The draft Listing Rules of the Zagreb Stock Exchange are thorough and comprehensive. In fact, the comprehensiveness is so impressive that it is queried whether the provisions may have been borrowed from one or more developed market precedents. If so, that is not necessarily a good approach because, at this stage of the Zagreb Stock Exchange’s development, the exchange has to be concerned with its economic viability as well as sound listing criteria. If the criteria are good on paper, but Croatian companies cannot satisfy the criteria at this time, the exchange may suffer, and issuers may turn to other markets. Accordingly, the exchange is urged to take this point into consideration and solicit comments on the feasibility of the listing rules from a sampling of the leading Croatian enterprises.1

It is not clear how regulatory authority is to be allocated between the Securities Commission of the Republic of Croatia and the exchange. Article 12(10) of the Securities Act requires the commission to prescribe the mandatory content of reports by companies that make public offerings. On the other hand, the listing rules provide detailed disclosure requirements that the Securities Act seems to contemplate. It is suggested that the commission consider adopting the listing rules so as to avoid having two separate sets of requirements with which companies must comply.

The rules appear to be a good combination of issuer disclosure and substantive agency approval. It is, however, somewhat surprising to see such a strong invitation to make projections and estimates of future business, profits, and dividends. Such forward-looking statements invite exaggeration and inaccuracy. If such statements are to be permitted or encouraged, the basis upon which the projections are premised should be better defined and disclosed to investors.

There seems to be an unnecessary emphasis on the timing of various actions, for example, "14 days prior" or "48 hours prior." All of these filing dates, relevant to the issuance of securities, could be tied to an approval date or "effective date," as is used in the United States. This system actually fits with other provisions of the rules, since ultimate approval is required prior to sale. The rules seem to suggest that there is a target date for some kind of "determination," and, hence, all of the filings are sequenced prior to that target date. If the United States’ experience is any guide, the system needs to be more flexible than this. Whatever administrative processes emerge will be the product of experience and necessity rather than rule or edict.

Drafting Concerns

Cross-References

Cross-references should refer to articles exclusively and never to page numbers. It must be expected that the listing rules will be circulated in a number of different editions, the pagination of which is likely to vary. Where, in any article, references are made to other articles, the references should be verified for correctness. In the present draft, cross-references are frequently incorrect. In many cases, the correct cross-reference can be deduced from the context,2 but, in many other cases, the intended cross-references are obscure.3

Terminology

In the draft rules, there are several examples of the inconsistent use of terminology. It is appreciated that the draft being reviewed is a translation and that inconsistencies may be attributable to errors in translation. Nevertheless, the importance of terminological consistency must be emphasized, both to assure that the governing authority of the exchange really understands the import of these rules and to facilitate compliance by the persons who are expected to abide by the rules.

For example, in Article 48, Article 52, and elsewhere, there are references in the rules to important information, a significant change, and so forth. It might be useful to decide upon a generic term, define the term, and use the term throughout the rules. In the United States, the standard is material, and material has been defined by the Securities and Exchange Commission rules of disclosure and by case law. There is a definition of significant in Article 53, but that term is not uniformly used. The word material is used in the draft rules to gauge the importance of certain contracts but bases importance on an odd standard of fifteen percent of the issuer’s assets.4 It would be helpful throughout the rules to tie the measure of importance to something that is easily identified and relevant, such as sales or profits. Another method, which is used in the United States, is to measure importance by whether a reasonable investor would consider the information important in deciding whether to purchase or sell the securities. This is a subjective test but is free from the arbitrariness of specified standards.

Promotion of a Free Market Economy and Foreign Investment

As a very general matter, it appears that Chapter 3 is similar in purpose to the United States’ exchange rules. Therefore, the broad contact point of comparison is the United States Securities Exchange Act of 1934, which, among other things, regulates: (1) "national securities exchanges," (2) brokers and dealers who conduct securities business in interstate commerce, (3) transfer agents, (4) clearing agencies, (5) municipal brokers and dealers, and (6) securities information processors such as investment advisors and research service "newsletters."

The keys to the regulation of both securities and exchanges are the concept of "materiality" and the ability to reasonably rely on accounting information presented in accordance with United States generally accepted accounting principles as modified by a very detailed Securities and Exchange Commission ("SEC") regulation denominated Regulation S-X. For the purposes of this analysis, it is assumed that Croatia has adopted the notion of materiality in its laws as referred to in the listing rules.5

Beyond materiality, however, international accounting standards differ markedly from those in the United States. This distinction is significant because, under international accounting rules, investors do not generally have as much financial information as do their United States counterparts. This increases the transactional costs of researching investments. Nonetheless, the rules provided by Chapter 3, if enforced, should greatly promote the free market economy and, all other things being equal, foreign investment.

Further, as a general matter, it seems that if an exchange is to "work," the exchange must reflect the culture and structure of the home country as well as recognizing overall long-term international goals. Therefore, it would be helpful for Croatia and the Zagreb Stock Exchange to not only reference and seek comments from United States-based securities professionals but also from those with knowledge of European Union and continental domestic law.

Comparison with European Union law is important for two reasons. First, it may represent closer cultural comparisons. Second, if joining the European Union is a long-term goal, now might be the easiest time to conform to some of the European Union Directives. Among the directives concerned are: Directive of 5 March 1979, which establishes listing conditions for exchanges, including minimum company size, free negotiability of shares, and the minimum proportion of shares that must be held by the public; Directive of 15 March 1980, which establishes information requirements in the form of "listing particulars" before a company’s shares may be traded on an exchange; and Directive 82/121/EEC, which directly addresses post-listing information requirements. The Council, as of 1992, was also considering directives concerning insider trading and takeovers. Continental civil law also would provide comparisons that might more closely reflect the culture than the United States comparison, although it appears that the Zagreb Stock Exchange may be contemplating a United States-style system. By way of illustration, the following quote may be instructive:

A number of commentators have speculated concerning the possible explanations for differences in the corporate structures found in the United States and other modern industrial countries such as Germany and Japan. In general, ownership in the United States is more fragmented than ownership in these other countries. It has been argued that greater fragmentation reduces the power of shareholders to supervise management and, conversely, increases the power of senior management. Some commentators, notably Adolf Berle and Gardiner Means, have argued this greater fragmentation is the result of economic forces—political and historical forces such as American populism and interest group politics—have also helped shape a legal landscape that precludes the development of corporate structures resembling those found in Germany or Japan.6

Given all these factors, including international accounting rules and the concept of materiality, it appears that Chapter 3 is a good basic framework and a good starting point for further evolution through time. The existence of such provisions should help encourage foreign investment. The most troubling omission is, perhaps, any reference in the listing rules to organic structure, amendment and further rulemaking, and arbitration of disputed rule interpretation. Those rules are absolutely necessary to enable the exchange to evolve and survive over time.

Some of the exchange rules do seem to warrant broader application to all securities trades whether or not on the exchange. That is, can a company avoid certain rules simply by using the equivalent of an over-the-counter market—direct to the public—rather than the exchange? That is a question beyond the scope of this review.

Individual Rights, Democratic Ideals, and Comprehensiveness

A review of Chapter 3 indicates that the chapter is both comprehensive and consistent with individual rights and democratic ideals. The Securities Act of the Republic of Croatia was not reviewed in this connection and, thus, the following question is posed: do the securities laws provide for periodic reports to the commission and shareholders? If so, the laws and rules are believed to be comprehensive in combination.

One political issue, quite possibly false, relating to individual rights and democratic ideals is anticipated: the issue of privacy. Specifically, under Chapter 3, certain safeguarding of shareholder lists is provided. Nothing therein is more intrusive than is provided in United States securities laws. Nonetheless, there may be a heightened sense of privacy in newly independent states that would question the need for the type of financial and management personnel information necessary for the operation of an efficient market prescribed by the semi-strong efficient market hypothesis regulatory model on which the listing rules seem to be based.

Listing

Conditions for Listing

It is unclear why only corporations are covered as issuers and whether this restriction is a peculiarity of business law in Croatia. If not, it would seem appropriate to cover all types of entities that offer securities for sale and to define securities as broadly as possible. The listing rules focus on stock and debt securities and make a few references to tranches, which implies the possible use of derivative securities that split out the various interest and principle obligations into sequenced tranches for payment—although this is not clearly specified. Since derivative securities have become such a significant part of investment activity around the world, some coverage should be included in the listing rules, unless the rules intend to exclude such instruments from registration and trading. An exclusion of this kind does not seem to be a good idea, however, as businesses need derivative instruments to hedge their ordinary business risks, and the public securities market is the proper place to find, sort, and match up with investors who are able to bear the risks the businesses need to reduce.

Perhaps a special provision should be made for foreign companies, which are subject to the disclosure requirements of another country. Article 1 of the listing rules contemplates that foreign companies may be listed on the exchange, but the problem of dual—and perhaps differing—requirements does not seem to be addressed in the rules. Perhaps foreign companies should be permitted to comply only with home-state requirements if the exchange or the commission finds that such requirements are comparable to the exchange rules, with the additional proviso that any disclosures made to Croatian investors be translated into the Croatian language.

In Article 4, it does not appear to be necessary to disclose "all" management changes. Management could, perhaps, be defined to include only certain high-level directors and officers. In Article 5 and elsewhere, the statement that the issuer has sufficient working capital for a six-month period is a suspect requirement. Does this requirement assume that no other business changes will be made in that time frame? This provision is similar to the United States’ requirement that accountants must qualify their audit opinion letter if there is sufficient concern that the company has insufficient capital to meet its obligations as the obligations mature. The twenty-five percent in Article 7 seems a high threshold for a "substantial" shareholder. In a publicly held company, a person with only ten percent, or even five percent, of the stock may very well have de facto control. Also in Article 7, it is unclear how a shareholder is "entitled" to control the appointment of directors.

Article 9 may be difficult to enforce if only because it is not clear what kinds of conflicts are covered and what is meant by "no detriment to the company’s interest." Perhaps the provision should provide that any contracts or arrangements between an issuer and an insider—including a substantial shareholder—be completely fair to the issuer and be fully disclosed to shareholders. In Article 11 and elsewhere, there are many references to securities that "have not been fully paid." If the corporate law of Croatia permits securities to be sold without payment, perhaps the drafters should consider a change to prohibit the practice. The possibility that securities will be issued for trading while not having been paid for presents dramatic risks to the market. Even if the issue is limited to purchasing securities on margin by investors, there needs to be regulation to keep control of the extent to which this practice is permitted. In the United States, this is controlled through corporate law and treasury regulations. The stock market in Kuwait crashed several years ago, reportedly due in large part to the free use of debt by investors to acquire securities.

Regarding Article 14, the number of shares held by shareholders—excluding insiders—and the number of public shareholders are at least as important as the percentage of shares held by the public. Minimum standards based on the number of shares in the "float" and the number of shareholders are therefore recommended.7 In Article 20(b), perhaps the exchange should have the right to approve or disapprove when the underlying shares of convertibles or warrants are listed on a foreign exchange, since not all exchanges have adequate markets for shares. The purpose of Article 21 is unclear. One would think that the problem is having a market for the underlying shares rather than having enough information in order to evaluate the shares.

Disclosure

Form and Contents of Listing Particulars

Subchapter 2.1 appears to use the terms listing particulars and prospectus interchangeably, although other portions of Chapter 2 8 would appear to permit, in lieu of a prospectus, the use of annual or semiannual reports in cases of applications for listing previously outstanding securities. It is unclear why there are so many distinctions among various disclosure documents, such as the prospectus, circular, listing particulars, notices, advertisements, and so forth.9 It is not clear which of these is intended to be the actual offering document that investors will see and upon which investors will rely. It also appears that the offering documents will not necessarily get into the hands of the investors and that the investors must make some special effort to obtain the offering documents from the issuer or the exchange. The United States system utilizes the listing particulars to provide the relevant—that is, material—information including comparative financials.

Perhaps Subchapter 2.2 should expressly refer to Part Two, Title I of the Securities Act. Further, it is not clear how this subchapter is affected if an abridged prospectus is used under Article 19 of the Securities Act.

Listing Particulars—Narrative

It should be made clear that there are two parts of the listing particulars: a narrative part and the financial statements. The narrative part would include the history and a description of the business, the management, a summary of the financial information, and the capital structure and securities being listed.

History and Description of Business

The requirement that the narrative portion of the listing particulars must include the history and a description of the business is generally covered by Article 67—inexplicably duplicated, though not without total consistency, in Article 75—as to which the following observations are offered. Generally, a statement should be made that the information required by the paragraphs of Article 67 should be included only to the extent that the information is relevant to the particular enterprise being described. Paragraphs (1), (3), and (10) appear to require or contemplate line-of-business or industry segment reporting. In Article 67(1), it might be clearer to companies if there were numerical guidelines as to what is meant by "principal activities,"10 for example, any activity accounting for at least ten percent of revenues or at least twenty percent of profits. Thus, a materiality threshold should be stated, e.g., that a separate description is required with respect to each of the issuer’s business activities only to the extent that the activity accounts for ten percent or fifteen percent of the issuer’s turnover. Similarly, in Article 67(3), some guidance as to what has to be broken out, in terms of minimum percentages, would be helpful. Also, it is unclear whether "net turnover" refers to net profits or some other figure.

If the line-of-business or industry segment reporting is required, then the information that should be disclosed, in lieu of or in addition to—as applicable—the information now called for by Article 67 with respect to each line of business, in narrative form, is:

The principal products produced or services rendered by the segment;

The status of the product, if any, e.g., planning stage, development stage, or production and sale stage;

The sources and availability of raw materials;

The importance to the segment of patents, licenses, or other intellectual property rights;

The extent to which the business of the segment is seasonal;

Working capital requirements of the segment, e.g., inventories;

The dependence of the segment on a single customer or a few customers, naming each customer that accounts for more than ten percent or fifteen percent of the segment’s turnover;

Information as to the segment’s backlog;

Effects on the segment’s business of government regulation in such areas as price control, quality control, environmental control, contract renegotiation, and so forth;

The segment’s competitive position in its relevant market which, pace Article 67(14), may or may not be Croatia;

The number of persons employed in the segment; and

Summaries of material contracts.

To the extent that segment reporting is not required or appropriate, the foregoing information should be furnished, to the extent relevant, for the business as a whole. Moreover, if segment reporting is required, consideration should be given to requiring, in tabular form, the following information for all segments separately:

Turnover outside group by geographical area;

Operating profit; and

Identifiable assets.

For this purpose, unallocated revenues, expenses, and assets may be aggregated as a separate segment.

Article 67(4) as written does not make sense. It is unclear whether net turnover means net sales. It seems odd to tie the disclosure of real estate holdings to some notion of a percentage of net sales. Perhaps a percentage of assets would provide more relevant information. Alternatively, perhaps what should be required is such information regarding the location and general character of materially important physical properties of the issuer and its subsidiaries as will inform investors as to the suitability, adequacy, productive capacity, and extent of utilization of the facilities.

In Article 67(8), it is suggested that threatened or actual regulatory proceedings, such as an investigation or disciplinary proceedings by the commission or the exchange, also be included. In Article 67(13), the advisability of having issuers disclose "future investments" is questioned. It is not clear in Article 67(14) what is meant by describing the company’s "position" within its branch of industry in Croatia; if the reference is to competition, this provision should be expanded to refer explicitly to competition.

Management

The information that should be required about the management of the issuer is outlined in Article 69 and duplicated, to some extent, in Subchapter 2.2.15. While some of the information that appears to be called for by Article 69 appears excessive, the following additional information should be required:

Identification of the chief executive and chief financial officers and, possibly, other managers of important business functions, whether or not directors. Investors should be able to tell who is actually running the business and who is primarily responsible for the accuracy of the financial statements;

Identification of those directors and supervisory board members who are not employed by or otherwise associated with the business or, by family ties or otherwise, with other directors or supervisory board members—the "disinterested directors."11 If any directors or advisory board members are directors or advisory board members of any other enterprise, each such other enterprise should be named;

Disclosure of any material interest that any senior manager, director, or advisory board member—or any family member of such person or any entity of which such person is a manager, director, or supervisory board member—may have in any ongoing or proposed material transaction, or during the past three years has had in any material transaction, of the issuer, its subsidiaries, or its management. For this purpose, the listing rules may specify materiality thresholds for both interests and transactions;

Disclosure of any material legal proceedings in which the issuer, any of its subsidiaries, or any senior manager, director, or supervisory board member may be involved, or during the ten years preceding the application has been involved, and the status or outcome of those proceedings;

Description of compensation arrangements for senior managers, directors, and supervisory board members—for example, salary, bonuses, fees, profit participations, pensions, stock options, and so forth—should be clearly described and, for each of the past three years, quantified, in tabular format if appropriate. Remuneration of the four or five highest-paid officers should be shown separately; and

Description of directors’ affiliations for the past five years.12

In Article 69(5), it is suggested that loans by directors to the company also be shown. Also, substantial shareholders should be included in this disclosure. In Article 69(6), it is not clear what are the "schemes to involve the employees in the capital." Article 69(7) should perhaps disclose how directors’ compensation is set; for example, is there a committee, who is on the committee, and what guidelines are used? Article 69(7)(c) seems to imply that directors might be borrowing money from the issuer. The corporate law should prohibit this. If not, all details should be disclosed. This is a high risk factor for the investor.

Summary Financial Information

The summary financial information that appears to be called for by Article 68 and, duplicatively, Article 76 seems to overlap the information provided by the financial statements. Consideration should, however, be given to requiring the following in the narrative portion of the listing particulars:

In tabular form, summary financial highlights, showing those aspects of the data in the financial statements that the issuer regards as most significant;13

A management discussion and analysis of the issuer’s financial position and profit and loss, with emphasis on liquidity and adequacy of capital resources, variations in results over the periods being reported on, and known risks, trends, and uncertainties that may cause future results to differ from past results. Something along these lines appears to be called for in response to Article 70, which should, however, be amplified as suggested; and

At least optionally, financial projections along the lines attempted to be dealt with in Article 104 and Article 105.

Capital Structure and Securities Being Listed

Article 65, Article 66, and Article 73 generally seem adequate.14 A few suggestions may be appropriate, however. Article 73 contains a good list of disclosures but should be supplemented with a final clause that requires the disclosure of any other "material" information. The information called for by Article 66(1) through Article 66(7) has nothing to do with capital structure but belongs in the history and description of business portion of the narrative.15Article 66(7), as relocated, should refer simply to all of the supporting documentation submitted pursuant to Article 38 through Article 40, rather than a selected and possibly inconsistent list. In any event, Article 66(7)(f) does not belong here; if required at all, the provision should be included in the documentation called for by Chapter 1.

Article 65(9) refers to payment of capital gains tax. The article does not specify what capital gains tax, by whom the tax is paid, and so forth. For instance, is this a tax that the issuer must pay before the issuer can make a public offering? If so, then the statement might state that the tax has been paid. It may be a much better idea to keep the taxing system separate from the securities regulation and exchange system, except to the extent that the failure to pay taxes is a material fact affecting the value of the securities to investors.

In Article 65(14) and elsewhere, there are many references to preemption rights held by shareholders. In the United States, the exchanges discourage—and perhaps prohibit—the listing of securities that carry preemptive rights. If the securities are widely held and traded, such rights to purchase pro-rata shares in any new offering are an administrative nightmare. Perhaps consideration could be given to eliminating such rights on exchange-traded securities. Article 139 specifically grants such rights.

Article 65(10) and Article 65(14), as relocated, should be combined since the articles deal with the same subject. Article 65(10) is, however, confusing because Article 11 states unequivocally that restrictions on transfer are not allowed. Article 66(17) is also out of place. Summaries of material contracts belong in the description of business portion, not in the capitalization portion, of the listing particulars, where ongoing material contracts as well as contracts completed in the past—perhaps three—years should be described. Chapter 1 should require copies of material contracts to be submitted among the supporting documentation, subject to any request for confidentiality.

Listing Particulars—Financial Statements

The financial statements that should be included in the listing particulars are those called for by Article 2. Accordingly, Article 68 and its virtual duplicate, Article 76, as well as Subchapter 2.4 are redundant and, to some extent, inconsistent. For example, Article 2 properly calls for the accounts to be prepared in accordance with international accounting standards, whereas Article 98(c) and Article 105 speak of national accounting standards, and Article 112 refers to accounting practices of the Republic of Croatia. It may be questioned whether the Croatian accounting profession has had time to develop meaningful accounting standards or practices or whether it would make sense for Croatia to develop accounting standards or practices that differ from those accepted in the European Union. Accordingly, it is urged that the articles in Chapter 2 relating to the financial statements limit themselves to those desired items of information that would not normally be included in financial statements prepared in accordance with international accounting standards. An accounting expert should be consulted.

The auditor’s reports referred to in Article 102 and elsewhere should include balance sheet comparisons as well as profit and loss comparisons. It is suggested that Article 104 be broadened to include any material forward-looking information, not just forecasts of profits. For example, a forecast of sales, backlogs, or changes in the company’s lines of business could have an impact on investors’ decisions. It is unclear in Article 106 what is meant by stating that forecast information must be "subordinate" to actual historic audited data. Certainly, clear distinctions need to be made as to whether information is actual and historic as opposed to projections regarding the future.

In Article 109, it is not clear what the purpose of the preliminary statement is, when the preliminary statement must be sent to shareholders, or what role the exchange will play in reviewing the preliminary statement. It is queried whether this requirement might not delay disclosure of the company’s results to the public. Article 110 could establish a deadline for the sending of the annual report to shareholders. In Article 113, one percent seems a low threshold and may result in the disclosure of a lot of information that will not be meaningful to shareholders.

Other Disclosure Matters

Omissions

Article 54 through Article 58 and Article 120 appear inapt. There can never be any reason why information required to be included in the listing particulars may be omitted. As outlined above, the listing particulars simply need not call for any information that is of minor importance or the disclosure of which would be contrary to the public interest or that would cause detriment to the issuer.16 One should be particularly concerned about the "public interest" standard, which suggests that the exchange might be subjected to political pressure. Also in Article 55, assuming the provision is retained, it might be a good idea to indicate the kind of information that would be eligible for non-disclosure, for example, trade secrets.17

In Article 56, it would be appropriate to permit the issuer to request that a contract submitted as a supporting document be accorded confidential treatment on the grounds that the contract contains competitively sensitive information, the disclosure of which would cause serious detriment to the issuer. The issuer should be permitted to submit such request directly without intervention of the sponsor.18

Definition of Material Contract

The definitions of material contract found in Article 57 and Article 58(d) are inconsistent and out of place. The definition of material contract belongs in the articles dealing with the narrative portion of the listing particulars. A contract should be deemed material if either (i) the contract is not in the ordinary course of business or (ii) the contract accounts for more than a certain percentage of the issuer’s consolidated or segment turnover—whether fifteen percent or another percentage. Relating materiality to the issuer’s assets, as Article 57 appears to do, does not work well. Similarly, the one-percent ratio in Article 113—with which, as such, there is no argument—should relate to turnover rather than capital and reserves or total liabilities or receivables.19

Directors’ Responsibility and Compensation

In Article 44, substantial shareholders could be made responsible for the information in the listing particulars in addition to the issuer’s directors. In Article 74(13)(b) and elsewhere, there are references to the "emoluments received by the directors." Does this mean compensation, perks, and so forth? The compensation of directors should be disclosed. In Article 112(5), it is unclear what "waiver of emoluments" means?

Publication, Advertising, and Circulation of the Listing Particulars

In Article 82, the listing particulars should be made available through distribution to investors by underwriters and brokers as well as being available at the issuer’s office and at the exchange. Article 86 and Article 87 refer to a "mini-prospectus," which is a summary of the real listing particulars. This is risky because the "summary" never tells the whole story. The burden placed upon directors to insure that the mini-prospectus is a "fair summary" cannot really be met. It seems likely that these mini-prospectus documents will become the real listing particulars, and investors will not have ready access to the information they need to make informed judgments. In Article 89, is the offeree company required to furnish the offeree with a shareholder list? Otherwise, how can the offeror send the listing particulars to the offeree’s shareholders?

Substantive Consideration

The exchange should consider imposing certain standards relating to corporate governance that would impact on the content and quality of the disclosures in the listing particulars.

Audit Committee

One gathers from the listing rules that Croatian law follows the German model relating to the governance of business corporations by requiring or permitting a supervisory board in addition to a board of directors. It is assumed that, if an enterprise has a supervisory board, the enterprise’s board of directors will consist predominantly, if not entirely, of members who are active in the enterprise’s business. In that event, the exchange might require that a majority of the members of the supervisory board be "independent directors."20 The independent members of the supervisory board should constitute an audit committee. If an enterprise does not have a supervisory board, the exchange could require that at least two members of the board of directors be "independent directors," at least two of whom would constitute an audit committee. The audit committee’s function would be to select the outside auditors, to discuss with the auditors the scope of their audit, and to be available to the auditors to discuss any weaknesses in the enterprises’ internal controls that might impact materially on the quality of the information disclosed in the financial statements. The identity of the members of the audit committee would, of course, be disclosed in the listing particulars.

Voting Rights

The exchange might consider requiring, as a condition of eligibility for listing, that the enterprise applying for listing have only one class of common or ordinary shares and that all shares in that class have equal voting rights. If such a requirement is deemed not to be practical, then, as a minimum, any differential voting rights must be prominently disclosed.

Post-Listing Obligations

Subchapter 3.1 discusses access to shareholder records, general obligations to disclose, notifications relating to business and capital, "major interests in share" provisions, shareholder rights communication with shareholders, and other related obligations.

Notification and Access to the Shareholder Register

In Article 122, it is assumed that there are publication or notification requirements concerning the "more or different continuing obligations" that the exchange may reasonably require by industry group. Although this might be difficult now, it is suggested that Article 124 at least anticipate an electronic mail notification system to the exchange somewhat like the SEC’s EDGAR system in the United States. That system would allow instantaneous notification to the exchange of overnight developments. Article 125 provides the exchange’s right to inspect shareholder registers and records. This is a necessary power. It is assumed that either the securities or business organization laws deal with shareholder access to this information in conjunction with the proxy process contemplated in Subchapter 3.1.8. This may rise to the level of financial democracy.

General Obligation of Disclosure

Subchapter 3.1.3 is one of several very welcome references to "material information." It might be helpful to address when information ripens to material information in Article 128 and to expand the negotiation exceptions in Article 128 and Article 130 in a corresponding fashion. On similar grounds, Article 129, which requires notice to the exchange concerning government investigations, is disliked. It is suggested that the materiality standard should apply here as well.

Perhaps most important as a procedural matter is the expense of notification "to holders of its listed securities" in Article 127. It is unclear how the information is to be disclosed, but it is hoped that notification would not require airmail mailing to each holder. It would also be helpful to delineate insider trading if not already done in the general securities laws. A somewhat more detailed definition of the kind of information that must be disclosed in Article 127 is suggested. This could, perhaps, include any information that is likely to affect investors’ decisions or the price of the security.

Notification Relating to the Business and Notification Relating to Capital

Subchapter 3.1.4 and Subchapter 3.1.5 are fundamentally sound. It is not clear, however, to whom the notification is given. Here, as well as in other sections, the notification must be "without delay." In the United States, a time limit is generally set for such disclosure, e.g., ten days. The reason is to avoid a hurried, alarming, and inaccurate public disclosure. It is unclear how Article 132 ties in with Article 127. It is suggested that Article 132 apply to any information that meets the criteria of Article 127. Furthermore, a requirement that information be disclosed that "may lead to substantial movements in the price of its shares" is likely to exclude some information that ought to be disclosed.

Notification of Major Interests in Shares

Either the translation or the drafting of Subchapter 3.1.6 obscures an understanding of the article’s scope. It is believed that its purpose is to provide information either on "control persons" or on take-over bid notification. Both of these are important and should be as unambiguous as possible.21

Rights as Between Holders of Securities

It is unclear what is meant by "[u]nless its shareholders otherwise permit," in Article 139. Perhaps it would be better to require preemptive rights unless the company’s charter states the contrary. Alternatively, perhaps it is a matter of translation.

Communication with Shareholders

Subchapter 3.1.8 does not contemplate United States style proxy battles, nor does the article contemplate that notice of meetings or proxy solicitation be meaningful or specific. Thus, the chapter provides a fundamental framework without rights that might be used to company and shareholder disadvantage. Could these rules be dovetailed with annual shareholder financial notification? Are any qualification requirements for the registrars and paying agents contemplated in Article 141?

Acquisitions, Disposals, Takeovers, and Mergers

Assuming there is a way for these rules to evolve over time, these rules are fundamentally adequate.22 A major procedural problem will probably develop, however, under Article 158 concerning the language "must at an early stage."23 As stated in a United States treatise, "[f]ew disclosure issues cause more anxiety among corporate officials than the disclosure of ongoing negotiations." Does the early date language alter the general materiality provisions in earlier articles?

Two other general comments can be made. First, tying mandated disclosure to asset value may increase transactional costs and invite valuation disputes in enforcement. Second, it seems that Article 171’s disclosure of indemnity or other arrangements should have broader application to situations outside the acquisition or disposal context.

Transactions with Related Parties

Article 178 contains the troubling language "at an early stage" previously discussed with regard to Article 158. More generally, this chapter seems to contemplate notions contained in both securities law and state corporation law—the context of conflict of interest—and, additionally, might relate to insider trading. Such conflict of interest transactions present very significant issues to United States companies. Disclosure of material transactions is the response usually made in the United States, coupled with prohibitions on short-swing profits from stock trading, the use of inside information to profit in the market, and market manipulation. These rules appear inadequate to handle these many problems.

There may be definitional problems with insiders and the classic United States issues of whether a tippee is an insider and whether the "theft of information" automatically gives rise to insider status for the thief. Germany has dealt with this issue as a matter of securities law, not exchange requirements, and, therefore, it has broader application.24

Again, there is concern about the timing and expense of shareholder approval, and it is suggested that the transaction be approved by the Board of Directors (in a manner consistent with the provisions of Subchapter 3.4), that the transaction be immediately reported to the exchange, and that notification then be given to shareholders together with the periodic results of financial operations or with the next proxy statement or shareholder meeting announcement.

Directors

For information critical to corporate governance and of a kind that must be disclosed to shareholders, it is recommended that the same mechanism be used as suggested in Section IV(E). As a matter of disclosure, the prohibitions in this chapter should probably apply to "control persons"—officers and those owning a controlling number of shares—as well as directors. Article 203 uses the term responsible person, which hints at "control," but there does not appear to be a definition of responsible person. Concerning the exercise of options, Article 203 is probably too terse and should be a matter of disclosure to shareholders. Moreover, in the United States, it has been necessary to develop very detailed rules on the exercise of options and include gain in the disclosure of salary under "Director Service Contracts" in these rules.

Purchase of Own Securities

In the United States, state company law regulates the purchases of an issuer’s own securities through financial capital statutes. That mechanism seems to be contemplated by Article 208, and it is assumed that Croatia’s corporate law provides the necessary backdrop to make Article 208 meaningful. Of course, once the shareholders vote to authorize the purchase, the market will quickly drive the price of the securities to be purchased to a higher price. It is recommended that the very practical issue of whether this mechanism works as intended needs to be carefully considered.

The language of Article 207 about "on behalf of a third party" is troubling, as is Article 211, which seems redundant or subject to better drafting. Would this transaction be denominated a loan for disclosure purposes? Moreover, the use of nominees keeping the name of the purchase private through the use of the company itself as a mechanism causes one to pause and consider abuse of the company, the acquisition and merger listing requirements, the transactions with related person requirements and enforcement nightmares for insider trading, and the "interested party" provisions discussed previously. Even though it is quite possible that the business purpose of this chapter has been misunderstood, the chapter is very broad, and it is suggested that the chapter be reconsidered carefully.

Circulars

Again, the provisions on circulars provide a basic framework for information dissemination. As a general matter, it is not clear where the filing of periodic financials or the sending of the same to shareholders via this chapter is required. With the latter exception, these rules are adequate assuming that there is a fair way to augment these rules by exchange regulations. An example of a place that needs supporting regulations is Article 220(c). What is adequate disclosure and what are the parameters with misstatements? Article 212(d) is rather questionable; since the article will probably never be enforceable or effective, it is suggested that the article be deleted. Far more important, there are no provisions for shareholder access to the proxy machinery as a matter of the exchange rules. That, dependent on the model being used, may have democratic implications.

Major Investment Projects

An issuer without any operating history and without any prospect of obtaining bank or other financing can be admitted to the exchange to raise capital on the basis of information provided in its prospectus. Although the issuer must have capital of twenty million ECU, an investor’s claim to this money in all probability would be subordinated to that of other creditors of the issuer. Thus, the public sale of interests in major investment projects poses a substantial financial risk to investors.

This approach appears suited to an emerging market because the system allows start-up companies to obtain capital. However, a large number of high-risk enterprises trading on the exchange would affect the exchange’s image. Start-up firms involve high risk and many can be expected to fail and, thus, disappoint the expectations of investors. Trading of this sort does not project an image of relative safety and stability. Consequently, permitting start-up companies to raise capital on the exchange may affect the international reputation of the exchange.

One way to deal with this effect is to divide companies by size, trading volume, and risk. Lists are often used for this purpose. In Estonia, the Tallinn Stock Exchange uses an A-list restricted to its best and largest companies. Some of these companies now trade on foreign exchanges. The contrast between A-list companies and companies trading on the over-the-counter market provides useful information to the investor and the market.

Compliance with and Enforcement of the Listing Rules

Chapter 7 appears to balance the need of the exchange to manage the market with the issuer’s interests in the public trading of its securities. The rules are straightforward, simple, and adequate to protect the exchange. On the other hand, the procedural due process issues raised by Subchapter 7.3 and Subchapter 7.4 seem quite inadequate. The issuers, sponsors, and so forth should have the right to hear the charges against them, present a defense, and have judgments made by an impartial tribunal. To exclude lawyers from this process 25 is totally inappropriate and compromises the property rights of the affected parties. It is argued conversely that, although the board forbids an appearance by counsel for the issuer, the procedure nevertheless gives the issuer a meaningful opportunity to be heard. The appeals process affords the issuer a hearing before the listing committee and then the board. The decision of the board is written. While administrative enforcement is appropriate and probably necessary, it should be safeguarded by appeal to final judicial determinations. Otherwise, the agency is too powerful.

Endnotes

1. Alternatively, another course of action is suggested. In October 1995, stock exchanges in the fifteen European Union member states, plus Switzerland and Norway, created a Eurolist system that establishes standard listing requirements and provides for secondary listings based on certification from the issuer’s home jurisdiction. In addition, the European Union has promulgated an Admissions Directive and a Listing Particulars Directive that, like the Uniform Commercial Code in the United States, the several member states have adopted as domestic law with local variations. Thus, the Zagreb Stock Exchange could adopt these trans-European initiatives substantially verbatim in order to increase coordination with the European Union countries.

2. For example, the references in Article 60 to Article 60 should obviously be to Article 59.

3. For example, see Article 44, Article 46, Article 66(7)(c), Article 120, and so forth.

4. See Section IV(A)(3)(b) for further comments.

5. See, e.g., Article 128.

6. Douglas G. Smith, A Comparative Analysis of the Proxy Machinery in Germany, Japan, and the United States 58 Pittsburgh Law Review 145, 146-147 (1996).

7. It is assumed that the purpose of this provision is to ensure that there is a real public market for the shares.

8. The drafters may wish to refer to Regulation S-K of the United States Securities and Exchange Commission, 17 Code of Federal Regulations 229, when reviewing the comments relating to Chapter 2.

9. In the comments that follow, reference will be made consistently to listing particulars. Furthermore, it is observed that Article 38 through Article 40 of Chapter 1 require the submission of supporting documentation that presumably will be open for inspection by the public. In some of the comments that follow, references will be made to certain additional supporting documentation, not referred to in Article 38 through Article 40, that the drafters ought to consider requiring.

10. A similar comment applies to Article 67(10) with regard to "main categories of activities."

11. See Section IV(B)(1).

12. See Article 69(1).

13. See Article 104 through Article 108.

14. Article 74 should be omitted; the article duplicates not only Article 65 and Article 66 but also, in part, Article 67.

15. See Article 67.

16. See Article 55.

17. It is assumed that the requirements of Article 55 are disjunctive; if so, it is suggested that an "or" be inserted before paragraph (c).

18. See Article 56(a).

19. It is queried whether Article 58(b) should refer to Article 55; if so, the reference should be corrected.

20. This requirement might not work if, following the German model, one-half of the members of the supervisory board must be representatives of the work force. In that event, most of the other members of the supervisory board should be "independent directors."

21. See comments on Chapter 3.4.

22. On the other hand, Subchapter 3.2 may be inadequate to handle all of the problems attending takeovers. It is suggested that the drafters review a copy of the United States Williams Act provisions contained in Section 13 and Section 14 of the Securities Exchange Act of 1934.

23. It is assumed that there is a printing error in Article 158 and that "state" should be changed to read "stage."

24. See Second Financial Market Development Act of 1994.

25. See Article 281.

Biographical Statements of Experts Assessing the Draft Listing Rules

John J. A. Burke

John Burke has received a Juris Doctor and a Doctor of Philosophy degree. He is a citizen of the United States and Ireland. Admitted to the New Jersey and New York bars, Mr. Burke practices law in the State of New Jersey. In 1993, Mr. Burke served as a legal specialist for the Central and East European Law Initiative assigned to the Republic of Estonia. In 1994, he advised the Estonian Ministry of Finance on the development of its securities regulatory system and later served as legal advisor to the Estonian Securities Board (now the Estonian Securities Inspectorate). Mr. Burke has published several law review articles on commercial law and legal and economic developments in Central and Eastern Europe.

Professor Robert C. Downs

Robert Downs has been a professor of law for sixteen years. He is currently teaching at the University of Missouri-Kansas City. He teaches and writes in the areas of securities law, corporate law, and the law of mergers and acquisitions. Prior to becoming a professor, Mr. Downs practiced law for ten years, specializing in securities law and corporate law. Professor Downs is a frequent commentator for CEELI on draft legislation from Central and Eastern Europe.

Professor Thomas Earl Geu

Thomas Earl Geu is a professor at the University of South Dakota Law School, where he teaches in the areas of transactional, capital formation, and organization law. He received his Juris Doctor from the University of Nebraska in 1983 and his Bachelor of Science in Economics and Finance from the University of Nebraska-Lincoln in 1980. He is a member of the American, South Dakota, District of Columbia, and Nebraska Bar Associations, where he serves as a member of several committees.

Professor Geu is an advisor to the NCCUSL Limited Partnership Drafting Committee for the ABA Real Property, Probate and Trust Section and has been an advisor to the Uniform Limited Liability Company Act and the Limited Liability Partnership Amendments to RUPA. He is also a moderator of the LNET-LLC electronic discussion group. He was co-author of the updates on Duncan, Lyons, and Geu, The Law and Practice of Secured Transactions for five years, and he has broad research interests. He practiced law for four years and was a law clerk for the United States Tax Court and the United States Court of Appeals for the Seventh Circuit. He is a frequent CLE speaker in the area of unincorporated entity law.

Professor Norman S. Poser

Norman Poser’s background includes six years on the staff of the United States Securities and Exchange Commission, where he was Assistant Director of the Division of Trading and Markets. He also served for twelve years as executive vice president for legal and regulatory affairs at the American Stock Exchange. Since 1980, he has been a professor of law at Brooklyn Law School, where he teaches securities regulation, corporations, contracts, and corporate finance.

Professor Poser served as a consultant concerning securities markets and securities regulation in Central America for the World Bank, in Colombia for the International Finance Corporation, in Venezuela for the Organization of American States, in India and Brazil for the United States Agency for International Development, and for the Government of Spain. He served for six months as a consultant to the Central Bank of Brazil, where he participated in the drafting of various securities regulations. Professor Poser is also the author of two books and numerous articles on securities regulation. He received his law degree from Harvard Law School and his Bachelor’s degree from Harvard College.

Max A. Stolper

Max Stolper was born in Vienna, Austria. He received both his Bachelors and Juris Doctor degrees, magna cum laude, from Harvard University, and he was a member of the Harvard Law Review. Mr. Stolper began his career with the firm of Sullivan & Cromwell in New York City and later served in various executive capacities with Deltec Panamerica S.A., an investment and merchant banking firm involved in Latin America. While he worked with Deltec Panamerica, he was often asked to provide advice to Latin American governments on capital markets legislation.

Since 1975, Mr. Stolper has practiced law in Washington, D.C., and he is currently a partner with Leonard Hurt & Parvin, P.C. His practice specializes in investment company, venture capital, and other securities law matters, with an emphasis on international financial transactions. Mr. Stolper is a member of the American and Inter-American Bar Associations, as well as the American Society for International Law.

Robert D. Strahota

Robert Strahota has been an Assistant Director in the SEC’s Office of International Affairs since September 1993. His responsibilities include management of the SEC’s technical assistance programs for emerging securities markets, including USAID-funded programs for Central and Eastern Europe and the New Independent States of the former Soviet Union. During 1992 and 1993, Mr. Strahota served as SEC Senior Adviser to the Polish Securities Commission and was awarded an Officer’s Cross for meritorious service to the Polish Republic. During 1991 and 1992, he was an Attorney-Fellow in the SEC’s Office of General Counsel. Mr. Strahota also is an Adjunct Professor at the Georgetown University Law Center, where he teaches a graduate course on Global Securities Markets.

Mr. Strahota received a Bachelor of Arts degree in Economics and a Masters of Business Administration degree with concentrations in Accounting and Finance from Cornell University and a Juris Doctor degree from The Catholic University of America School of Law. His professional experience includes nineteen years of private practice with the law firm of Kirkland & Ellis, where he specialized in securities, corporate, and partnership law, and eight years in the SEC’s Division of Corporation Finance. Mr. Strahota is a member of the District of Columbia Bar and the American Bar Association Sections of Business Law and International Law and Practice.

Analysis of the Draft Zagreb Stock Exchange Listing Rules for the Republic of Croatia

Introduction

Drafting Concerns

Cross-References

Terminology

Promotion of a Free Market Economy and Foreign Investment

Individual Rights, Democratic Ideals, and Comprehensiveness

Listing

Conditions for Listing

Sponsors

Disclosure

Form and Contents of Listing Particulars

Listing Particulars—Narrative

History and Description of Business

Management

Summary Financial Information

Capital Structure and Securities Being Listed

Listing Particulars—Financial Statements

Other Disclosure Matters

Omissions

Definition of Material Contract

Directors’ Responsibility and Compensation

Publication, Advertising, and Circulation of the Listing Particulars

Substantive Consideration

Audit Committee

Voting Rights

Post-Listing Obligations

Notification and Access to the Shareholder Register

General Obligation of Disclosure

Notification Relating to the Business and Notification Relating to Capital

Notification of Major Interests in Shares

Rights as Between Holders of Securities

Communication with Shareholders

Acquisitions, Disposals, Takeovers, and Mergers

Transactions with Related Parties

Directors

Purchase of Own Securities

Circulars