22-04-2013

Corporate Governance Issues Concerning All Business Entities

Authors

  • Eris Hysi, Attorney at Law,
    Senior Associate at Haxhia & Hajdari Attorneys at Law

Introduction

Corporate governance as developed by the Albanian commercial legislation through the relevant provisions deals with particular matters related to control, supervising, managing and compliance. However this concept is not specifically defined by the law, but particularly through doctrine and court practice. Albanian commercial legislation introduced the modern and mixed approach of corporate governance allowing the implementation of both Anglo-Saxon and German model of corporate governance. The model followed by each business entity is further defined by the existing relationship between external and internal stakeholders and Managing Body of the business entity. This relationship is subject of rules of corporate governance set by the law and those elaborated internally as a code of ethics or manual of operation by each business entity.

Which forms of business entities operate in Albania?

Law no. 9901, dated 14.04.2008 “On Entrepreneurs and Companies” (LC or law) provides four forms of organization of business entities in Albania:

  • Partnership;
  • Limited partnership;
  • Limited liability companies;
  • Joint stock companies

There are also other forms of organization of business entities as provided by law no. 9723, dated 03.05.2007 on National Centre of Registration and other applicable laws in Albania, such as:

  • Saving - lending companies;
  • Reciprocal cooperation companies;
  • Financial institutions (banks and non banking institutions)
  • Collective investment funds etc

According to the provisions of the relevant legislations each form of business entity mentioned above establishes rules for the management, control and separation of competencies relevant to all members of its structure. However with relevance to the personal companies, like the partnership and the limited liability companies, the corporate governance policies are not developed due to the close relationship existing between the shareholder and the managing body together with the difficulty of separation of the limited liability of the shareholders. On the other hand the Albanian law provides for the capital companies to be the business entities which have an interest in building up modern and efficient corporate governance process and procedures. It is essential for them to set up accurate rules of their organization, functioning, delegation of competencies and relationship between the shareholders and other stakeholders and the managing bodies of the entity. The limited liability and joint stock companies are the most recognized forms of business entities which require attention when dealing with the corporate governance issues, analyzed in the following.

Which model of corporate governance is applicable for business entities?

a) Model followed by Limited Liability Company (LLC)

The structure of the limited liability company consist of two bodies, the General Assembly of the Shareholders (GASH), which is the main decision making body and the administrator/s in charge with management and administration of the company. Concerning this type of business entity, the system of organization is simplified as the managing body, otherwise referred as administrator, is the sole executive and managing structure. The GASH controls and supervises the executive structure of the company, according to the competencies and authorities provided by the law and statute of each company.

Which is the competent body to appoint and remove the administrators of the LLC?

Article 95 of the commercial law states that the competent body for the appointment and removal of the administrator is the GASH. The commercial law does not specify the majority required by the General Assembly (GA) in order to appoint the administrator. Such matter is regulated by the provisions of the statute of each company. On the other hand for the removal of the administrator it requires a simple majority of votes, which according to the meaning of the article 95/6 is mandatory and is not subject of limitation or omission. In the practice, the statute provides the same majority for the appointment and removal of the administrator. The administrator is appointed for a 5-year mandate, which is renewable. The effect of appointment and removal of administrator begins with the registration of the respective resolution near the National Centre of Registration for Commercial Companies. However such effect should be specified in the resolution, as the registration process is aimed to make the resolution content known to third parties.

Who is elected as administrator of an LLC?

Article 95/1 of the relevant law provides that only individuals - physical persons - can be appointed as administrators of the LLC. The person eligible as an administrator may be a shareholder or a person not related to the company. Moreover the legislator provides some barriers limitation on the election of individuals, in order to avoid conflict of interest and to protect the company from individuals with potential risk of managing. Article (s) 13, 17 and 95 of law No 9901, provide (s) for the circumstances in which an individual is prohibited to hold this position. According to the article 13/1 an individual that has been convicted regarding a criminal offense, is not eligible as legal representative of the company for e period of 5 years from the date of conviction, so to protect the interest and the reputation of the company.

Other cases of limitation of mandate, aiming to eliminate the conflict of interest between the person holding the position of administrator and other structures of the company include conflicts in case of dual mandate in companies having a parent -affiliate relationship. This kind of limitation has as purpose to eliminate the abuse by the management which may have a conflict of interest when running the activity of the company or may have a financial relationship with other structures of the company. Finally a person cannot be selected (appointed) in more than two managing bodies or hold another controlling and / or managing posicion in other companies operating in the same sector of economy as the company in question. Such restriction is related to the principle of independence, loyalty and moreover for the protection of competition, stipulated further in article 17 of the law.

Which are the main responsibilities of the administrator?

The main competences of the administrator are stipulated in articles 95 96 and 98 of law No 9901. The administrator has the right and the duty to assure the running of the everyday activity of the company in accordance with the policies and strategies established by the GASH. The main duties of the administrator are mainly related with the disclosure and compliance with the regulatory system implemented in the specific sector of economy and moreover the protection of financial interests of shareholders. The administrator is also vested with the quality of legal representation of the company which allows him/ her to enter into a relationship with any third party - public or private. The requirement of loyalty and skills and duty care are essential when acting as manager and administrator of the company, as specified in article 98 of the law.

How to controll the managing body of the company - how to define the relationship between the managing body and the stakeholders of the company?

The control over the managing structure of the company is made by the shareholders of the company together with the other stakeholders of the company. There are mechanisms to control and supervise the activity of the managing body as defined in article 91 and 92 of the law, such as the special investigation of the outgoing activity of the company or the process of nullifying an illegal decision or action of the administrator. Through such rights, the shareholders or the creditors may identify possible responsibilities of the managing body. Article 98 of the law provides that the administrator shall be held responsible to compensate the company and the shareholders for the damages due to illegal actions and noncompliance on his duties. However the company shall be held responsible for the obligations towards its creditors. The GA has control over the management, however it should not interfere with managing policies and strategies to be implemented by the administrators.

b) Model followed by Joint Stock Companies (JSC)

The Albanian commercial law recognizes both Anglo Saxon and German system of corporate governance, especially for joint stock companies.

One tier system

Article 154 to 165 of the commercial laws regulate the one tier model of management and control of the company. According to these articles the organizational structure of the joint stock company consists of a sole managing and controlling body which is the Board of Administration (BA), while the main decision making body is the General Assembly of the Shareholders. The BA has an odd number of members from 3-21 with non-executive and executive powers called respectively members and administrators. It is the same structure of the company that exercises controlling, supervising authority and compliance with regulatory system, which at the same time administers and manages the activity of the company.

Which is the competent body to appoint and remove the Board of Administration and the Administrators in one tier system?

The members of the BA are appointed and removed from duty by the GASH in the limit of members as provided above. In case the incorporation act of the company has not provided for a different majority, the member of BA is appointed or removed by simple majority of votes. The term of duty of BA members is about a 3 - year and renewable. The administrators are appointed for a 3 year term. They are appointed and removed by the BA at any time. No legal reason is required for their removal. The BA with a simple majority of votes can appoint as administrator an independent individual or any of its members. The appointment and removal is effective after the publication of the respective decision at the Commercial Registry.

Two tier system

The two tier model of management and control, or otherwise said the German model is provided by articles 166 and 167 of the commercial law. In this case the company has two separate bodies having each separated supervising and managing competencies and a General Assembly of the Shareholders which is the main decision body. In two tier systems, it is the Supervisory Council (SC) which is vested with supervisory, controlling competencies and compliance with regulatory system and in the other hand the Administrator/Administrators are the executive and managing body.

Which is the competent body to appoint and remove from duty the Supervisory Council and Administrators in a two tier system?

According to article 167 of the law, the members of the SC are appointed and removed from duty through the same procedure provided in respect to the members of the BA. The SC is appointed for the same term of duty and has the members of the BA. Concerning the appointment and removal of the administrator in a two tier system, article 167 of the law provides two models -the German and Italian. According to the German model, the administrators are appointed and removed by the SC. This is a model that distinguishes the ownership and control. In Italian model, the administrators are appointed and removed by the GASH, which means direct control of the owners.

Common characteristic and differences of both systems

Who is elected as a member of the BA, SC and Administrator?

The member of BA is an individual selected among shareholders, or employees or an independent person. The last one could be a person outside the structure of the company and not subject of any relation with the company. According to article 158 of the law, the majority of the Board members have to be independent and not involved in managing maters, so non executive members. In contrast with the two tier system, the minority of members of BA may also be administrators of the company. Nevertheless, not every person has the right to be selected as a member of BA. There are limitations imposed by law - article 13 and 156 - which exclude convicted persons or those having any relationship that may allege a conflict of interest. A person cannot hold more than two mandates as member of BA. Also it is not allowed that the non executive member has a role as an administrator in parent - affiliate companies and vice versa, but in practice such limitation is not applied. Concerning the qualification of members for SC, the same rules apply, with a notable difference. The members of the SC shall be not allowed to have managing authorities or being administrators of the company. On the other hand, the employees of the company may participate as members of the SC. As to administrators, the law provides that only individuals may be appointed. Administrators in one tier system may be a member of BA, whereas in a two tier system the administrator is not allowed to be a member in SC. For the limitations on the persons holding the position of administrator, see above: LLC,

Which are the main responsibilities of BA, SC and administrators?

According to article 154, the BA is the structure of the company vested with two types of competencies which are, on one hand, those of controlling and supervising and, on the other hand, those of managing nature. In contrast, the SC in the two tier system only controls and supervises the implementation of managing strategies from the part of administrators. For the responsibilities of members of BA, SC and administrators see above: the administrator of the LLC. According to provisions of articles 163, 164 and 167, the members of BA, SC and administrators are jointly liable. The members of the SC are held liable if they fail in any way to determine the violation of an administrator or relevant liabilities.

How to controll the supervising and managing body of the company - how to define the relationship with the stakeholders of the company?

The shareholders of the joint stock company in the one tier system have a direct control over the BA. However, the administrator of the company is not directly controlled since its appointment and removal is made only by the BA. In the two tier system, the shareholders directly control the SC and also the administrator (Italian model). In other cases, the ownership does not control the administrator who is under the control of the SC (german model).

According to articles 150 and 151 of the law, except from the shareholders, there are also other external stakeholders - creditors of the company that define a relationship of power over the managing bodies of the company. This relationship is established by mechanisms of investigation and actions against illegal decisions of the managing bodies. In both models of corporate governance for joint stock companies, business entities are oriented on the election of individuals having independence from another structure of the company. This is a modern approach to corporate governance meaning that independent persons and professionals are considered as a key element for good management and profit raising scope of a business entity. However, in practice there still exists the problem of centralization of ownership and control on running the activity. This policy is comprehensible for small and medium enterprises, but nowadays big enterprises, adopting the form of LLC, also apply for the centralized system of control and management. In our opinion, despite some advantages the centralized system of management should no longer continue. The recent development of the large and international firms in Albania requires a modern model of corporate governance based on independence, professionalism and experience of managing bodies.

GREEK LAW DIGEST REPUBLIC OF ALBANIA MINISTRY OF INTEGRATION Union of Chambers of Commerce and Industry of Albania
Nomiki Bibliothiki ALBANIA INVESTMENT DEVELOPMENT AGENCY Foreign Investors Association of Albania
     

 

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