The OECD

1
The OECDs Work on Corporate Governance-Related
Dispute ResolutionCategories of Disputes

• Janet Holmes
• Senior Legal Adviser, Corporate Affairs Division
• OECD

2
Overview

• Background to the OECDs work on corporate
  governance and dispute resolution
• Categories of corporate governance-related
  disputes

3
Background

• Revised OECD Principles on Corporate Governance
  include a chapter on structure and quality of
  regulatory framework
• Chapter I stresses the need for effective
  enforcement of corporate governance (CG)
  standards
• Criminal / quasi-criminal enforcement
• Administrative enforcement
• Civil enforcement
• Market discipline
• Efficient dispute resolution mechanisms are
  crucial to effective civil enforcement of CG
  standards
• Need for effective enforcement and remedies
  emphasised throughout new OECD Methodology
• OECD Principles and Methodology are
  outcome-oriented and emphasise functional
  equivalence

4
Background (contd)

• Discussions in Regional Corporate Governance
  Roundtables
• Highlighted institutional weaknesses affecting
  traditional civil enforcement mechanisms in
  non-OECD countries
• Improving enforcement of CG standards
  efficiency of CGDR mechanisms is a high priority
  for many participants
• OECD Steering Group on Corporate Governance has
  also expressed a strong interest in this subject
• Effective and/or efficient civil enforcement of
  CG standards is also a challenge in some OECD
  countries

5
OECDs Work to Date

• Exploratory meeting in Vienna (June 2003) on
  arbitration of company law disputes
• Organised jointly by OECD, UNCITRAL and the ICC
• Synthesis Note for Vienna meeting available in
  Events Archive at www.oecd.org/daf/corporate-affai
  rs
• More broadly focused experts meeting on CGDR
  mechanisms held in Stockholm in March 2006
• Synthesis Note for Stockholm meeting available at
  www.oecd/org/daf/corporate-affairs
• Questionnaire on CG disputes and qualities for
  resolution of CG disputes discussed

6
Initial Categorisation of CG Disputes at
Stockholm Meeting(expert groups priorities
marked with a )

• Disclosure documents delivery, accuracy,
  completeness
• Annual accounts granting or withholding
  shareholder approval
• Nomination / appointment of board members
• Individual discharge of board members /
  executives
• Share / bond issues
• Alleged mismanagement

• Self-interested transactions
• Minority shareholders rights
• Suspension of payments / bankruptcy
• MA transactions
• Takeovers
• Share valuation
• (Non-) compliance with CG codes
• Works councils

7
Alternative Approaches to Categorisation of CG
Disputes

• Categorisation based on, e.g.
• Chapters II-VI of OECD Principles
• Identity and characteristics of complainant
  defendant
• Nature of activity that is subject of complaint
• Nature of alleged harm and/or remedy requested

8
Classification Based on OECD Principles

• II Rights of shareholders key ownership
  functions
• e.g. timely receipt of relevant, material
  information exercise of voting rights sharing
  in company profits
• III Equitable treatment of shareholders
• e.g. protection of minority shareholders from
  abusive actions by or in interests of controlling
  shareholders
• IV Role of stakeholders
• e.g. effective remedies for stakeholder rights
  protected by law effective enforcement of
  creditor rights
• V Disclosure transparency
• e.g. external auditors accountable to
  shareholders owe duty to company to exercise
  professional care in conduct of audit
• VI Board responsibilities
• e.g. boards duties to company board members
  rights to information

9
Examples of Classifications Basedon Identity of
Complainant Defendant

• Complainant
• Shareholder
• Company
• Board
• Board committee
• Individual board member
• Executive
• Employee
• Creditor
• External auditor
• Offeror / bidder

• Defendant
• Company
• Shareholder
• Board
• Individual board member
• Management
• Individual executive
• External auditors
• Custodian
• Broker
• Offeror / bidder
• Company adviser?
• Analyst?

10
Examples of Classification Based on Identity or
Characteristics of Complainant

• e.g. sub-categories of shareholders
• Controlling shareholder, significant shareholder
  or small shareholder
• Institutional investor or individual (retail)
  investor
• Passive investor or activist investor
• Portfolio investor or strategic investor
• Domestic investor or foreign investor
• Registered shareholder, beneficial shareholder or
  ADR holder
• e.g. characteristics of complainants
• Value of investment or interest relative to
  expected costs and potential benefits of pursuing
  claim / seeking to resolve dispute
• Incentives and disincentives to initiate or
  participate in CG dispute (free rider problems,
  extent to which complainant has been able to
  diversify investments (, human capital))
• Relative power of complainant in relation to
  defendant (voting power, access to information,
  alliances, other sources of influence)
• Obstacles to exercise of influence or pursuit of
  remedy (e.g. need to involve intermediaries to
  exercise rights, exert influence or pursue
  claims)
• Knowledge level

11
Example of Classification Based on Activity
Subject to Complaint

• e.g. routine / recurring events versus
  extraordinary events
• Routine matters - e.g. receipt of disclosure
  documents exercise of voting rights, declaration
  payment of dividends shareholder approval of
  annual accounts / discharge of auditors,
  management and board
• Extraordinary events - e.g. takeovers, mergers
  substantial acquisitions or dispositions
  squeeze-out transactions exercise of appraisal
  rights allegations of misuse of confidential
  information material related party transactions

12
Examples of Classification Based on Alleged Harm
or Remedy Requested

• Alleged harm
• Exercise of right denied or frustrated or
  instructions disregarded
• Ability to fulfil obligation frustrated
• Failure to receive required documents or
  information
• Misappropriation of corporate assets
• Loss of position (e.g. retaliation against
  complainant)
• Diminution in value of investment

• Remedy requested
• Derivative action vs personal action
• Mandatory order / specific performance
• Action (e.g. approval of transaction) annulled
• Injunction of proposed action
• Payment of damages / restitution
• Removal of individual from board
• Removal of firm (e.g. external audit firm)
• Rescission of contract

13
Next Steps in OECD Project

• Develop inventory of corporate governance-related
  dispute resolution mechanisms to facilitate
  policy dialogue provide guidance for reform
• Inventory not intended to favour any particular
  form of dispute resolution
• Inventory intended to raise awareness of
• Range of options that exist
• How they can or could function in corporate
  governance context
• Range of experiences in different contexts for
  different types of disputes
• Inventory to take advantage of expertise
  experience in Regional Roundtables, OECD Steering
  Group informal experts groups
• Format
• Base set of case studies, written by country
  experts, focusing on dispute resolution
  mechanisms in particular countries
• Supplementary notes and comments
• Describing how similar mechanisms work in other
  countries, or
• Evaluating potential for adaptation of mechanisms
  in particular countries or regions
• Lead paper to key themes in depth and/or provide
  template for analysing options

14
For More Information

• OECD Principles and Methodology available at
  www.oecd.org/daf/corporate-affairs
• Contact
• Janet Holmes
• 2, rue André Pascal
• 75775 Paris Cedex 16, France
• janet.holmes_at_oecd.org
• Tel [phone]