders, including misuse of corporate assets and abuse in related party transactions. Materially not observed (v) Ensuring integrity of accounting and financial reporting systems, including independent audit, systems of control, compliance with law Materially not observed (vi) Monitoring governance practices and making necessary changes Materially not observed (vii) Overseeing disclosure and communication Materially not observed Principle 5. The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management. E. Objective judgement on corporate affairs: (i) Assignment of non-executive (supervisory) board members to tasks of potential conflict of interest (e.g. financial reporting, remuneration) Materially not observed ­ Although in practice supervisory board members might be given responsibility for these tasks, there is no requirement mandating that these tasks be given to non-executive (supervisory) board members. (ii) Devote sufficient time to their responsibilities Materially not observed ­ While anecdotal evidence would indicate that active independent directors do exist (notably from the PIFs), there are no disclosure requirements that would allow an assessment of director commitment to board responsibilities. Policy Recommendation: Best practice would require that board meeting attendance by directors be reported at the annual general shareholders meeting. 27 Principle 6. In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information. F. Access to accurate, relevant, and timely information Materially not observed ­ Again, although board members might have access to information, there are no board standards on this issue. 28 Table 1 Summary Fact Sheet Market and Regulatory Overview Yes/No Remarks Market Cap (percent of GDP) Kuna 22.2 billion (US$ 2.6 billion) or 13.4 of GDP (2000) Turnover Ratio ______ Number of Listed Companies 4 companies are listed on Quotation I, 61 on Quotation TN, 2 on Varazdin "Market", 478 on "Supply/Demand" Legal System (Origin) Civil Law Autonomy of Capital Markets Regulator Established by 1995 Securities Law Powers of the Capital Markets Regulator De-list issues, halt trading, refer to courts & prosecutor- general Stock Exchange Governance Owned by member brokers Corporate Ownership Structure Shareholders' Rights Voting Rights May be limited by company statute Proxy Voting Permitted Cumulative Vote/Proportional Permitted but not required for election of supervisory Representation board. Ownership percent required to call Can be requested by shareholders with five percent of Shareholder Meeting shares Redress against Violations/ Minority Derivative action, but not class action Oppression Remedies Take-over Code Part of 1997 Law on Takeover of Joint Stock Companies Mandatory Tender Offer in Change of Required with 25 percent purchase of shares Control Insider Trading & Self-Dealing Prohibition Prohibited under 1996 Law on Issuance and Sale of Securities Preemptive Rights Can be waived by company statute Oversight of Management Board Structure Two-tier with supervisory and management boards Independent Directors Company management not permitted to join supervisory board Committee Practices No guidelines available Disclosure and Transparency External Auditors Required for all joint stock companies Consolidated Statements Required under International Accounting Standards (IAS) Segment Reporting Required under IAS Disclosure of Price Sensitive Information Required under 1995 Securities Law Accounting ­ Standards and Enforcement Follows IAS but audit practices considered weak Company Officers related Disclosures Required under Securities Law Related Party Transactions Not specifically required, except as part of IAS disclosure Disclosure of Ownership No requirements for disclosure of beneficial ownership Risk Management and other Disclosures (None cited in report other than IAS) 29 Table 2: OECD Principles Assessment Matrix Section I: The Rights of Shareholders A. Basic shareholders rights: (i) Secure methods of ownership registration (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Share transfer (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) Access to information (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iv) Participation and voting at AGM (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (v) Election of (supervisory) board (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (vi) Share in the profit (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed B. The right to participate in decisions on fundamental corporate changes: (i) Amendments to the statutes (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Authorization of additional shares (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed . (iii) Extraordinary transactions (resulting in sale of the company) (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed C. The right to be adequately informed about, participate and vote in general shareholder meetings (AGM): 30 (i) Sufficient and timely information about AGM (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Opportunity to ask question and place items on agenda (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) Vote in person or in absentia (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed D. Disclosure of capital structures and arrangements enabling control disproportionate to equity ownership: (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed F. Efficient and transparent functioning of market for corporate control: (i) Clearly articulated and disclosed rules and procedures, transparent prices and fair conditions (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) No use of anti-takeover devices to shield management from accountability (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed F. Requirement to weigh costs/benefits of exercising voting rights (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed Section II: Equitable Treatment of Shareholders A. Equal treatment of shareholders within same class (i) Same voting rights for shareholders within each class. Ability to obtain information about voting rights attached to all classes before share acquisition. Changes in voting rights subject to shareholder vote. (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Vote by custodians or nominees in agreement with beneficial owner. 31 (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) AGM processes and procedures allow for equitable treatment. Avoidance of undue difficulties and expenses in relation to voting. (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed . B. Prohibition of insider-trading and self-dealing (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed . C. Disclosure by directors and managers of material interests in transactions or matters affecting the company. (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed . Section III: Role of Stakeholders in Corporate Governance A. Respect of legal stakeholder rights (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed B. Redress for violation of rights (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed C. Performance-enhancing mechanisms for stakeholder participation (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed D. Access to relevant information (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed Section IV: Disclosure and Transparency A. Disclosure of material information (i) Financial and operating results (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Company objectives 32 (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) Major share ownership and voting rights . (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iv) (supervisory) board members, key executives and their remuneration (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (v) Material foreseeable risk factors (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (vi) Material issues regarding employees and other stakeholders (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (vii) Governance structures and policies (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed B. Preparation of information, audit, and disclosure in accordance with high standards of accounting, disclosure, and audit (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed C. Annual audit by independent auditor (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed D. Channels for disseminating information allow for fair, timely, and cost-efficient access to information by users (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed Section V: Responsibilities of the (Supervisory) Board A. Act on an informed basis, in good faith, with due diligence and care, in the best interest of the company and shareholders (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed B. Fair treatment of each class of shareholders 33 (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed C. Compliance with law and taking into account stakeholders' interests (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed D. Key functions: (i) Corporate strategy, risk policy, budgets, business plans, performance objectives, implementation and performance surveillance, major capital expenditures, acquisitions, divestitures (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Selection, monitoring, replacement of key management (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iii) Key executive and (supervisory) board remuneration, (supervisory) board nomination (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (iv) Monitoring of conflict of interest of management, (supervisory) board members, and shareholders, including misuse of corporate assets and abuse in related party transactions. (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (v) Ensuring integrity of accounting and financial reporting systems, including independent audit, systems of control, compliance with law (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (vi) Monitoring governance practices and making necessary changes (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (vii) Overseeing disclosure and communication (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed E. Objective judgement on corporate affairs: 34 (i) Assignment of non-executive (supervisory) board members to tasks of potential conflict of interest (e.g. financial reporting, remuneration) (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed (ii) Devote sufficient time to their responsibilities (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed F. Access to accurate, relevant, and timely information (a) Observed (b) Largely observed (c) Materially not observed (d) Not observed This table attempts to summarize the comments in this report, , benchmarked against the main items set out in the OECD Principles of Corporate Governance. Observed means that all essential criteria are generally met without any significant deficiencies Largely observed means that only minor shortcomings are observed, which do not raise any questions about the authorities' ability and intent to achieve full observance within a prescribed period of time Materially not observed means that, despite progress, the shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance Not observed means that no substantive progress toward observance has been achieved. (derived from IMF criteria for ROSCs) 35 Appendix 1: Acronyms and Contact Details Acronyms: CroSec: Croatian Securities Commission IAS: International Accounting Standards PIF: Privatization Investment Funds SDA: (Croatian) Securities Depository Agency Varazdin: Varazdin Over The Counter Market (OTC) ZSE: Zagreb Stock Exchange Contact Details: Croatian Securities Zagreb Stock Exchange Varadzin Over-the-Counter Commission Marinko Papuga Market Mr. Ivica Smiljan General Manager Ms. Melita Marceta Chairman and Chief Ksaver 200 Director Commissioner Zagreb, Croatia Tel: 385-42-212-313 Bogovieva 1a Tel: 385-1-420-293 Fax: 385-42-313-233 Zagreb, Croatia Fax: 385-1-467-7680 Varadzin, Croatia Tel: 385-1-481-1407 www.zse.hr Kapucinski trg 2/I Fax: 385 1 4811-507 42000 Varazdin, Croatia www.CroSec.hr www.otc.hr 36 Appendix 2: ZSE Market Information Table 1: ZSE Sectors List of Sectors Represented on the ZSE as of December 2000 Sector Market value percent in Sector Market value percent in (in HRK 000) total (in HRK 000) total market market value value INDUSTRY FINANCE Food 1,744.2 7.8 Banking 6,909.8 30.8 Light Industry 55.6 0.3 Insurance 268.3 1.2 Wood & Paper 23.1 0.1 Other 0 0.0 Chemicals 9,700.5 43.3 SERVICES Building Materials 309.3 1.3 Wholesale & Retail 0 0.0 Construction 0 0.0 Conglomerates 0 0.0 Electro 91.9 0.4 Telecom & IT 0 0.0 Metals 57.2 0.3 Other 2,955.5 13.2 Other 307.9 1.4 TOTAL 100.0 Source: Zagreb Stock Exchange Table 2: ZSE Industry Sectors ZSE Industry Sectors (December 2000) MARKET PERCENT IN VALUE (in HRK TOTAL MARKET SECTOR 000) VALUE* Industry Food 1,744.20 7.8 Light Industry 55.6 0.3 Wood & Paper 23.1 0.1 Chemicals 9,700.50 43.3 Building Materials 309.3 1.3 Construction 0 0 Electro engineering 91.9 0.4 Metals 57.2 0.3 Other 307.9 1.4 Finance Banking 6,909.80 30.8 Insurance 268.3 1.2 Other 0 0 Services Wholesale & Retail 0 0 Conglomerates 0 0 Telecom & IT 0 0 Other 2,955.50 13.2 Total 22,423.30 100.1 *might exceed 100 percent due to rounding 37 Table 3: Market Capitalization of Ten Largest Traded Companies on ZSE Market Capitalization of Ten Largest Traded Companies on ZSE (as of December 31, 2000) Market Capitalization Percentage of Market Cumulative Percentage (Millions KHR) Capitalization Pliva 9,701 43.7 43.7 Zagrebacka banka 3,935 17.7 61.5 Privredna banka Zagreb 1,416 6.4 67.9 Jadranski naftovod 1,114 5.0 72.9 Podravka prehrambena 838 3.8 76.7 industrija Zagrebacka pivovara 546 2.5 79.1 Plava Laguna 533 2.4 81.5 Varazdinska banka 404 1.8 83.4 Rijecka banka 398 1.8 85.1 Riviera Holding 310 1.4 86.5 Table 4: Turnover of Ten Most Actively Traded Securities on ZSE Turnover of Ten Most Actively Traded Securities on ZSE in 2000 .Mkt Ca Turnover (Millions Percentage Cumulative Percentage KHR) Varazdinska banka 446 29.2 29.2 Zagrebacka banka 423 27.9 57.1 Pliva 220 14.4 71.4 Dalmaniska Banka 137 8.9 80.4 Podravka prehrambena 93 6.1 86.5 industrija Rijecka banka 40 2.6 89.1 Zagrebacka banka 22 1.4 90.6 (preferred shares) Plava Laguna 21 1.4 92.0 Arenaturist 18 1.2 93.1 Supetrus hoteli 17 1.1 94.3 Other 88 5.7 100.0 Total 1529 38 Table 5: Share Prices and Turnover Ratios for Companies Traded on ZSE Share Prices and Turnover Ratios for Companies Traded on ZSE High Low Last Date Net Volume Turnover Turnover change (000s HRK) (000s HRK) Velocity (000s HRK) Quotation I Dalmaniska 300.00 75.00 280.00 21.12.2000 273.3 575,121 136,833.3 47.0 Banka Pliva 625.00 410.00 480.00 29.12.2000 -5.9 417,985 219,902.8 2.3 Podravka 185.00 89.00 154.99 29.12.2000 74.1 669,169 93,108.4 11.1 prehrambena industrija Varazdinska 305.00 75.00 221.00 13.12.2000 176.3 1,704,250 445,974.7 110.3 banka Shipyard Viktor 108.00 48.00 77.00 29.12.2000 37.5 28,135 2,306.7 2.0 Lenac Varazdinska 1,620.00 940.00 1,450.00 29.12.2000 59.3 322,023 426,684.2 10.8 banka Quotation TN Arenaturist 86.00 21.00 35.00 29.12.2000 -10.3 805,932 18,021.5 23.6 Atlantska 48.00 25.01 38.00 28.12.2000 100.0 327,065 15,659.4 30.3 plovidba Badel 1862 60.00 25.00 39.00 15.12.2000 -33.3 118,020 6,949.6 23.6 Erste & 4,400.00 4,400.00 4,400.00 29.12.2000 -12.0 784 3,449.6 1.8 Steiermarkische bank Croatia 900.00 775.00 775.00 04.12.2000 -3.1 11 9.3 0.1 osiguranje (preferred shares) Croatia 900.00 500.00 850.00 21.12.2000 6.3 503 306.9 0.1 osiguranje (ordinary shares) ELKA Tvornica 67.00 22.15 36.00 14.12.2000 -34.5 30,950 1,677.6 2.9 elektri c nih kabela Hotel Inter- 150.00 80.00 100.00 05.10.2000 11.1 1,250 157.3 0.2 Continental Rabac, 43.00 25.13 43.00 14.12.2000 -34.2 1,758 52.3 0.1 ugostiteljstvo i turizam Hrvatska 100.00 80.00 100.00 28.12.2000 0.0 57,600 5,184.0 22.2 stambena stedionica Istraturist Umag 55.00 20.00 35.00 28.12.2000 84.2 53,657 2,140.4 1.3 Jadroplov 39.00 25.00 39.00 15.12.2000 -51.3 1,500 50.0 0.1 Jadran-Turist 50.00 22.00 38.00 29.12.2000 130.3 72,974 2,722.2 1.7 Jadranski 1,501.00 1,100.00 1,500.00 29.12.2000 87.5 152 202.7 0.0 naftovod Karlova c ka 400.00 275.00 275.00 29.12.2000 -19.1 10,141 3,338.0 2.4 39 pivovara Kon c ar 84.00 30.00 36.50 29.12.2000 -11.0 115,964 5,631.2 6.1 elektroindustrija Kras 263.00 85.00 140.00 29.12.2000 64.7 87,194 15,687.8 8.3 Lola Ribar 157.54 157.50 157.50 09.05.2000 0.2 8,980 1,414.5 6.5 Lovincic 55.00 55.00 55.00 17.03.2000 44.7 434 23.9 0.1 Nasicecement 480.00 480.00 480.00 21.08.2000 0.0 2,900 1,392.0 0.5 Privredna banka 114.00 60.10 85.00 29.12.2000 -25.4 44,430 3,791.7 0.3 Zagreb Plava Laguna 975.00 300.00 975.00 15.12.2000 77.3 25,649 21,254.5 4.0 Rijecka banka 220.00 75.00 129.98 29.12.2000 85.7 339,428 40,408.0 10.2 Riviera Holding 100.00 60.00 84.90 29.12.2000 41.5 95,180 7,769.3 2.5 Slavonska 600.00 600.00 600.00 23.11.2000 - 1 0.6 0.0 banka Supetrus hoteli 90.00 90.00 90.00 29.05.2000 - 190,963 17,186.7 54.4 Stedionica 200.00 35.00 150.00 28.12.2000 0.0 620 78.9 1.9 Sonic Splitska banka 95.00 60.00 80.00 08.12.2000 77.8 34,012 2,729.7 1.1 Suncani Hvar 29.00 19.01 20.00 27.12.2000 11.1 26,981 639.9 1.0 Tvornica 700.01 500.00 600.00 22.12.2000 -14.3 1,347 893.3 0.5 duhana Zagreb Trgovacka 1,703.00 1,703.00 1,703.00 26.06.2000 0.0 335 570.5 0.5 banka Varteks 32.00 20.00 22.00 29.12.2000 10.0 17,347 466.3 1.4 Zagrebacka 1,199.00 400.00 900.00 18.12.2000 171.1 32,377 21,997.2 15.3 banka (preferred shares) Zagrebacka 788.00 522.00 650.00 21.12.2000 25.0 937 560.9 7.6 banka (preferred shares) Zagrebacka 900.00 560.00 880.00 18.12.2000 57.1 2,711 1,867.0 0.3 pivovara Zlatni rat 40.00 15.00 15.00 18.12.2000 -62.5 2,661 65.2 0.8 Note all shares issues are ordinary shares, unless otherwise indicated. 40 Appendix 2: Listing Requirements for Varazdin OTC Market Quotation of Varazdin OTC Market (2 companies as of December 2000) - Prospectus. - Total stockholder's equity of at least 5,000,000.00 Kuna. - At least 25% of number of securities outstanding have to be publicly owned. - Securities must have unlimited ownership transfer. - Applicant is obligated to: - Deliver issuer's financial reports with auditor's report to the Market for at least last two business years, or to deliver a report on successfully accomplished IPO. - Regularly deliver issuer's final audited financial reports and semi-final and quarterly reports to the Market. - Provide the Market with all information on issuer's business activities it possesses, concerning events that might influence trading with issuer's security. - Inform public about any material fact that might influence the price of securities listed on his application or that might influence investors' decisions. - Inform the Market if there was creating of option, or if the issuer's management or their family members have sold and bought stocks in total value greater than 5% of the value of shares outstanding. - To deny inappropriate rumors if they occur as result of unusual market activity or stock price volatility. PIF Quotation (Seven privatization funds as of December 2000) - Prospectus. - At least 25% of number of securities outstanding have to be publicly owned. - Securities must have unlimited ownership transfer. - Establishment reports. - Fund registration statement from the Court Register. - Statute. - Applicant is obligated to: - Regularly deliver issuer's final audited financial reports and semi-final and quarterly reports to the Market. - Provide the Market with all information on issuer's business activities it possesses, concerning events that might influence trading with issuer's security. - Inform public about any material fact that might influence the price of securities listed on his application or that might influence investors' decisions. - Inform the Market if there was creating of option, or if the issuer's management or their family members have sold and bought stocks. List of supply and demand (478 companies as of December 2000) - Applicant is obligated to: - Deliver issuer's financial reports with auditor's report to the Market for last year. - Deliver Statute. 41 Appendix 3: Varazdin Market Information Table 1: Varazdin Trading Overview (December 1993 ­ July 2000) Trading overview (1993. ­ 30.06.2000.) Number of Number of Average daily Year securities traded transactions turnover (USD) Total turnover (USD) 1993. 18 87 5.057,13 905.225,62 1994. 47 158 29.882,28 7.530.335,60 1995. 75 346 55.950,46 14.043.565,77 1996. 48 7.380 68.107,71 17.231.249,77 1997. 96 13.216 166.126,23 42.196.062,26 1998. 67 4.463 78.436,45 19.765.986,39 1999. 249 6.551 230.417,03 58.525.924,75 1h 2000. 122 8.742 277.830,06 33.895.267,40 Table 2: Ownership Structure of Market Tier Companies Ownership Structure Quotation of Varazdin OTC Market Listed Companies Percentage of Shares Held by Each Name of Company Names of Primary Shareholders (1)Shareholder Duro-Dakovic Montaza d.d. Duro Dakovic Holding d.d. 86,40% Small Shareholders 10,20% Company Management 3,16% ZIF Breza invest d.d. 0,03% HZZO 0,21% 100% 42 Table 3: Market Capitalization of Ten Largest Traded Companies on Varazdin OTC Market (as of December 31, 2000) Market Capitalization Percentage of Market Cumulative Percentage Capitalization Jadranski naftovod 1.115.011.846,00 16,41% 16,41% Nasicecement 309.277.920,00 4,55% 20,96% Riviera Holding 295.934.877,00 4,36% 25,32% Dalmacijacement 289.600.000,00 4,26% 29,58% Tvornica duhana Zagreb 227.365.600,00 3,35% 32,93% Kras 222.661.160,00 3,28% 36,20% Plava Laguna 207.611.766,36 3,06% 39,26% Istraturist 186.999.800,00 2,75% 42,01% Ericsson Nikola Tesla 166.456.250,00 2,45% 44,46% Jadranturist 162.425.984,00 2,39% 46,85% t Cap Table 4: Market Capitalization of Ten Smallest Traded Companies on Varazdin OTC Market (as of December 31, 2000) Market Capitalization Percentage of Market Cumulative Percentage (Millions KHR) Capitalization Tiskara Porec Joakim 648.410,00 0,0095% 0,0095% Rakovac Interplutex 557.000,00 0,0082% 0,0177% Stedionica sonic SSNC- 520.000,00 0,0077% 0,0254% P-A Zlata tvornica konfekcije 324.720,00 0,0048% 0,0302% Ratarstvo Ugljara 300.607,00 0,0044% 0,0346% Uzor Imko 292.800,00 0,0043% 0,0389% Suuraj 253.281,60 0,0037% 0,0426% Praonica Plat 184.295,00 0,0027% 0,0453% Krapinsko Zagorska 120.000,00 0,0018% 0,0471% slobodna zona Sr 113.082,30 0,0017% 0,0488% 43 Table 5: Turnover of Most Actively Traded Securities on Varazdin Turnover of Most Actively Traded Securities on VOTCM in 2000 Mkt Ca Turnover Percentage Cumulative Percentage Dalmacijacement 76.232.132,00 18,17% 18,17% Istra cement international 34.358.979,10 8,19% 26,35% Dom fond - PIF 27.923.401,87 6,65% 33,01% RHMJ-A-A 19.653.827,70 4,68% 37,69% Expandia PIF 17.093.883,96 4,07% 41,77% Velebit PIF 15.982.056,20 3,81% 45,57% Sredisnji nacionalni fond PIF 15.288.425,86 3,64% 49,22% Ericsson Nikola Tesla 14.610.400,47 3,48% 52,70% Okipor 11.382.362,00 2,71% 55,41% Elka 10.770.150,54 2,57% 57,98% Other 176.340.316,32 42,02% 100,00% Total 419.635.936,02 Table 6: Share Prices and Turnover Ratios for Companies on Varazdin Share Prices and Turnover Ratios for Companies Traded on VOTCM Ticker % change Previous High Low Last Volume Turnover (Kn) Number of transact. ABPR-R-A - - 167,21 167,21 167,21 17.645 2.950.420,45 5 ACI-R-A -52,67% 900,00 550,07 300,00 426,01 121 52.843,71 7 ACNK-R-A - - 390,00 390,00 390,00 475 185.250,00 1 AGPT-R-A - - 465,86 465,86 465,86 1.359 633.103,74 1 ANTA-R-A 50,00% 800,00 1.200,00 400,00 1.200,00 2.160 2.555.250,00 8 ARNT-R-A -12,82% 39,00 80,00 34,00 34,00 15.013 896.612,05 24 ASC-R-A 11,51% 120,17 134,00 134,00 134,00 4.360 584.240,00 1 ATPL-R-A -14,47% 38,00 40,00 26,00 32,50 1.690 56.801,50 11 ATPP-R-A -5,66% 106,00 100,00 100,00 100,00 7.717 771.700,00 1 BCOP-R-A -0,10% 152,71 152,55 152,55 152,55 2.517 383.968,35 1 BD62-R-A 20,00% 50,00 60,00 60,00 60,00 5 300,00 1 BDSS-R-A 118,18% 55,00 120,00 50,00 120,00 11.198 1.208.913,00 11 BGAT-R-A - - 157,00 157,00 157,00 4.090 642.130,00 2 BILO-R-A 33,33% 15,00 96,00 14,70 20,00 11.849 951.681,30 11 BLKL-R-A -24,54% 57,99 76,00 43,76 43,76 11.140 732.736,08 2 BLSC-R-A 60,00% 25,00 60,00 27,00 40,00 60.452 3.614.379,00 4 CHBL-R-A -13,34% 94,90 82,24 82,24 82,24 2.229 183.312,96 1 CHGB-R-A 0,00% 440,00 440,00 440,00 440,00 252 110.880,00 24 CNPR-R-A - - 50,00 50,00 50,00 4.329 216.450,00 1 CNTL-R-A 60,00% 80,00 128,00 80,00 128,00 451 48.211,00 7 CRLN-R-A 222,22% 9,00 29,00 22,00 29,00 115 3.230,00 2 CRSP-P-A - - 2.709,00 2.709,00 2.709,00 40 108.360,00 2 CSMA 0,68% 41,00 41,28 41,28 41,28 17.465 720.955,20 5 CTKS-R-A 20,48% 83,00 100,00 80,00 100,00 52.823 5.217.268,00 12 DHPD-R-A - - 55,00 55,00 55,00 102 5.610,00 1 DIMO-R-A 34,29% 70,00 94,00 94,00 94,00 7.557 710.358,00 1 DIPP-R-A - - 20,00 20,00 20,00 43.668 873.360,00 1 44 DLMA-R-A -67,69% 130,00 109,00 42,00 42,00 228 19.960,00 6 DLMC-R-A 141,33% 300,00 724,00 724,00 724,00 105.293 76.232.132,00 1 DRVD-R-A -46,54% 159,00 128,00 85,00 85,00 230 23.778,00 6 ELKA-R-A 38,24% 55,00 76,03 53,00 76,03 148.725 10.770.150,54 6 ELPR-R-A 0,31% 74,77 75,00 74,77 75,00 17.388 1.300.121,69 2 ERNT-R-A 8,70% 115,00 250,00 125,00 125,00 76.773 14.610.400,47 803 FRBU-R-A 10,91% 55,00 61,00 61,00 61,00 28.198 1.720.078,00 2 GLEB-R-A - - 177,00 98,00 177,00 22.845 3.716.067,50 5 GMRC-R-A -64,21% 108,00 108,00 38,65 38,65 20.200 780.868,70 3 GPRJ-R-A 57,00% 100,00 157,00 157,00 157,00 12.402 1.947.114,00 3 GRCA-R-A - - 112,70 112,70 112,70 8.412 948.032,40 2 GRDJ-R-A - - 86,00 86,00 86,00 4.145 356.470,00 1 HBVD-R-A - - 62,37 62,37 62,37 72.235 4.505.296,95 1 HICZ-R-A 118,75% 80,00 175,00 75,00 175,00 1.120 141.100,00 8 HIMR-R-A -29,41% 85,00 115,54 60,00 60,00 2.075 204.182,52 16 HINZ-R-A - - 80,00 80,00 80,00 22.735 1.818.800,00 1 HJDR-R-A -42,86% 17,50 10,00 10,00 10,00 2.168 21.680,00 1 HLAD-R-A -23,53% 51,00 39,00 39,00 39,00 1.426 55.614,00 1 HRBC-R-A -27,18% 35,03 77,40 25,51 25,51 42.085 2.517.691,39 36 HTCP-R-A 0,02% 55,00 55,01 22,57 55,01 94.466 3.579.447,99 19 HZDZ-R-A - - 81,00 76,00 81,00 87.850 6.735.244,00 16 INFS-R-A - - 100,00 100,00 100,00 750 75.000,00 2 IPLX-R-A 28,21% 78,00 100,00 100,00 100,00 1.774 177.400,00 5 ISBA-R-A - - 750,00 740,00 740,00 3.330 2.494.200,00 2 ISCM 106,19% 375,24 773,70 760,00 773,70 44.409 34.358.979,10 4 ISTT-R-A 105,66% 19,45 50,00 19,50 40,00 1.637 65.678,00 12 IVNC-R-A -9,58% 178,00 160,95 160,95 160,95 2.906 467.720,70 1 JDER-R-A - - 472,50 472,50 472,50 1.167 551.407,50 1 JDGT 0,00% 100,00 100,00 90,00 100,00 1.691 167.600,00 4 JDHR-R-A -9,09% 55,00 50,00 50,00 50,00 184 9.200,00 2 JDKM-R-A - - 77,65 77,65 77,65 30.637 2.378.963,05 1 JDNS-R-A - - 17,00 17,00 17,00 281.030 4.777.510,00 1 JDPL-R-A -71,43% 70,00 20,00 20,00 20,00 200 4.000,00 1 JDRA-R-A -25,93% 540,00 1.200,00 400,00 400,00 9.370 10.740.668,00 4 JDRF-R-A - - 120,00 120,00 120,00 48.308 5.796.960,00 1 JDRN-R-A 8,33% 120,00 400,00 130,00 130,00 1.656 524.705,00 70 JDTC-R-A - - 62,83 45,00 62,83 25.434 1.371.274,11 3 JDTT-R-A 108,22% 18,25 55,00 19,00 38,00 1.751 56.181,00 12 JLEN-R-A 0,00% 155,00 155,00 155,00 155,00 6.913 1.071.515,00 1 JNAF-R-A 76,59% 850,00 1.501,00 1.000,00 1.501,00 130 156.873,35 20 KAPI-R-A -3,22% 310,00 385,00 300,01 300,01 1.260 472.301,40 4 KINO-R-A 113,61% 82,16 195,00 175,50 175,50 3.195 593.775,00 2 KMNK-R-A - - 390,00 390,00 390,00 180 70.200,00 1 KOEI-R-A -35,03% 40,00 59,63 25,99 25,99 90.095 3.927.190,45 5 KRAS-R-A 118,67% 75,00 240,00 80,00 164,00 5.883 1.056.781,82 50 KRMA-R-A -69,23% 65,00 20,00 20,00 20,00 137.866 2.757.320,00 1 KRNA-R-A -3,73% 70,00 69,23 67,39 67,39 44.725 3.068.869,79 13 KZSZ-R-A - - 1.200,00 1.200,00 1.200,00 25 30.000,00 1 LANA-R-A - - 100,00 100,00 100,00 15.276 1.527.600,00 2 LANO-R-A 75,73% 95,60 168,00 168,00 168,00 13.364 2.245.152,00 1 45 LEDO-R-A -32,56% 267,00 180,07 100,00 180,07 128 19.042,24 4 LNIA-R-A 206,46% 15,01 46,00 46,00 46,00 19.953 917.838,00 3 LRH-R-A -55,00% 400,00 700,00 180,01 180,01 901 504.631,08 7 LVCV-R-A - - 185,91 185,91 185,91 8.197 1.523.904,27 1 MGPA-R-A 0,00% 25,00 25,00 25,00 25,00 9.412 235.300,00 2 MHNV-R-A 46,79% 27,25 40,00 40,00 40,00 60.723 2.428.920,00 1 MLPR-R-A - - 390,00 390,00 390,00 59 23.010,00 1 MMBA-R-A 5,26% 380,00 430,00 400,00 400,00 420 171.300,00 2 MNTS-R-A - - 490,00 490,00 490,00 200 98.000,00 1 MTC -44,66% 365,00 202,00 202,00 202,00 5.802 1.172.004,00 1 MTSO-R-A -0,63% 449,00 457,64 446,17 446,17 4.353 1.971.908,25 2 NACE-R-A 0,00% 480,00 480,00 480,00 480,00 200 96.000,00 1 NEON-R-A 69,09% 66,00 111,60 111,60 111,60 7.926 884.541,60 2 NPRS-R-A - - 86,91 86,91 86,91 6.418 557.788,38 1 OKPR-R-A 145,50% 200,00 491,00 491,00 491,00 23.182 11.382.362,00 4 OPST-R-A - - 30,20 30,20 30,20 20.005 604.151,00 2 PLAG-R-A -15,55% 450,00 950,00 362,00 380,02 254 179.830,77 14 PLCH-R-A -55,43% 359,00 160,00 160,00 160,00 26 4.160,00 1 POOP-R-A - - 651,36 651,36 651,36 1.275 830.484,00 1 PPLM-R-A -40,48% 168,00 100,00 100,00 100,00 3.918 391.800,00 1 PPLT-R-A -75,83% 60,00 14,50 14,50 14,50 5.804 84.158,00 2 PRRD-R-A -40,00% 100,00 60,00 40,00 60,00 10.050 602.960,00 2 PSNJ-R-A - - 66,00 66,00 66,00 17.091 1.128.006,00 2 PSTR-R-A - - 60,00 60,00 60,00 144 8.640,00 1 RBRI-R-A - - 34,00 34,00 34,00 5.813 197.642,00 1 RDBA-R-A 28,57% 70,00 110,00 70,01 90,00 491 46.010,59 5 RIVP-R-A 32,79% 61,00 100,00 61,00 81,00 7.356 596.040,85 62 RNTX-R-A 0,76% 94,12 94,84 94,84 94,84 3.729 353.658,36 1 RTPL-R-A -73,19% 165,61 68,73 44,40 44,40 11.706 537.799,26 2 RTPT-R-A 0,22% 89,80 91,35 90,00 90,00 991 89.696,25 2 RTUG-R-A -22,50% 20,00 15,50 15,50 15,50 12.640 195.920,00 1 RZVL-R-A -2,86% 35,00 35,00 34,00 34,00 850 29.606,00 4 SAS - - 1.392,07 1.392,07 1.392,07 892 1.241.726,44 1 SAVA-R-A -13,85% 325,00 325,00 275,00 280,00 2.554 715.717,00 4 SCRJ-R-A - - 85,80 85,80 85,80 1.725 148.005,00 1 SIBA-R-A 0,00% 150,00 150,00 150,00 150,00 3.406 510.900,00 6 SLGA-R-A - - 80,00 80,00 80,00 11.399 911.920,00 1 SLJM-R-A - - 63,00 63,00 63,00 23.156 1.458.828,00 1 SLNJ-R-A - - 13,00 13,00 13,00 24.802 322.426,00 1 SLTA-R-A - - 75,00 75,00 75,00 3.714 278.550,00 1 SLVK-R-A -30,17% 116,00 81,00 78,00 81,00 7.566 612.546,00 6 SRDJ-R-A - - 3,23 3,23 3,23 3.098 10.006,54 1 SSNC-P-A -84,00% 2.500,00 650,00 400,00 400,00 25 12.250,02 13 SSNC-P-A1 - - 100,00 50,00 100,00 50 3.500,00 3 SSNC-R-A -99,14% 5.800,00 2.000,00 50,00 50,00 14 8.500,00 4 STJR-R-A -23,08% 390,00 300,00 300,00 300,00 1.128 338.400,00 2 STPL-R-A 118,18% 55,00 120,00 120,00 120,00 35.158 4.218.960,00 2 SUNH-R-A 68,75% 16,00 27,00 21,00 27,00 2.805 66.604,00 13 SUZY-R-A -0,03% 195,44 197,58 195,39 195,39 488 95.884,68 2 TDMM-R-A -45,89% 144,35 78,11 78,11 78,11 24.572 1.919.318,92 1 46 TDZ-R-A -38,86% 1.145,00 700,00 700,00 700,00 286 200.200,00 7 TEP-R-A - - 10,56 10,56 10,56 222.587 2.350.518,72 1 THPN-R-A -9,15% 82,00 74,50 74,50 74,50 87.939 6.551.455,50 2 TKZD-R-A 54,57% 150,00 231,85 178,00 231,85 3.598 817.179,70 2 TNPL-R-A 114,29% 70,00 150,00 60,00 150,00 7.069 702.041,08 43 TPGR-R-A 500,00% 15,00 90,00 90,00 90,00 2.169 195.210,00 1 TPJR-R-A - - 35,00 35,00 35,00 1.405 49.175,00 3 TPKO-R-A - - 98,80 98,80 98,80 8.000 790.400,00 1 TUHO-R-A - - 75,00 75,00 75,00 48.170 3.612.750,00 1 TUHP-R-A -9,09% 110,00 100,00 100,00 100,00 768 76.800,00 1 UNVZ-R-A - - 305,00 305,00 305,00 20 6.100,00 1 URTH-R-A 20,00% 60,00 72,00 60,00 72,00 2.259 157.260,00 2 UTEN-R-A -17,16% 66,84 55,37 55,37 55,37 16.996 941.068,52 4 UZOR-R-A - - 452,00 452,00 452,00 200 90.400,00 1 UZRI-R-A -73,33% 60,00 16,00 16,00 16,00 8.254 132.064,00 2 VAPE-R-A - - 85,90 85,90 85,90 4.690 402.871,00 1 VART-R-1 5,37% 19,00 25,00 20,00 20,02 39.946 803.017,44 7 VELB-R-A - - 192,00 192,00 192,00 367 70.464,00 1 VIS-R-A 410,64% 11,75 60,00 51,00 60,00 36.648 1.994.850,00 1 VISK-R-A - - 160,00 160,00 160,00 1.000 160.000,00 3 VRBN-R-A 14,12% 1.402,00 1.600,00 1.600,00 1.600,00 21 33.600,00 1 VSGD-R-A - - 15,90 15,90 15,90 21.573 343.010,70 1 ZKSS-R-A 3,90% 77,00 80,00 80,00 80,00 5.579 446.320,00 4 ZLTA-R-A - - 15,00 15,00 15,00 4.931 73.965,00 6 ZLTO-R-A -30,89% 72,35 50,00 50,00 50,00 17.533 876.650,00 1 ZLZR-R-A - - 35,00 35,00 35,00 60.058 2.102.030,00 1 ZNTL-R-A 0,00% 200,00 200,00 200,00 200,00 506 101.200,00 3 ZZPP-R-A 35,23% 440,00 595,00 595,00 595,00 79 47.005,00 1 Total - List of supply and demand: 2.826.187 302.286.340,92 1.617 DOMF-R-A 52,09% 11,00 31,00 11,01 16,73 1.494.318 27.923.401,87 3.639 EXPF-R-A 61,85% 11,01 29,00 11,02 17,82 849.003 17.093.883,96 2.461 PLTR-R-A 159,09% 4,40 20,00 4,40 11,40 573.136 6.233.251,91 1.257 SLPF-R-A 95,29% 4,25 16,20 4,30 8,30 1.035.123 10.020.946,71 1.713 SNCE-R-A 76,67% 4,33 16,00 4,43 7,65 582.134 4.950.804,49 1.099 SNF-R-A 211,86% 5,90 19,01 5,95 18,40 986.779 15.288.425,86 2.551 VLBT-R-A 146,67% 6,00 20,00 6,05 14,80 1.119.143 15.982.056,20 1.879 Total - PIF Quotation: 6.639.636 97.492.771,00 14.599 BRIN-R-A 40,00% 25,00 50,00 35,00 35,00 4.480 202.996,40 18 Total - Quotation of Varazdin OTC Market: 4.480 202.996,40 18 RHMJ-A-A - - 56,80 38,00 40,00 44.844.047 19.653.827,70 268 Total ­ Certificates 44.844.047 19.653.827,70 268 TOTAL: 54.314.350 419.635.936,02 16.502 Auctions 78.645.121,00 Total (Turnover + Auctions): 498.281.057,02 47