The Swedish Shareholders’ Association Corporate Governance Policy – guidelines for better control and transparency for owners of companies quoted on the Swedish stockmarket Address: SE-113 89 Stockholm Website: www.aktiespararna.se Phone: +46 8 50 65 15 00 Telefax: +46 8 50 65 15 71 Foreword Foreword In October 2001 the Swedish Shareholders’ Association, Aktiespararna, pre- sented a new version of its Corporate Governance Policy. The new policy represents an augmentation and tightening up on a number of issnes compa- red with the Guidelines for better control and insight into companies quoted on the stockmarket that the Swedish Shareholders’ Association presented in March 1993. At that time the Swedish Shareholders’ Association was an early contributor to the corporate governance debate. Shortly before that, in December 1992, the important Cadbury report had been published, the recommendations of which have had a great impact, both in the UK and the rest of the world. The Swedish Shareholders’ Association’s new Corporate Governance Policy will provide important support in our coverage of Shareholders’ Meetings and in the assessment of various corporate deals, share issues, etc. We will also strive to promote knowledge and acceptance of this policy throughout the Swedish stockmarket. Stockholm 26th October 2001 The Swedish Shareholders’ Association Sveriges Aktiesparares Riksförbund Sten Trolle Lars-Erik Forsgårdh Chairman Managing Director 3 Contents International overview 7 6.5.5 Evaluation 25 1. Transparency for the shareholders and opportunities to 6.6 New share issues in subsidiaries 25 exercise control 9 6.7 Information to shareholders 26 1.1 The Shareholders’ Meeting 9 6.7.1 Information in the notice of meeting 26 1.1.1 The Shareholders’ voting rights 9 6.7.2 The annual report 27 1.1.2 Conduct of the Shareholders’ Meeting 10 6.8 The auditor’s role 28 1.1.3 Participation in the Shareholders’ Meeting at a distance 11 6.9 The company’s responsibility after a decision at the 2. The company's capital 12 shareholders’ meeting 28 2.1 New share issue 12 6.10 Amortisation of staff loans 29 2.2 Board authorisation for directed share issues 12 6.11 Other incentive schemes 29 2.3 Buyback / re-selling of own shares 12 7. Information to the stockmarket 30 2.3.1 Decision processes 13 7.1 Investor relations, IR / Investor contacts 30 2.3.2 The view of the Shareholders’ Association 13 7.2 Information to the market 30 3. The Board of Directors 15 7.3 Mass media channels / Internet 31 3.1 The composition of the board 15 7.4 Annual report and interim report 31 3.1.1 Nomination Committee 15 7.5 Accounting of goodwill 32 3.2 The board’s responsibility 16 7.6 Selective information 32 3.3 Planning and evaluation of the work of the board 17 7.7 Prospectus 32 3.4 Participation by the board in incentive schemes 17 8. Public takeover bids 34 4. Remuneration to management 18 8.1 The offer 34 4.1.1 Key executives’ remuneration and benefits 18 8.2 The mandatory bid rule 35 4.1.2 Remuneration Committee 19 8.3 Compulsory acquisition 35 4.2 Remuneration to the Managing Director 19 9. Summary 37 5. The auditors 20 5.1 Audit committee 20 Appendix: 6. Incentive schemes for management and employees 21 Criteria for the magazine Aktiespararen’s Annual Report Competition 39 6.1 The view of the Swedish Shareholders’ Association 21 6.2 Stock option plans 22 6.3 Call option plans 22 6.4 New share issues directed at related parties – the LEO Law 23 6.5 Terms of the new share issue 23 6.5.1 The size of the issue 23 6.5.2 Allocation 24 6.5.3 Duration and interest 25 6.5.4 Terms according to prevailing market conditions 25 4 5 Introduction Introduction The Swedish Shareholders’ Association’s guidelines are directed at compa- Background nies whose stocks are quoted on the stockmarket, but should also be applica- The aim of the Swedish Shareholders’ Association in producing these guideli- ble to other companies with a spread of ownership, for example in companies nes is to increase the individual shareholder’s confidence in the Swedish that have previously been quoted on the stockmarket or that are aiming at a stockmarket and the Swedish stock exchange. By ensuring good control and stockmarket listing. transparency, confidence in the boards and management of companies quoted on the stockmarket will also increase. International overview If there is to be a positive development of Swedish trade and industry it is Corporate governance or owner control, as the concept is referred to in Sweden, essential for companies to be provided with a sufficient supply of risk capital. is an important international issue. The Cadbury report was the first of a number A well-functioning stockmarket is of great importance from society’s econo- of reports from institutions and organisations in Europe within this area. The mic viewpoint. One characteristic of a well-functioning stockmarket is a good Cadbury report emphasises the importance of institutional investors showing turnover in the shares of the quoted companies, coupled with a large number interest in and responsibility for the company and exercising their influence. of individual shareholders. The individual shareholders as a group represent a This work has since been carried further through the Greenbury report in which great resource in terms of new risk capital and long-term ownership. the issue of remuneration to the board and key executives is dealt with as well All those involved in the stockmarket, trade and industry, institutions and as the Blue Ribbon report concerning audit committees. 1998 saw the presenta- private owners have a common interest to work to promote a broadening of tion of the Hampel report which further develops Cadbury’s thoughts and also individual share ownership. An increased individual share ownership presuppo- contains new ideas. Among other things Hampel recommends that larger institu- ses confidence in the ability of boards and management to drive and develop tional investors should have a long-term perspective in regard to investments. companies and in the way they manage the companies’ assets. Transparency is With the aim of fostering effective corporate governance and an interac- a vital prerequisite if the owners are to be able to exercise significant influence. tion between various groups of interested parties the OECD in 1999 drew up A number of incidents have illustrated the need for common and clear norms the report “OECD Principles for Corporate Governance”. This document is regarding the behaviour of boards and management in relation to shareholders. important since regard will be paid to it in the design of regulations in the 30 It is against this background that the Swedish Shareholders’ Association has member states and it contains recommendations about items that include the drawn up guidelines for better control and transparency for the owners of com- shareholders’ rights and obligations, equal treatment of shareholders, insider panies quoted on the stockmarket. The guidelines were published for the first trading, the duties of the board, the dissemination of information and audit. time in March 1993 and are based, among other things, on the recommenda- The publication of this document was also a clear indication that the OECD tions that were drawn up by a committee of the London Stock Exchange under considers corporate governance important. the leadership of Sir Adrian Cadbury and published in 1992, together with its The International Corporate Governance Network, ICGN, is a network for subsequent reports. institutional investors and individual shareholder organisations working to The recommendations in these reports are considerably more comprehen- improve corporate governance in companies. ICGN has formulated global sive and detailed than the preceding guidelines. The Swedish Shareholders’ corporate governance principles taking as a starting point the principle that all Association’s guidelines highlight questions that are considered to be of spe- shareholders should be treated equally in relation to invested capital and that cial importance for Swedish companies quoted on the stockmarket. the necessary circumstances for exercising voting rights should be improved. The Swedish Shareholders’ Association also shares the values expressed in Further, the ICGN emphasises that institutional investors should have an obli- the report: “OECD Principles for Corporate Governance” (OECD, Paris, 1999). gation to exercise their voting rights. 6 7 Introduction Transparency for the shareholders and opportunities to exercise control The Brussels-based research organisation Centre for European Policy 1. Transparency for the shareholders and opportunities Studies, CEPS, in 1995 published a report commissioned by the EU on the topic to exercise control of corporate governance in Europe that resulted in a number of recommenda- The importance of shareholders to the company is something that has come tions. The basic goal of a corporate governance system, according to CEPS, is increasingly into focus in both national and international debate. Shareholders to achieve a consensus between the main parties involved. CEPS emphasises the are necessary to a company in more ways than one. Shareholders contribute importance of the shareholders, in particular the main owners, respecting the capital to the company but are also the company’s ultimate representative and company’s need of long-term growth and stability and that minority sharehol- an important driving force in the company’s development. It has been shown ders are treated fairly and equally, particularly in takeover situations. that with active shareholders come successful companies1. Share ownership the In the USA the corporate governance question was raised at an early stage. refore also implies a responsibility to exercise those voting rights that the shares An example of this is that US legislators as long ago as 1974 introduced confer. Ownership responsibility is both a right and an obligation. ERISA, the Employee Retirement Income Security Act. The law is aimed at The shareholders have a right to take part in the decision-making process and private pension fund managers but has increasingly begun to be seen as a norm use their voting rights, and also to receive correct and clear information from for regulating management assignments for other types of institutional owners. the company. Larger shareholders also have an obligation to participate in sha- ERISA lays down the fund managers’ obligations, among them the obligation reholders’ meetings and vote for their shares, as well as to make clear to other to act with care and loyalty and also an obligation to vote for the shares that shareholders what their attitudes are to questions concerning the company. have been entrusted to them. Also through the activities of the large US pension fund the Californian Public Employees’ Retirement System (CalPERS) in the 1.1 The shareholders’ meeting corporate governance area the question of owners’ responsibility and rights The company’s highest decision making body is the shareholders’ meeting, at have come to be very important in the USA. CalPERS has developed interna- which the owners together decide on important issues for the company. It is tional corporate governance principles that mean that every company should the shareholders’ meeting that appoints the board, which is responsible for the follow the national principles that have been established in respective countries. management of important matters concerning the company. The shareholders’ These are designed among other things to make it possible for shareholders to best opportunity to exercise influence over the company is to use the right to monitor the board, above all through exercising voting rights. ask questions, receive answers to these questions, and to vote at the sharehol- Finally, we would also like to mention the French Vienot report, the second ders’ meeting on questions concerning decisions about the company’s results, edition of which from 1999, as does the ICGN, recommends that boards should the election and remuneration of the board and auditors, and to examine the evaluate their work on an annual basis. It has been decided within the EU to carry board’s management. The company has an obligation to try to ensure that as out a major mapping out of the corporate governance documents that have so far many shareholders as possible can take part in the shareholders’ meeting and been published within the EU. This work is expected to be completed by the are informed about the decisions that are to be made there. The shareholders’ beginning of 2002. The work within the EU has as an aim to draw up common meeting is the occasion when the company’s shareholders have the opportuni- rules in the area, not least for those countries that are aiming at membership of ty to meet and make decisions concerning the company. the Union. In the former East European states there is in a number of cases a lack of understanding for basic principles regarding minority protection and the like. 1.1.1 The shareholder’s voting rights A number of international research reports show that active ownership gives increased returns. This has led to a greater interest in corporate gover- The Swedish Shareholders’ Association’s attitude in principle is that every nance issues among institutional investors. 1 California Public Employees’ Retirement System, ”Why Corporate Governance Today?” Steven L. Nesbitt, ”Long- Term Rewards From Shareholder Activism: A Study of the ”CalPERS Effect”. 8 9 Transparency for the shareholders and opportunities to exercise control share in the company should be accompanied by one vote. Respect for The board, management and auditors should attend the meeting and be ownership rights demands that the changeover to one and the same class of well prepared for questions that might be asked by the shareholders at the stock must always take place voluntarily. Shareholders holding shares with meeting. The shareholders must be given the opportunity to ask questions and full voting rights have normally paid more for their shares than those who comment on the items on the agenda before the meeting moves to the deci- have shares with lesser voting rights. sion. The MD’s speech should always be timetabled before the decision con- cerning the adoption of the results and balance sheets. 1.1.2 Conduct of the shareholders’ meeting The shareholders’ meeting should be presided over by a competent To make it easier for the shareholders to examine the company’s activities, the Chairman for the meeting. If criticism of the board is expected it is not suitable interim report, the notice of the closing of the books and the annual report for the Chairman of the board to assume the role of Chairman for the meeting. should in good time contain the dates when information will be distributed to shareholders during the coming year and the date of the shareholders’ meeting. 1.1.3 Participation in the shareholders’ meeting from a distance The notice of the shareholders’ meeting should contain a complete and num- The company should strive to make it possible for as many shareholders as bered agenda and, as far as possible, proposals for decisions. In special matters, possible to participate in the shareholders’ meeting. for example directed issues, the background to the proposals should also be A problem for many shareholders is that the meeting is held somewhere that reported in detail. The notice of the meeting should also be issued in English. is far from where they live. One way of solving this problem is to broadcast the The notice of meeting should be posted on the company’s website on the Shareholders’ Meeting to several locations at the same time. The Swedish Internet and before that there should be information there saying when the Shareholders’ Association is positive to the conduct of the meeting in this manner notice of meeting will be posted. provided that the possibility to hear, see and vote at the shareholders’ meeting is Ahead of extraordinary shareholders’ meetings it is of particular importan- so good that it is on a par with being present at the meeting in person. ce that notice is given in such a way that there are no suspicions that the com- Another way of giving those shareholders who cannot attend the meeting a pany has tried to withhold information from the shareholders. possibility to receive the information given there and follow the debate the mee- The shareholders’ meeting is in the first place a forum for the shareholders. ting gives rise to is to broadcast the meeting via the Internet. The Swedish However, it often happens that journalists and others who are not shareholders Shareholders’Association does not consider the risk of non-shareholders gaining want to attend the meeting and receive the information that is given there. It access to the proceeds of the meeting as a problem. The shareholders’ meeting in might be appropriate to allow the shareholders’ meeting to decide on a guest list companies quoted on the stockmarket should in principle be open. Information that has been drawn up in advance on which are listed those who are not share- that could affect the share price that is presented at the Shareholders’ Meeting must holders who would like to attend the meeting. The Swedish Shareholders’ in accordance with stock exchange regulations also be given to the market in gene- Association is of the opinion that the decision to allow non-shareholders to par- ral. In this situation too, however, those shareholders present at the meeting should ticipate in the shareholders’ meeting can be made by a simple majority. be given an opportunity to decide whether the meeting should be broadcast on the The shareholders’ meeting should be held in Swedish and the material that Internet or not. A decision of this nature should be made by a simple majority. is presented should also be in Swedish. In those cases where the presentation The Swedish Shareholders’ Association is of the opinion that shareholders or questions need to be formulated in English there should be simultaneous who take part in the shareholders’ meeting at a distance should if possible be interpretation of the meeting. given the opportunity to vote. Voting at a distance however requires two-way The Shareholders’ Meeting should be arranged at a time that makes it pos- communication between those taking part at a distance and the physical mee- sible for as many shareholders as possible to attend. ting. 10 11 The company’s capital 2. The company’s capital has been limited in several respects. The new provisions in the Companies’ 2.1 New share issue Act stipulate, among other things, that acquisition may only take place within In all developing companies a need for further capital will arise sooner or the framework of the company’s own free capital and that the aggregated hol- later. In the case of new share issues, new shares are subscribed to in ding of the company’s own shares may amount to at most ten percent of all exchange for cash, or what is known as capital contributed in kind. The basic shares in the company. The company cannot exercise any voting rights for rule is that in the case of an increase in share capital the shareholders have reacquired shares. preference to the new shares ahead of outsiders. Thus in the case of new share issues, it is the existing shareholders who should in the first instance be 2.3.1 Decision processes invited to subscribe to the new shares and this principle should only be depar- Any decision concerning acquisition of the company’s own shares should be ted from in special circumstances. made by the shareholders’ meeting. The shareholders’ meeting can also authorise the board to make a decision 2.2 Authorisation to the board to carry out directed new share issues concerning the acquisition of the company’s own shares. A decision by the The Swedish Shareholders’ Association has noted that it has become increa- shareholders’ meeting about acquisition of the company’s own shares or con- singly common to propose at the shareholders’ meeting that the board be cerning authorisation for the board to make such a decision is only valid if it given the authority to decide on new share issues, thus waiving the sharehol- is consented to by shareholders with at least two thirds of both the shown ders’ preferential rights as stated in the Swedish Companies Act (Aktiebolags- votes and the shares represented at the shareholders’ meeting. lagen) chapter four, paragraph 14. Authorising the board to make decisions The notice of meeting posted ahead of the shareholders meeting that is to deal that are normally the duty of the shareholders’ meeting should only be done with a proposal concerning the acquisition of the companies’ own shares or a in exceptional circumstances. The purpose of the authorisation could be to proposal concerning authorising the board to make a decision concerning such an remedy an acute liquidity crisis or to effect a corporate acquisition. Departure acquisition should state the main contents of the proposal and the purpose of the from the shareholders’ preferential rights is an encroachment on the rights of acquisition. The proposal for the decision about the acquisition of the company’s shareholders and it is therefore necessary that the shareholders be given detai- shares or the authorisation of the board to make such a decision should be made led information concerning the authorisation in the notice of the meeting. The available at the company for shareholders for a period of at least two weeks Swedish Shareholders’ Association considers that the notice should clearly state before the shareholders’ meeting. If the annual report is not to be dealt with at the what that or those new issues the board, with the support of the authorisation, meeting, certain documents should be included with the proposal, among them a can decide on, are to be used for and who shall be allowed to subscribe, and the copy of the annual report containing the latest approved balance sheets and profit main subscription conditions, together with how great a dilution of the share- and loss account statement, together with a statement from the auditors about holders’ ownership the new share issue could lead to. A greater dilution than ten events after yearend. The reason for this demand for information is that the sha- percent should not be accepted. reholders must be able to judge the company’s current financial position. 2.3 Buyback / re-selling of own shares 2.3.2 The view of the Swedish Shareholders’ Association On 10th March 2000 a possibility was opened for Swedish public limited lia- The Swedish Shareholders’ Association considers that the buyback of the bility companies to buy back and re-sell their own shares. The scope for this company’s own shares can be justified in three cases. The first case is if a company really has a strong financial standing and cannot see any other interesting investment alternatives. 12 13 The company’s capital The Board of Directors In the case of a reacquisition of the company’s own shares the starting 3. The Board of Directors point must be that the balance of power within the company is not affected. The Shareholders’ Meeting is the company’s highest organ and decides on a The decision must, over and above the demands placed by the Companies number of important questions. Act, clearly state to what extent the relationship between A and B shares will Management of the company’s affairs is entrusted to the board by the share- be changed through the reacquisition. It is, further, important that the buyback holders’ meeting. The board in its turn appoints the company’s Managing of the company’s own shares is not used to influence the outcome of already Director who is responsible for the company’s day-to-day management. The outstanding options schemes. Managing Director has other key executives in the company to assist him. The second situation in which a buyback can be motivated is when the company is to finance a current or future acquisition with the help of reacqui- 3.1 The composition of the board red shares. The board should be composed in a balanced way and members’ competence The third situation in which an acquisition can be motivated is when the should be of relevance to the company. The board members should be self-gover- shares are to be used in a staff options scheme. A procedure such as this does ned and independent in respect of the company’s management. The board should not necessarily entail a dilution of the company’s ownership. normally consist of 6-9 people. No employees apart from the Managing Director The Swedish Shareholders’ Association is opposed to a later sale of reac- should sit on the board. A Managing Director who is leaving that position should quired shares on the stock exchange or marketplace and considers that reac- normally not be appointed as Chairman or remain on the board. It is not suitable to quired shares should be deregistered. This is to prevent the possibility for a appoint a so-called working Chairman, nor that the board Chairman be appointed company’s management to use the company’s funds to conduct unfair share group chief executive. The board should engage a permanent secretary, preferably speculation. This could seriously harm confidence in the Swedish stockmar- a corporate lawyer. It is very important that the members of the board are involved ket. The only acceptable alternative to deregistration of reacquired shares is to in the development of the company’s stock through themselves being shareholders. use the shares as payment currency in a company acquisition, or in staff options schemes. If the purpose is to finance an acquisition of another compa- 3.1.1 Nomination Committee ny, a sale of the shares on the stock exchange or market place could be moti- To help ensure there is a sound selection process and to guarantee quality and open- vated in certain circumstances. ness in the nomination process leading to the election of the board, the Swedish Shareholders’Association recommends that every company quoted on the stock- market should set up a nomination committee. A nomination committee increases openness around board members and individual shareholders are given a means whereby they can communicate their suggestions. Further, a nomination committee ensures that serious proposals that are put forward in time are considered. The nomination committee should comprise 3-5 members and be appointed by the company’s owners at the shareholders’ meeting. The members of the nomina- tion committee should reflect the company’s different categories of owners. At least one member should be linked with the smaller owners. The Chairman of the board should also be on the committee. Members should not be employees of the company. The committee members should be presented in the nine-month report and in the annual report. Their costs should be covered by the company. 14 15 The Board of Directors The notice of a general shareholders’ meeting where the board is to be ny’s owners and other interested parties is characterised by openness and cor- elected should include the names of people the committee intends to propose rectness and that an annual evaluation of the board’s and the individual board and information about them. Representatives of the nomination committee members’ contribution to the board is carried out. should always be present at the shareholders’ meeting and be prepared to explain the reasons the committee’s proposals are based on. 3.3 Planning and evaluation of the work of the board The nomination committee should also deal with the question of remune- The board is legally obliged to draw up a work agenda, directive to the MD ration to the board members. The nomination committee should prepare and and reporting directives, the contents of which should be adapted to the indi- put forward proposals for directors’ fees. The shareholders’ meeting must be vidual company’s circumstances. given a clear account of all remuneration from the company to the board of The board should annually evaluate its work and check that the work agen- directors. The nomination committee should be obliged to explain the reaso- da, the directive to the MD and the reporting directives are being followed. ning behind their proposals at the shareholders’ meeting, if asked to do so. The nomination committee should also be given the opportunity to check, in good time ahead of the general shareholders’ meeting that the work of the 3.2 The board's responsibility board has been conducted in accordance with the established guidelines. The members of the Board should act with great thoroughness and care in the The nomination committee should evaluate both the work of the board as a best interests of the company and all the shareholders. The members of the whole and the contributions of individual board members. This will give the nomi- board should have the capacity to make independent and objective judgements nation committee a basis on which to found a proposal for a well-constituted and of the company’s operations, especially in relation to corporate leadership. competent board. The nomination committee can then ahead of the shareholders’ In order to be able to fulfil the responsibilities, the members of the board should meeting give reasons for why board members should be re-elected or replaced. have access to correct, relevant and current information. If necessary, in matters of importance for the company, individual board members should have the right, at 3.4 Participation by the board in incentive schemes the cost of the company, to seek information and advice from independent sources. The Swedish Shareholders’Association considers that as a general rule the board Board members should devote sufficient time to their board assignment. should not take part in incentive schemes for employees. Board members should This means, among other things, that members should not sit on more than 5- instead be direct owners of shares. In many smaller developing companies the 6 boards. The Managing Director of a stockmarket company should not have board members’ competence and involvement in the company is a prerequisite for more than two board positions in other companies. the company’s development, while at the same time the economic resources needed The owners should ensure that the board takes responsibility for the sha- to attract qualified board members are lacking. In some cases, therefore, there is a ping and development of the strategic management of the company, the busi- need to pay a fee to these members in the form of subscription warrants. The ness idea, goals, risk policy, budgets and business plans, as well as deciding Swedish Shareholders’Association considers that in exceptional cases it can be per- on major investments, acquisitions, and divestitures, the appointment and, if mitted for even the board’s existing and future members to receive subscription necessary, replacement of in the first place the Managing Director. Further, warrants in those cases where this happens at the suggestion of an independent the board shall be responsible for steering and control as well as compensa- nomination committee appointed by the shareholders’ meeting. An incentive sche- tion and reward of the company’s management. The board is also responsible me of this nature must be designed by a valuation institute commissioned by the for ensuring that the company’s internal and external accounting fulfils the nomination committee so that there can be no rise to the suspicion that the board is highest possible requirements concerning, among other things, audit, control involved in the proposal. It is, in addition, important that the programme is desig- and risk management and for ensuring that communication with the compa- ned in such a way that it will not be influenced by individual events during the year. 16 17 Remuneration to management 4. Remuneration to management 4.1.2 Remuneration committee 4.1.1 Key executives’ remuneration and benefits The board should appoint a remuneration committee consisting of three repre- The board, or the remuneration committee appointed by the board (see sentatives from the board. This committee should be responsible for ensuring below), should both determine the salary and other conditions of employment that comprehensive and well thought through contracts are drawn up with the for the Managing Director and the principles for salary scales and other con- Managing Director and other key executives. The board has the ultimate ditions of employment for other people involved in corporate management. responsibility for the company’s remuneration policy and the total costs for this. This process thereby increases the likelihood that these matters will receive a The remuneration committee should also be responsible for ensuring that balanced and thorough treatment. principles for salary structures and other terms of employment are also drawn Information should be given in the annual report concerning the principles the up for other people in the corporate management. This increases the likeli- company applies when it comes to periods of notice, severance pay, pensions and hood that these matters will receive a balanced and thorough treatment. other benefits for the Managing Director and other key executives. Information It is the remuneration committee and in the last instance the board that decide should also be given regarding bonus payments and other similar results-based on salary levels and other terms of employment for the company’s key execu- remuneration. The recommendations of the Industry and Commerce Stock tives, in the first place the Managing. Exchange Committee (Näringlivets Börskommitté) concerning benefits to key executives apply in this respect from and including 1995 for companies that are 4.2 Remuneration to the Managing Director registered on the Stockholm Stock Exchange (Stockholms Fondbörs). Remuneration to the Managing Director and other key executives should be For those not covered by existing legislation concerning security of sufficient to attract and keep leaders of the right competence to run the com- employment it would appear that there is generally a need for special employ- pany well. Remuneration should reflect the importance of the post and the ment contracts. These agreements should regulate among other things the responsibility of the person concerned. Salaries for the company’s key execu- conditions that apply if the company wishes to rapidly remove people from tives can well be performance-based. employment. Examples of other similar situations are cases when the corpo- If the company’s board wishes to give notice to a Managing Director on rate leadership has the right to terminate employment contracts on account of account of unsatisfactory performance, serious differences of opinion, changed a changed ownership relationship. For the company’s part, this means there is ownership structure or the like, the Managing Director should receive severance a latent exposure risk in regard to costs for changing the corporate leadership. payment that normally does not exceed two years’ basic salary including salary These commitments can amount to considerable sums. under notice. The severance pay should not include any bonus. There can be what The shareholders and the market have a legitimate interest in knowing is known as a settlement procedure, but this should not be used during the first how much the total exposure amounts to. It is the job of the auditors to scruti- twelve months after notice has been given. Severance pay should not be paid if the nise all such contracts. The value of the total remuneration of this nature that Managing Director resigns on his own initiative or has seriously mismanaged his the company/group may have to pay out for the Managing Director and cor- assignment. The Managing Director should receive pension benefits based on sala- porate management should be particularised in the annual report. ry and qualification period. Pension after 65 can be paid according to a work-rela- In accordance with the rules of the stock exchange contract, the sum of the ted superannuation plan (Swedish ITP), a guideline being a remuneration of about board members’ fees and other remuneration must be stated in the annual 50 percent of basic salary. The corresponding rules can apply between 60 and 65 accounts, including that which issues from subsidiaries and associated com- years of age, providing there is a reciprocal right for the parties to claim retire- panies. The fee and any other remuneration to the Chairman of the board ment. Other key executives can also benefit from such pension terms as applicable. should be stated in a separate account. 18 19 The auditors Incentive schemes for management and employees 5. The auditors 6. Incentive schemes for management and employees 5.1 Audit committee The interest in various forms of incentive schemes for company management To assure the quality of the audit and to improve contacts between the board and employees has in recent years increased strongly among the Swedish and the company’s auditors an audit committee should be set up, thereby companies quoted on the stockmarket. Internationally, incentive schemes are giving the auditors’ principals, the shareholders, a better guarantee that their a common occurrence, especially in countries such as the USA and the UK. interests are safeguarded. The board should appoint an audit committee from Investors often place great importance on the management owning options in among board members who are not employees of the company. The commit- the company. The Swedish Shareholders’ Association is of the opinion that tee should consist of at least three members and can co-opt further suitable there is a great need of guidelines that balance the interest between the share- persons. holders, management and other employees. The audit committee should be a sub-committee of the board and does not These guidelines are concerned primarily with the issue of warrants for exempt the board from any responsibility. The audit committee’s members new subscriptions (subscription options or warrants) or convertible bonds should be presented in the annual report. (convertibles) through directed new issues. With the term employees is meant, if nothing else is stated, both key executives and other employees. The duties of the audit committee should be: In the spring of 2001 major institutional owners together drew up ● To, on behalf of the board and nomination committee, take part in the pro- “Guidelines for information to the shareholders about incentive schemes in curement of and furnish proposals as to the choice of auditors; stockmarket companies”. The Swedish Shareholders’ Association agrees with ● To during the year maintain contact with the auditors on a continuous these guidelines but has in certain cases farther-reaching viewpoints concer- basis with the aim of among other things checking that the company’s ning the design of the schemes. accounting, both internal and external, fulfils the demands that are placed on a company quoted on the stockmarket; 6.1 The view of the Swedish Shareholders’ Association ● To discuss the extent and focus of the audit work; The Swedish Shareholders’ Association considers it is good that companies ● To deal with any divergence of views between management and the audi- try to increase the involvement of employees by making them long-term sha- tors; to take responsibility to see that any important remarks made by the reholders in the company. The best way of achieving this is through offering auditors come to the attention of the entire board. Minutes of the audit the employees the opportunity to invest regular savings in the company’s sha- committee’s meetings should be sent to all members of the board. res. Over and above this there are further ways of giving the employees an incentive to increased involvement, for example through convertibles or war- rants, call options in respect of existing shares, synthetic options, profit sha- ring foundations or bonus programmes linked to the company’s development. Through directed issues the company can issue convertibles and warrants to employees. This is a good way of increasing involvement among employees and in the long term offering them part ownership of the company. Options schemes and convertible loans that are directed at the employees are often explained as being offered because they are a cheap way for the company to motivate employees and make them loyal to the company. The schemes do not involve any direct costs for the company, the cost is instead transferred to 20 21 Incentive schemes for management and employees the shareholders who pay with the dilution that the issue brings with it. A pre- 6.3 Call option plans condition is therefore that the issue takes place in accordance with prevailing The price and other terms for such call option plans as a main owner can market conditions and that the scheme can generate value for the sharehol- issue on existing shares must be based on terms that are in accordance with ders. The starting point must be that the issue in the long term can be judged the current market conditions. Call options issued by the main owner have the to be to the advantage of both the old shareholders and the employees. advantage that no dilution effect occurs. However a conflict of loyalties could The Swedish Shareholders’ Association is positive to what is known as the arise between different owner interests. Information about the call options pilot school, which involves key executives owning shares in the company. issued should immediately be conveyed to the market and also be summari- This is desirable since it increases management’s involvement and will to sed in the company’s annual report. work in their own company. The starting point must however be that manage- ment should be allowed to share in the future growth that they themselves are 6.4 Issues directed at related parties – the LEO law3 party to creating. An offer should thus not represent a reward for past perfor- The possibility to waive the shareholders’ preferential rights to the benefit of mance2.To maintain the confidence of the stockmarket it is of particular the employees is regulated by what is known as the LEO law. This law came importance that the terms of issues exclusively to management are strictly in into existence in order to prevent the rules concerning deviation from the sha- line with current market conditions. reholders’ preferential rights being exploited in order to favour people within Common to all types of incentive scheme is that the terms shall be drawn the company. The regulation is a very effective and important protection up with good judgement and consideration. Since the allotment is not the against inappropriate favouring of certain persons’ standing in the company. same for all it must stand in reasonable proportion to the salary of the person The law is applicable to directed issues to staff in stockmarket companies. concerned and an upper limit should be stated in the terms. It is the board’s Thus the law includes those incentive schemes that lead to a dilution of the task to show in what way the scheme generates value for the shareholders. It share capital. Decisions about directed issues to staff and the terms of the issu- is also the board, or where appropriate the remuneration committee, that es must according to law be made by the shareholders’ meeting. According to should draw up and present proposals for incentive schemes, management the law it is necessary for at least 90 percent of the attendant votes and capital should not be involved in this work. to adopt the proposal. The Leo law does not allow for the shareholders’ mee- ting to authorise the board either to decide on a directed new issue to the staff 6.2 Stock option plans or to draw up the terms for such an issue. However, the shareholders’ meeting In the USA it is common for companies to give their employees what is can delegate the execution of a new issue that has been decided on to the known as stock options. The Swedish equivalent of these are “personaloptio- board. ner” or stock options. This is a fiscal term for a certain type of options sche- The wording of the Leo law only refers to stockmarket companies. The me. It is normally forbidden to transfer the stock options and they can only be Swedish Shareholders’ Association considers that other companies whose shares used after a certain qualifying period. The duration is often long. Taken toget- are or have been the object of market quotation should also adhere to this law. her, these terms mean that stock options have a strong link to employment. The Swedish Shareholders’ Association sees this link to employment as right 3 The law that came about in 1987 has a background in what is known as the Leo affair. In November 1983 the and is therefore in principle positive to staff options on condition that the Shareholders’ Meeting of Leo, a subsidiary of Sonesson AB, decided that the company would effect a new share allotment and terms are reasonable and that the information about them is issue directed at people who included a number of key executives in the group. During 1985 Leo was floated on the stock exchange and the market value of Leo shares was considerably higher than the price that was quoted in open and relevant. the directed issue. The ensuing debate lead to the appointment of a commission. The Leo law (the law concerning directed issues to staff in stockmarket companies) is a result of that investigation. In its report SOU 2001:1, the 2 For further discussion see Ds Fi 1986:21 Directed issues of shares etc. A report from the commission for investiga- Companies’ Committee (Aktiebolagskommitté) has proposed that the LEO law should be incorporated into the ting certain share issues, etc. Companies’ Act. 22 23 Incentive schemes for management and employees 6.5 Issue terms future new recruitment, on condition that these new recruits are later offered 6.5.1 The size of the issue the chance to acquire the instruments in accordance with prevailing market In the case of directed issues to employees the number of new shares that can be terms at that time. subscribed to should not normally exceed five percent of the total number of It has become common, in order to cover the company’s costs in connec- existing shares or votes, i.e. the dilution effect should not exceed five percent. tion with incentive schemes, to issue options over and above those that are Issues that give the right to subscribe to shares with special voting rights should subscribed to by the employees in order to then sell them on the market. not occur. On determining the dilution effect, earlier issues directed at staff These options further dilute the company’s capital. This practice should there- should also be taken into account to the extent that they are still outstanding. The fore only be used in exceptional cases when the company has no possibility dilution should be calculated on the number of shares before any proposed new to stand for the costs itself. The dilution must never exceed five percent. issue. In exceptional circumstances it could be accepted that staff-intensive, fast- expanding companies with little equity carry out new issues that lead to a 6.5.3 Duration and interest somewhat greater dilution. The duration of the convertible or subscription warrant should be 4–5 years. The conversion or, respectively, subscription time should be set so that the instrument 6.5.2 Allotment runs for some time before conversion or subscription is possible. The rate of Incentive schemes should include only people actively working in the compa- interest on the convertible should not exceed the market interest rate. ny concerned, i.e. not external board members. Board members are elected representatives and it is formally the board that draws up and puts forward 6.5.4 Terms according to prevailing market conditions proposals for incentive schemes. This suggests that it is unsuitable to allow The terms in the form of interest, duration, conversion or, respectively, subscrip- the board to participate in such programmes (see however 3.4 above). tion rate and issue price should be adjusted so that considered all together they When the issue is directed at all employees the Swedish Shareholders’ mean the issue takes place in accordance with conditions prevailing on the mar- Association recommends that everyone is granted the same maximun subse- ket. The programme should not be so extensive that it is detrimental to the ription amount. A certain differentiation of subscription amount can be accep- employee’s private economy. The instrument should only give a good yield if the ted if the subscription amount is in reasonable proportion to the salary of the company develops well. This relationship must be emphasised for the employees person concerned. There should be the possibility to subscribe to smaller and in those cases where the options do not turn out to the employees’ advantage blocks of shares. When determining the maximum subscription amount it because the share price has not risen, the company should wait at least one year should be borne in mind that if this is set high, the employee risks big losses before any new options programme is designed to replace the old one. should the company find itself in difficulties. This is particularly applicable if The redemption price, i.e. the price at which the person entitled to subscribe the programme is combined with a loan offer. may buy shares in connection with the options, should be set higher than the For key executives, the subscription amount, i.e. the maximum sum for current market price at allotment to ensure that the options represent an which the person entitled to subscribe may buy the underlying shares for, incentive and not a reward for past performance. should stand in reasonable proportion to the salary of the person concerned. Half an annual salary could be seen as a reasonable upper limit. 6.5.5 Evaluation If a directed new issue is not fully subscribed to, it should not be possible When determining a market value for the instrument in question a generally- for the subscription rights that have not been used to be taken over by anybo- accepted evaluation model should be used. An independent valuation institute dy else. A smaller amount of the total issue sum can however be reserved for should be called on for this purpose. 24 25 Incentive schemes for management and employees 6.6 Options schemes or issues of convertibles in subsidiaries ● the nominal amount of the debenture, issue price, rate of interest and due date; Options programmes in subsidiaries that are not quoted on the stockmarket ● the conversion period and conversion rate for subscription warrants and should not occur. It is always difficult to effect a true evaluation of the subsidi- time and terms for new subscriptions, respectively; ary’s shares. In addition, there is a risk that the employees in such cases priori- ● the increase in the share capital in the case of full conversion or new sub- tise the subsidiary ahead of the group. Finally, difficulties arise for external scription respectively; assessors to calculate the dilution effects on earnings per share and net worth, ● the maximum dilution effect regarding capital and number of votes for the when issues or sales of the subsidiary’s shares are made to employees. scheme in question and seen together with earlier outstanding schemes; ● the effect on important key ratios; 6.7 Information to shareholders ● the extent and the terms of options schemes, bonus schemes, profit-sharing Decisions concerning incentive schemes for employees should be made at the agreements, synthetic options etc., already existing in the company since shareholders meeting. In order to be able to make a well-substantiated and an earlier date; informed decision it is necessary for the shareholders to receive detailed ● how much the operating income must increase to compensate for the dilu- information about the programme. In order to have an opinion the sharehol- tion effect on earnings per share in the case of maximum utilisation of the ders must have a chance to judge the reasonability of the programme and scheme; what economic benefit the company will gain from the scheme. The econo- ● other terms of essential significance. mic analysis that forms the basis of the company’s assessment of the advanta- The board’s complete proposal for the issue should be made available for all ges and disadvantages of the incentive scheme should therefore be presented shareholders in good time ahead of the shareholders’ meeting and sent to sha- to the shareholders. There should be an account of old schemes in connection reholders who request it. This should be obvious in the notice of meeting. In with the presentation of new ones and at the shareholders’ meeting there the proposal it should be evident which evaluation model and parameters should be a summary of a follow-up conducted after one year. have been used. The evaluation should be made available for those sharehol- ders who want to order it. The proposal should also make it clear which eva- 6.7.1 Information in the notice of meeting luation institute(s) has/have been used. Notice of and the full proposal should A supporting principle in the Leo law is that companies should inform in be available for the shareholders to read on the company’s Internet site. detail and in good time about a directed issue. Without going into any more detail, the law states that the main terms shall be stated in the notice of the 6.7.2 The annual report shareholders’ meeting. In the annual report the following information should clearly and visibly be reported: The Swedish Shareholders’ Association recommends that the following infor- ● original nominal amount of the directed issue and the remaining nominal mation be included in the notice of meeting: sum as per yearend; ● the intention of the options scheme; ● the duration, conversion or subscription time, conversion or subscription ● information about who took part in the decision-making process in the company; price and interest on the convertible; ● the highest sum in the issue; ● information about what class of shares the convertible / subscription war- ● how the price-setting of the financial instrument in the incentive scheme rant respectively entitle the holder to subscribe to; has come about and who has carried out the evaluation; ● the total dilution effect in the case of full conversion / subscription respectively; ● the scope of the offer, to what staff categories the issue is directed and ● which staff categories the issue is directed to; what amount respective categories are allowed to subscribe to; ● information as to whether the instrument is quoted on the market. 26 27 Incentive schemes for management and employees 6.8 The auditor’s role 6.10 Amortisation of staff loans The company’s auditor is appointed by the shareholders and has the role of an If the staff are offered the opportunity to borrow to finance participation in an independent examiner. incentive scheme the amortisation should be effected during the duration, in order The Swedish Shareholders’ Association considers that an auditor appoin- to avoid shares received at conversion being sold immediately to repay the loan. ted by the Shareholders’ Meeting ahead of a directed new issue to the staff Amortisation is also important in respect of risk-taking. Otherwise the should examine the scheme and the evaluation that forms the foundation of employee may be left with the whole loan to repay if the convertible or sub- the terms of the issue. The auditor should also be able to present information scription warrant should become worthless. concerning the proposed issue to shareholders at the shareholders’ meeting. It is valuable if a further auditor in addition to the company’s regular auditor is 6.11 Other incentive schemes engaged to scrutinise the terms of the issue and the valuation. Decisions about incentive schemes linked to the company’s development or share price should in principle be made by the board or remuneration committee, as part 6.9 The company’s responsibility after a decision at the sharehol- of the setting of salaries. In certain cases however the scope or design in general ders’ meeting of the incentive scheme might be of such a character that the decision is of parti- The company’s responsibility does not end after the Shareholders’ Meeting cularly great importance for the company. In such cases the company should sub- has made a decision. The company should use training and information initia- mit the decision about the incentive scheme to the shareholders’ meeting. tives to inform the staff so that on the occasion of subscription registration the employees can make an independent and well-informed decision. The information should be detailed, and given both orally and in writing. During the implementation period there should also be the opportunity for the employees to receive information personally from a specially designated per- son in their own department. It is particularly important that the staff are made aware of the risks connected with the different forms of instruments. The purpose of the issue is to make the employees shareholders in the compa- ny. Therefore the company should, through the giving of information, among other things, also seek to encourage the employees to keep the instruments and the shares they receive after conversion. The company also has a respon- sibility to ensure that future trade in the convertible or subscription warrant takes place in an orderly fashion. The company should remind the employees in good time before the expiration of the conversion or subscription time. To make it easier for the employees to subscribe to shares in the company on the basis of options or convertibles it is suitable for the company to make availa- ble some kind of savings scheme for employees. 28 29 Information to the stockmarket 7. Information to the stockmarket information. The listing agreement states that the entire market should simult- For many years now there has been a carefully regulated duty to give informa- aneously be given information that might affect share prices. The Swedish tion on the part of companies listed on the stock exchange. It is of mutual inter- Shareholders’ Association considers that all companies quoted on the stockmar- est for the owners, the stockmarket companies, the stock exchange, stock bro- ket should adhere to the listing agreement. kerage and the general public that is interested in the stockmarket that informa- 7.3 Mass media channels / Internet tion about companies is presented quickly and simultaneously to the market. All interested parties need information in order to form an opinion about the The law and the listing agreement assume that information is spread via the mass company’s financial situation and development and thereby gain a basis for a media and mail to the owners. Alongside this companies should use modern tech- true evaluation of the company’s shares. This information must therefore be nology such as for example the Internet, which is rapidly reaching an increasing open, correct, relevant and up to date, and just and clear in its content. number of shareholders. The Swedish Shareholders’Association finds it imperative The obligation to present information is above all regulated by the law concer- that the new technology, for example the Internet and e-mail, be used to a greater ning stock exchange and clearing operations. With the support of this law the extent to communicate with the shareholders. All companies quoted on the stock- Financial Supervisory Authority (Finansinspektionen) has issued directives con- market should have an Internet website. The website should be designed in cerning the content of the duty to inform (FFFS 1995:43). Further rules can be Swedish and the information should in addition be available in English. The websi- found in the stock exchange’s quotation contract. Further, the Industry and te should be easy to locate with a simple search using the company’s name and Commerce Stock Exchange Committee (Näringslivets Börskommitté) has issued should contain all the company’s press communiqués, interim reports and annual recommendations concerning information in certain situations. The Stockholm reports, the company’s articles, notice of shareholders meetings and minutes of the Stock Exchange (OM Stockholmsbörsen) has published a handbook on stockmar- shareholders meeting, for at least three years retrospectively. Notice of shareholders ket information that should be used by all companies quoted on the stockmarket. meetings and minutes of shareholders meetings should be available on the website and it should be possible to transmit these via electronic or regular mail. Traditional information channels should however also be retained for the time being. 7.1 Investor relations, IR / Investor contacts The Swedish Shareholders’Association would also welcome analyst meetings The Swedish Shareholders’ Association recommends that every stockmarket organised by the company being broadcast live via the Internet with the aim of company should institute an investor relations function. This will give the achieving rapid and uniform dissemination of information. company’s shareholders the opportunity to quickly obtain information and particulars concerning the company. 7.4 Annual report and interim report All stock market companies are required to post annual reports. The 7.2 Information to the market Stockholm Stock Exchange also requires quarterly reports from all companies Laws and the listing agreement regulate the minimum demands on the content quoted on its lists. Regarding the contents of these reports, the Swedish and form of the company’s information to the market. Registered shareholders Shareholders’ Association attaches particularly great importance to information have a self-evident right to information from the company. Information should about dividend policy and earnings forecasts. Information about dividend poli- be sent to all shareholders who have not expressly informed the company that cy should be given as a concrete quantification of, for example, share of ear- they do not wish to receive such information. It is not an acceptable practice nings or equity. A model earnings forecast contains information in figures and that the shareholders must actively inform the company that they wish to recei- an explanation of how the company arrived at the forecast. ve information in order to be assured of receiving such. The Companies’ Act Apart from this, we refer to the Appendix: Criteria for the Magazine refers above all to the already existing shareholders and assures them certain Aktiespararen’s review of annual and interim reports. 30 31 Information to the stockmarket 7.5 Accounting of goodwill exchange, a prospectus should be drawn up according to the regulations in the According to law (Årsredovisningslagen ÅRL) the annual report should give a law concerning stock exchange and clearing activities. true picture of the company’s results and standing. To achieve this demand the The prospectus should contain all the information necessary for an investor annual report must be drawn up in accordance with generally accepted accoun- to be able to make a well-founded judgement of the issuer’s business operations ting principles and issued recommendations. Goodwill forms what is known as and financial standing and of the rights that the securities are associated with. an immaterial asset that is depreciated over an estimated economic lifespan. Over and above this the Financial Supervisory Authority has issued direc- (According to ÅRL this depreciation period would amount to five years if no tives (FFFS 1995:21) concerning prospectuses. These include rules for how other longer time period can with a reasonable degree of security be established. the prospectus should be made public along with more detailed directives In RR’s (Swedish Financial Accounting Standards Council) recommendations concerning the content of the prospectus. Finally, the Industry and Commerce there are further provisions about how this time should be estimated.) The Stock Exchange Committee has issued a recommendation concerning public Swedish Shareholders’ Association considers that a depreciation period that bids concerning share acquisition where an appendix concerning the content stretches between five and ten years is a reasonable period of time. There are a of prospectuses is included. number of different items that can be included in goodwill and thus a certain Over and above this the Swedish Shareholders’ Association would like to flexibility is necessary. A longer period can, however, not be motivated on emphasise the following important points: account of the difficulty of carrying out reliable estimates that stretch farther into – a takeover prospectus should be designed so as to give an all-round eluci- the future. The Swedish Shareholders’ Association considers that goodwill must dation of both the target company and the parent company with the aim of be continuously evaluated to determine whether the asset has any real value. The giving the target company’s shareholders a substantial foundation on which depreciation period must, however, always be limited to at the most ten years to base their decision; even in cases where some calculations would show that there was still a value – detailed information about the buyer should also be given in the case of a existing at the end of the depreciation period. cash offer; – the prospectus should include an earnings forecast and a sensitivity analysis; 7.6 Selective information – prospectuses drawn up in connection with a merger should illustrate the Companies must not disseminate information that has not been made public that consequences of other alternatives, not least concerning development if could affect share prices to closed circles. Representatives for the media should the merger does not take place, i.e. what is known as a stand-alone alternative. always be invited to attend analyst meetings. Alternatively the company must be prepared to issue press communiqués to the market in connection with analyst meetings. Experience shows that the publication of earnings forecasts reduces the risk of the management of a company selectively disseminating information. 7.7 Prospectuses If a public company is to make public or to a wider circle in some other way direct an offer to subscribe to shares in the company, the board must draw up a prospectus according to the regulations stated in the Companies Act. The law prescribes what information there should be in the prospectus. When registering a listed security (for example a share certificate) at the stock 32 33 Public takeover bids 8. Public takeover bids be able to judge the new company’s prospects. An important aspect of owner responsibility is the larger owners’ solicitude for the In the case of cash offers too it is very important that the reason for the offer is company and its minority shareholders. Larger institutional investors are above all made public. In this way the shareholder has the opportunity to judge the seriousness interested in the shares as a capital investment. This is a reason for the lack of of the offer. The Swedish Shareholders’Association considers in addition that it is interest there is in some cases to exercise the voting rights the shares confer. desirable in these situations to summon the shareholders to a Shareholders’Meeting Larger owners have a responsibility that goes beyond the duty to vote. where the board explains the background for their attitude to the offer and allow the Controlling shareholders are duty bound to heed the interests of minority sha- opportunity to discuss the offer. The Swedish Shareholders’Association accepts that reholders before they sell their shares and leave other shareholders with a there can be different offers for different classes of shares on condition that these are new main owner. In a number of cases a change in the controlling owner has quoted on the market and traded at different prices. The bid premium should, howe- brought with it losses for the minority. To rectify this situation many countri- ver, be a percentage equivalent. In those cases where a percentage bid premium is es have introduced what is known as a mandatory bid rule. offered, the grounds on which this has been calculated should be clearly stated. 8.1 The offer 8.2 The mandatory bid rule When a publicly traded company makes an offer for another company, the offer The Swedish Companies Act does not include any mandatory bid rule. should, in view of the tax consequences contain both an exchange alternative, i.e. Prevailing international conditions, work on EU directives and Swedish expe- that settlement is paid out in shares in the purchasing company or the new com- rience all argue in favour of such a rule being introduced in Sweden. The pany, and a pure cash offer. Industry and Commerce Stock Exchange Committee’s recommendation con- The Swedish Shareholders’Association considers that it is of very great impor- cerning public tender share acquisitions now contains such a rule. The recom- tance that the shareholders receive information about who it is they are being mendation applies to owners in stockmarket companies and obliges anyone asked to sell their shares to as well as the buyer’s intentions in making the purcha- who secures 40 percent or more of the votes in a company to extend an offer se. If there is no account of the buyer, the owners cannot judge whether, e.g., there to all the other shareholders. The Swedish Shareholders’ Association welco- are close-standing relationships involved. In the case of an offer where the main mes this recommendation, but is of the opinion that the obligation should also owner is participating, directly or indirectly, higher demands should be placed on be validated by law. an independent evaluation than what is currently stipulated. Independent state- ments should be sought that in a comprehensive way give the shareholders a com- 8.3 Compulsory acquisition plete basis for decision making. A statement like this should give an account of the It is expedient and probably necessary for the functioning of the stockmarket assumptions that the statement is based on, alternatives to the deal or long-term that the compulsory purchase of minority shares is possible. The purchasing forecasts. In addition proper information concerning the buyer’s financial circum- company has an obligation to ensure that those shareholders who for some stances should also be required, particularly in the case of a cash deal. The share- reason have not accepted the public offer receive the opportunity to have their holders in the target company have a responsibility for and interest in that the shares redeemed or sold at a reasonable price that does not fall below the ori- company is acquired by serious buyers. Higher demands are already placed ginal price offered. Within the framework of a redemption procedure however when key executives buy parts of the company. When it comes to information, there must be guarantees for the protection of the minority whose shares the same should apply for the main owner. could be the object of expropriation according to civil law, i.e. compulsory An explanation of the reason for the deal is particularly important when sett- acquisition. The need for protection must be satisfied both financially and lement is in the form of exchange shares since the shareholders in that case must procedurally. The minority must be assured recompense for their shares even in the case of the parent company’s bankruptcy or reduced ability to pay. This 34 35 Public takeover bids Summary can take place through the parent company at the start of the process always 9. Summary furnishing collateral for those shares they intend to redeem in return for the Shareholders’ Meeting: minority relinquishing their shares. ● The notice of the shareholders’ meeting should include a numbered agen- In a takeover situation the acquiring company, when it is established they da and a list of proposals that are to be decided upon. have control of more than 90 percent of the capital and votes in the target ● In all companies quoted on the stockmarket there should be nomination, company, must give the remaining shareholders a further opportunity to audit and remuneration committees. accept the proposed bid. It would also appear to be in the interests of the acquiring company that the number of minority shareholders is kept low. The The company’s management: shares of the company that has been taken over should remain listed for as ● The board should comprise 6-9 independent members elected by the long a period as possible to give remaining shareholders a chance to dispose shareholders’ meeting, with an MD as the only salaried employee. of their shares. As long as the demands on liquidity placed by the stock ● The board or the remuneration committee should make decisions concer- exchange are fulfilled there should be no deregistration. ning remuneration to the MD and other key executives. The parties’ legal representatives are obliged to aim at the completion of ● Information concerning remuneration principles and salary terms should the process in as short a time as possible. Long-drawn-out processes that in be stated in the annual report. certain cases are sabotaged are unacceptable for the individual and damage ● Severance pay to the MD should not normally exceed two annual salaries. trust in the stockmarket. ● Severance pay should not be paid if the MD has seriously mismanaged his task or resigns at his/her own request. Severance pay should not normally include bonus. Incentive schemes: ● The Swedish Shareholders’ Association is positive to incentive schemes on condition that the terms are in accordance with prevailing market condi- tions and the allocation is reasonable. ● In the case of directed issues to the staff the dilution effect of the incentive scheme in all should not normally exceed five percent. ● Allocation should only be to people actively working in the company con- cerned, which excludes board members. ● Issues in subsidiaries which are not listed on the market should not occur. ● The shareholders should be fully informed in the notice of the Shareholders’ Meeting and in the annual report. ● The auditor should scrutinise the incentive scheme and answer the share- holders questions at the shareholders’ meeting. ● Other incentive schemes could also be of such a nature that decisions to implement them should be submitted to the shareholders’ meeting. 36 37 Criteria for the magazine Aktiespararen’s survey of annual reports Information to the stockmarket: Criteria for the magazine Aktiespararen’s survey of annu- ● All publicly traded companies should have a person responsible for al reports for the year 2000 Investor Relations. ● The Internet and email should be used to a greater extent for communica- A. Company description – 14 POINTS ting with the shareholders. 1. Business idea/Strategy, 2 p ● All shareholders who have not expressly declined to receive information The business idea [1 p] should be sent information from the company. Concrete strategies for the coming period in list form [1 p] ● In the case of analyst meetings media representatives should be invited to 2. Products, 3 p attend. Product description (concrete account of what the company offers the market) [1 p] ● The prospectus should include a forecast. In the case of mergers the conse- Pricing policy (volumes/in the case of service companies the number and size quences of a so-called stand-alone alternative should be explained. of assignments), Patents (description, total number, number of new ones during the year), the strategic Public takeover bids position of the product range (price competition, differentiation, margins and ● Takeover bids should always where possible also contain a share swap degree of innovation, etc.), Trademark – History [2 p] alternative. 3. Processes, 2 p ● The Swedish Shareholders’ Association welcomes the initiative of the ISO-certification, Cost structures, Operating assurance, Quality (how quality is Industry and Commerce Stock Exchange Committees recommendation measured, results of measurements, satisfied customer index, percentage of concerning the mandatory bid, but is working for legislation in this field. faulty parts, etc.), Environmental aspects, R&D, IT (e.g. total investments, ● In the case of takeovers the target company should be listed as long as existing systems), etc. – History possible. 4. Markets (primarily product markets) per business area, 3 p ● The parties’ legal representatives are obliged to aim for the compulsory General description [1 p] acquisition procedure being completed in as short a time as possible. Market share or other degree of success, size (in kronor), Growth, Trends, Customers (current and potential), Etc. – History + Forecast [2 p] 5. Competitors per business area, 2 p Name [1 p] Market share, Strengths/weaknesses, Tendencies etc [1 p] 6. Employees, 2 p Number, Type of employee, listed according to sex, age and education/training, Staff turnover, Value added per employee, Costs for competence renewal per employee, Health hazards (number of incidents, absence due to illness). B. Earnings and turnover per business area – 3 points 1. Turnover per business area, 1 p 2. Earnings per business area, 2 p 38 39 Criteria for the magazine Aktiespararen’s survey of annual reports C. Financial overview five years – 9 points 2. Fees and possession of options, convertibles etc, 2 p – Total fees to board (Pro-forma for newly-listed companies) members, fee to Chairman of the board, remuneration to the board over and 1. Equity per share after full conversion and exercise of options rights, 1 p above that decided by the Shareholders’ Meeting, Salary and pension and 2. Net worth per share after full conversion and exercise of options rights, 1 terms of severance for MD, Incentive schemes for key employees or if there p is no such programme the board’s reasons for this (all information must be 3. Earnings/share after full conversion and exercise of options rights, 1 p included to gain points) 4. Cash flow/share, 1 p 5. Dividend per share, 1 p F. Earnings forecast, risk and sensitivity analysis and dividend policies 6. Market value and development, 1 p – 9 points 7. Return on equity, 1 p 1. Earnings forecast, 3 p 8. Return on capital employed (not property companies or banks), 1 p Figures, total and per share [2 p] 9. Only property companies: direct yield on properties, 1 p Explanation of how the company arrived at the forecast [1 p] (A purely verbal 10. Only banks: capital coverage ratio, 1 p formulation about profit development gives no points) 11. Financial strength or debt-equity ratio, 1 p 2. Risk and sensitivity analysis, 4 p Description of important operating and financial risk [2 p] D. Shareholders and shares – 6 points Description and quantification of sensitivity to operating and financial risk 1. Number of shareholders, 1 p factors respectively [2 p] 2. The biggest shareholders, 1 p – (of the share capital and in the case of gra- 3. Information about dividend policies, concretely quantified, e.g. as a pro- duated voting rights also the number of votes) portion of earnings or shareholders’ equity, 2 p 3. Number of shares before and after full conversion and exercising of options rights (total sum fully calculated), 1 p 4. Various owner categories’ holdings in percent (ownership by Swedish and Total 44 points foreign institutions, total foreign ownership, Swedish ownership in private hands), 1 p 5. Corporate governance, 2 p – Nomination, remuneration and audit commit- tees – names and information about members. If these are not provided: the boar- d’s reason and the decision making process for nominations and remuneration to management and board. E. Board, management and key employees – 3 points 1. Main occupation, other duties, Number of years on the Board, Number of years employed, Education, Shareholdings and Age (all information must be included for points to be awarded), 1 p 40 41