The Capital Markets Board (the "CMB") has adopted the Communiqué Series IV, No. 56 (the "Communiqué") on 30 December 2011 as a result of which (i) it has announced a new set of corporate governance rules ("CGR") that are attached to the Communiqué, introducing certain material changes in relation to the composition of boards of directors (a "Board") and the duties of independent Board members and (ii) it changed the nature of some of these corporate governance rules that had been issued previously only for recommendation purposes without having any mandatory effect, and declared that certain of these corporate governance rules are mandatory. The Communiqué entered into force on 30 December 2011, and it is required that publicly held companies make the necessary adoptions in the compositions of their Boards and their Articles of Associations ("AoA"), no later than by 30 June 2012.
The CMB has also set out three different categories among the publicly held companies, and introduced limited exemption opportunities for the application of the mandatory CRG rules for those companies falling within Category 2 and Category 3. The CMB has recently made an announcement, whereby it has disclosed which company falls within which category:
There are no mandatory requirements in the Communiqué in relation to the dividend distribution mechanism and election of the CEO, and there are only the CMB's recommendations proposing that companies are not required to comply therewith provided that they disclose their non-compliance with such rules, together with their reasons for such non-compliance on and annual basis in their compliance report regarding corporate governance rules.
Recently, the CMB, as a result of remarks made by scholars and experts regarding the shortcomings of the Communiqué, it has evaluated the materiality idea that will be used in order to determine the material transactions to which the Communiqué refers. Subsequently, the CMB has resolved, through its Decision No. 5/136 on 16 February 2012, in relation to principle No. 1.3.10 under the Communiqué that:
1. In order to determine the "materiality" idea under the relevant article of the Communiqué, the strategic importance of each transaction will be taken into consideration in relation to listed companies. The below-listed thresholds will be used in order to support the qualitative evaluation; however, such evaluation will be conducted by the independent members of the Boards, regardless of the said criteria, by bearing in mind the nature of the transaction;
2. In relation to the materiality criteria under the Communiqué, the following minimum ratios will be taken into consideration for determination thereof:
a. 20% of the actives under the latest financial tables disclosed to the public;
b. 40% of the related account group under the latest financial tables disclosed to the public;
c. 25% of the equity under the latest financial tables disclosed to the public; and
d. 20% of the gross sales income under the latest financial tables disclosed to the public.
In this respect, a transaction that complies with one of the foregoing criteria will be deemed as material.
3. With regard to evaluation of the materiality of the transactions, transactions that are of the same nature or within the same plan of the same party will be considered as one unique transaction;
4. Practices such as these transactions are completed in a number of steps, or if the accounting policies have changed in order to avoid exceeding the foregoing thresholds, these will not be accepted, and the relevant entities will be reminded of the application of process under the principle.
Another set of amendments to the Communiqué entered into force following their publication in Official Gazette No. 28201 on 11 February 2012 regarding the independent board member requirements:
1. Eligibility criteria, such as residence and certain specialties to be elected as an independent board member have been amended;
2. Approval of the majority of the independent board members is still required for adoption of resolutions regarding material issues; however, if such approval is not available for a matter, then approval of the general assembly can be sufficient instead; and
3. Statutory number of the independent board members has been amended, and now nomination of independent board members, the number of which is not less than one- third of the total number of the board members, will be sufficient.
The new resolution of the CMB is more understandable and straightforward than the previous one, and may result in a more stable implementation of the CGR as a result of the clarity of the resolution. Finally, the CMB has amended the CGR the Communiqué Series: IV, No:61 which was published in Official Gazette no. 28410 on 13 September 2012. This amendment enables the CMB to issue an injunction decision and file a lawsuit before commercial court for determination of the breach and its annulment in the event CMB deems the CGR are breached and provides detailed in relation to the litigation process initiated by the CMB.
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