Sources of corporate governance rules and practices

Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

Act No. V of 2013 on the Civil Code (the Civil Code) is of greatest relevance in the first instance, specifically its laws of contract, rules laying the basic framework for securities and shares, and the rules pertaining to legal persons and specifically to companies, including high level rules on the transformation, merger and demerger of companies.

Listed companies shall also observe the regulations and guidance of the Budapest Stock Exchange (BÉT). Regulations must be complied with, however, BÉT also issued a recommendation for responsible corporate governance (the Listing Recommendation), which is to supplement the rules of the Civil Code, and which operates on a ‘comply or explain’ basis (ie, it is recommended but not compulsorily applicable to listed companies), although deviations from the guidance must be explained and justified by the company. Companies are also to comply with the by-laws of their bodies, as well as voluntary company codes on business ethics, social responsibility, etc.

Act No. CXX of 2001 on the Capital Market (the Capital Market Act) contains essential rules on issuing and offering securities in public companies, the acquisition of participations in public companies, reporting obligations, IPOs and minimum offer prices. Special rules apply to companies engaged in regulated industries such as energy, media and financial sectors.

Responsible corporate governance must observe the requirements of Act No. C of 2000 on Accounting, and various data protection rules, as well as - in the financial and real estate sector, for the most - anti-money laundering regulations such as Act No. LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing. In these fields, companies are also required to compile and abide by their own specific rules of proceedings in compliance with the law.

Irrespective of the industry concerned, corporate actions shall comply with competition law regulations, safeguarded by the Hungarian Competition Authority (GVH) in accordance with the relevant Act No. LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (Competition Act) and in the regulations or guidance issued by the GVH.

Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

Primary legal rules pertaining to companies, including corporate governance, are made by the Parliament of Hungary in the first instance. Further legal rules and regulations are introduced by the Ministry of Finance, various ministries and sectoral authorities such as the Hungarian Energy and Public Utility Regulatory Authority, the National Media and Infocommunications Authority, and the Hungarian National Bank. Rules are enforced by the sectoral authorities, the Hungarian National Bank, and finally, the courts.

Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Ultimately, it is the shareholders who have the right to decide essential business and personal matters in the company. However, that right is not held by the shareholders alone, but jointly, in their capacity in the shareholders’ meeting.

Accordingly, directors are generally appointed or removed by the shareholders, based on a resolution of the shareholders’ meeting, which is adopted with the majority of shareholder votes. Generally, all shareholders have the right to vote, and they can cast votes in proportion to their stake held in the company. However, there may be deviations from the general rule, as explained in question 5 below, including the case when the appointment or removal of the directors must be decided with the vote of a shareholder owning a preference share granting him or her the exclusive right to appoint or remove the directors. It is of note, however, that in public companies shares granting the right to appoint or remove the directors may not be issued.

It is of relevance that the shareholders may resolve on the matters allocated to the competence of the shareholders’ meeting by the law or by the company’s statutes. Hence, the shareholders may pursue the board or management to take a certain action if the respective matter is allocated to their competence. Otherwise, the shareholders may not instruct the board or management. There is one exception to that rule: if the company is owned by one single shareholder, the sole shareholder may instruct the management on any matter, and the management is obliged to abide by such instruction.

Generally, matters are decided at the shareholders’ meeting with the simple majority (50 per cent + 1) of the votes, however, the law or the company’s statutes may require a higher majority (of, eg, 75 per cent or even 100 per cent) in certain matters.

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Shareholders may pass a binding resolution on the matters allocated to the competence of the shareholders’ meeting by the law or by the company’s statutes. In general, the shareholders’ meeting decides essential business and personal matters in the company. Accordingly, matters allocated to the competence of the shareholders by the law include merger, spin-off, appointing the management as well as the auditor and the members of the supervisory board, modifications to the company’s statutes, contracts to be concluded between the company and its management or shareholders, bringing damage claims by the company against the management or members of the supervisory board or shareholders, approval of the financial statements, payment of dividends, decisions on the company’s registered seat, activities and business, branches, etc. It is also common to allocate to the competence of the shareholders’ meeting further additional matters such as major contracts of the company, IP of the company, commencing lawsuits on behalf of the company, granting securities, taking loans, etc. Depending on the provisions of the company’s statutes, such additional matters may be decided by the shareholders’ meeting in any case, or only if the respective matter exceeds a given threshold.

Notwithstanding matters specifically allocated to the competence of the shareholders’ meeting, shareholders are free to discuss and resolve (with non-binding effect) on any matter that is put on the meeting’s agenda by the management or by the shareholders.

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In general, all shareholders have votes in proportion to their stake in the company; however, a few deviations from proportionate stakes may occur: shareholders holding non-voting shares may not vote at all; shareholders may veto the resolution on a certain matter based on a preference share granting such veto rights; and shareholders owning voting preference shares have more or multiple votes in general (as specified for the respective shares) than their stake in the company’s registered capital would justify. However, in public companies, voting preference shares are limited: the maximum votes that can be attached to a voting preference share is 10 times the votes that would correspond to the face value of the respective share.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders may take part in the shareholders’ meeting provided that they have been registered prior to the meeting in the members’ list or in the book of shares, as the case may be. In case of companies limited by shares, the shareholders must also present their shares or a certificate of ownership of the shares, to be admitted to the shareholders’ meeting. All shareholders admitted to the meeting have the right to vote, except the shareholders who hold non-voting shares and are conflicted in the respective matter. Shareholders may hold virtual meetings instead of physical meetings, provided that the company’s statutes so allow, and it sets forth the procedural rules for such virtual meeting. If the statutes so allow, and the management sends the proposals to the shareholders in writing, the shareholders may also pass resolutions without holding a meeting, by sending their votes back to the company’s management in writing.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Most commonly, the shareholders’ meeting is convened by the management. However, shareholders representing 5 per cent of the votes may ask the shareholders’ meeting to be convened for the cause and with the purpose as indicated by the shareholders. Should the management fail to convene the shareholders’ meeting accordingly and for the nearest possible date, within eight days, the court will, in its order, convene the meeting or authorise the proposing shareholders to do so.

Agenda items and resolutions - even for the appointment or removal of the directors - may be proposed, before the meeting and in compliance with the applicable procedural rules, by the shareholders representing at least 5 per cent of the votes in private companies, and by 1 per cent of the votes in public companies. New items or draft resolutions may also be put on the agenda at the shareholders’ meeting provided that all shareholders are present and consent to the amendment. New agenda items may also be introduced at the meeting if all shareholders are present and consent to the amendment. Such amendments and proposals can be made even against the wishes of the management board. In private companies, amendments are included in the agenda automatically. In public companies, amendments to the agenda must be made by the board pursuant to the proposal of the shareholder, and, although the management is obliged to make such amendments if the relevant procedures were kept by the shareholders, in case the board fails to amend the agenda, the proposing shareholder may have to face a costly and lengthy court procedure to enforce its right to put its item to a shareholder vote.

The board may be made to circulate statements by dissident shareholders if the dissident shareholder obtains a resolution of the shareholders’ meeting obliging the board to do so, or if the board is obliged to circulate such statement under a contract or the company’s constitutional documents such as the company’s statutes or the by-laws of the board.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders must be careful to pass resolutions in the interest of the company. Otherwise, if their resolution caused damage to the company, the company may bring damage claims against the controlling shareholders on the basis of the damaging resolution.

In addition, the controlling shareholders (even those of limited liability companies) must follow strict rules such as not to conduct detrimental business policy regarding the company, and to take into account creditors’ interests in a threatening insolvency situation. If these obligations are breached, the controlling shareholders will be held liable for the company’s uncovered debts. Respectively, if the company falls into liquidation, the person who was a controlling shareholder in the three years preceding the liquidation may be held liable for the uncovered claims of the creditors, provided that this person is proven to have failed to take into account the interests of the creditors in a threatening insolvency situation. Also, in the liquidation of the company, the shareholder holding at least 75 per cent of the votes or the sole shareholder may be held liable if it is proven to have conducted a continuously detrimental business policy regarding the company and may be held liable for the company’s uncovered debts.

Shareholders who intend to acquire certain statutory level of control in public companies must follow the statutory takeover procedural rules. If these rules are not kept, the acquirer cannot exercise its voting rights in the company, and the unlawfully acquired control must be terminated (ie, a number of shares must be transferred to decrease the acquirer’s stake below the statutory level of control).

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders cannot ever be held responsible for the acts or omissions of the company. For potentially being held liable for the debts of the company, see the cases mentioned in question 8 for lifting the corporate veil.

Corporate control

Anti-takeover devices

Are anti-takeover devices permitted?

Companies and management are free to apply various instruments to prevent takeover. If a public company’s statutes so provide, the board of the target company must remain impartial, and must not implement measures to prevent or disturb the acquisition (such as the acquisition of the company’s own stock or a capital increase). Nevertheless, even in that case, the board may: in a compulsory public takeover bid encourage a counter-offer to be made; or decide to implement a resolution of the shareholders’ meeting made before the announcement of the public takeover bid has been made (or information thereof has been received), provided that it falls in the ordinary course of business of the company; or take the measures specified in the resolution of the shareholders’ meeting made at a meeting convened after the announcement (or information) of the public takeover bid. According to the Listing Recommendation, public companies are to disclose their anti-takeover policies.

In private companies, the conduct of the board is not restricted (ie, they can attempt to prevent acquisition or make the company a less attractive target by any lawful means, eg, by making the shareholders implement a capital increase, or the acquisition of the company’s own shares, making the shareholders increase the level of votes required for certain decisions in the company). A rather simple but effective means to resist takeover is to require in the company’s statutes the company’s consent for the transfer of the shares.

Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

New shares may be issued once all formerly issued shares have already been paid up. Commonly, new shares can be issued only upon the approval of the shareholders. However, in companies limited by shares, the shareholders may also authorise the board in advance to increase the company’s capital, whereby the board will also be authorised to issue new shares (if the capital increase is implemented via issuing new shares, respectively) and to make all necessary decisions in relation thereto. Such authorisation may be granted to the board for a maximum term of five years, and the highest possible amount of the capital increase must be specified in the authorisation.

The shareholders automatically have a pre-emption right for the newly issued shares in proportion to their stakes held in the company. In companies limited by shares, persons holding subscription preference bonds in the company also have a pre-emption right (or subscription preference right) for the newly issued shares, and pre-emption right can be exercised during the period and in the order as specified in the company’s statutes. If the issuance is made against additional contributions to the company’s registered capital, the shareholders may authorise any third person to subscribe for the newly issued shares for the case the persons having pre-emption rights do not exercise such right.

However, shareholders will obviously not have pre-emption right if the newly issued shares are employee shares.

Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

The transfer of fully paid shares may be restricted in many ways, including limiting the allowed type of transfer, restrictions on the person of the potential transferee, requiring certain preliminary procedures or consents, or stipulating options or preference rights for the shares, etc. It is typical, for example, that the transfer may be subject to the consent of the company (such consent to be granted based on the decision of the shareholders’ meeting in a limited liability company, and commonly by the decision of the board in a company limited by shares), or the shares can only be sold subject to the pre-emption right of certain shareholders. As special case for transfer restrictions, employee shares cannot be transferred to persons who are not employees of the company. Also, the shares of private companies cannot be publicly offered for transfer.

In limited liability companies, it is common that shares can be transferred only via sale and purchase, and shares may be sold to non-shareholders only if neither the shareholders, nor the company, nor the third person authorised by the company exercised their statutory pre-emption rights. Certain statutory control in a public company can be acquired subject to conducting the relevant statutory takeover procedure.

Transfer restrictions regarding shares of a limited liability company shall be indicated in the company’s statutes to become effective, and to ensure enforcement, with regard to third persons. Transfer restrictions regarding shares of companies limited by shares are valid only if the restrictions are indicated on the printed shares themselves, or on the securities accounts where the shares are kept.

Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Companies limited by shares may issue redeemable shares, in a maximum value of 20 per cent of the registered capital, to which the put option of the shareholder or the call option of the company may be attached. Such put option or call option can be realised provided that the company’s financial status so allows (ie, if the company could pay dividends), and only for the shares the issue value of which has been paid up. Once redeemed, the shares must be withdrawn, and the company’s registered capital must be reduced accordingly.

Although not a classical redemption or repurchase, shares can (or, under certain circumstances, must) be withdrawn by the company, and the value of the withdrawn shares must be paid to the shareholder or its legal successor, while the company’s registered capital must be decreased accordingly. Withdrawal of shares may occur if a shareholder has failed to contribute the issue value of its shares or to perform its additional payment obligation (if any), if the company intends to discontinue holding its own shares, if a shareholder holding employee shares died or became incapable to hold the employee share any further.

Dissenters’ rights

Do shareholders have appraisal rights?

Shareholders cannot be obliged to take part in mergers or spin-offs, or in changing the company form. Dissenting shareholders will cease to be shareholders, and they shall be allocated their stake from the company’s equity according to the rules of allocation in case of the termination of the company. However, if the company’s statutes so provide, dissenting shareholders shall be paid a fair market value for their stake.

Responsibilities of the board (supervisory)

Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Hungarian law, the shareholders of a public company may decide in the company’s statutes whether the company will be managed in a two-tier system (managed by a management board and supervised by a separate supervisory board, each comprising at least three members) or a one-tier system. In the one-tier system, the company is managed by a board of directors of at least five persons, the majority of whom must be independent, and no separate supervisory board is appointed, but the board of directors also takes care of the tasks of the supervisory board.

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The board’s primary responsibility is to conduct the management of the company in the company’s best interests. The management board must regularly report to the supervisory board and to the shareholders in respect of the management, the company’s financial status and its business policy. The board of public companies must prepare and publish a corporate governance report and further reports required by the law and the Listing Recommendation.

Board obligees

Whom does the board represent and to whom does it owe legal duties?

Most commonly, the members of the board are appointed by the shareholders’ meeting. In private companies, however, the supervisory board may be vested (by the shareholders) with the powers to appoint the directors. In any case, the board, as well as the individual directors, must attend their management tasks in compliance with the laws, the company’s statutes and the resolutions of the shareholders’ meeting on the one hand, and on the other hand in the best interests of the company (and not in the interest of any of the shareholders). Although the board reports to the shareholders’ meeting and to the supervisory board, in connection with its management duties it bears legal responsibility towards the company in the first place.

The board is obliged to provide information and allow access to the company’s documents and registers to each individual shareholder. Information and access may be limited or refused only if that would infringe the company’s business secret, or the shareholder would abuse such rights.

In special situations such as in a threatening insolvency situation, when managing the company, the board must also take into account the interests of the company’s creditors. Consequently, if as a result of breaching this obligation or because of certain other unlawful actions of the board (or directors), the company’s debts are not fully covered in a liquidation, the directors may be held liable with regard to the company’s creditors for such uncovered debts.

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

The company (based on a resolution of the shareholders) may bring damage claims ex contractu against the directors if the directors breached their management duties and, as a result, the company incurred damage. In addition, if the director attends to his or her duties under an employment agreement with the company, the company may also bring claims against the director under the employment agreement. If the company was terminated without legal successor, the last shareholders of the company may enforce damage claims against the directors, as the case may be.

If directors do not provide information or allow access to the company’s documents to the shareholders as requested, the shareholders may attempt to enforce their right before court in non-litigious proceedings.

Directors may be held liable for the liquidated company’s uncovered debts (if the statutory preconditions are met) in a lawsuit commenced against the directors by the liquidator on behalf of the company, or by the company’s creditors in their own name.

Care and prudence

Do the board’s duties include a care or prudence element?

Directors must manage the company in the company’s best interests, which includes a care element. Nevertheless, care is understood as an increased level of care as it can be expected from a person who undertook his or her obligations in a contract, and who is in a responsible position of the director of a company. Hence, if the directors breached their management duties and, as a result, the company incurred damage, the directors will be held liable. Liability may be excused if the director proves that: the factor causing the breach was out of the director’s control; which could not have been foreseen by a person acting with due care under the same circumstances at the point in time when the director entered into the agreement with the company for his or her mandate; and the factor causing the damage or the damage itself could not have been be eliminated by a person acting with due care under the same circumstances.

Board member duties

To what extent do the duties of individual members of the board differ?

Directors’ duties and liability are essentially the same irrespective of any difference in their skills and experience. However, the board may delegate certain responsibilities to its members, considering the directors’ different skills and experience, whereby in fact duties of the individual directors may still differ. Delegation of duties, however, will not shift liability in respect of the delegated duty to the selected director. (See question 21.)

Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board may delegate certain responsibilities or powers to the individual directors, or its committees, or other persons such as the company secretary. Such delegation must comply with the provisions of the company’s statutes and the by-laws of the board. Public companies have to consider the Listing Recommendation upon delegation of responsibilities.

Delegation of powers usually serves practical or operational reasons and may trigger reporting obligations for the authorised persons. Such delegation, however, will not shift liability for the delegated responsibilities to the selected director, and will not eliminate the potential liability of the board regarding the delegated responsibilities with regard to the company or third persons. Respectively, the board is deemed to act and bear liability jointly and severally, as a body. Any difference or distinction in liability of the individual directors can be made upon determining the level of liability between the directors themselves.

Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Although in private companies there is no requirement to include non-executive or independent directors, sometimes private companies also happen to employ independent directors for business reasons, or to ensure the balance in the management board of a joint venture.

In public companies, if the management is operated in a one-tier system, the law requires more than 50 per cent of the board of directors to be independent. Directors are deemed independent if, apart from their seat on the board of directors and apart from any transaction conducted within the company’s usual activities, aiming to satisfy the board members’ personal needs, they do not have any other relationship with the company. In addition, a director will be considered independent provided that he or she:

  • is not the employee of the company or a former employee for five years following the termination of such employment;
  • does not provide services to the company or its executive officers for consideration as an expert, or other similar services, under personal service contract;
  • is not a shareholder of the company controlling at least 30 per cent of the votes, whether directly or indirectly, or is a close relative or domestic partner of such person;
  • is not a close relative or domestic partner of any non-independent member, executive officer or executive employee of the company;
  • is not entitled to receive financial benefits based on his or her board membership if the limited company operates profitably, or receives any other form of remuneration from the company apart from the salary for his or her board membership, or from a company that is affiliated to the company;
  • is not engaged in a partnership with a non-independent member of the board of directors in another business association on the strength of which the non-independent member attains control;
  • is not an auditor of the company, or an employee or partner of the audit firm, for three years following the termination of such relationship; or
  • is not an executive officer or executive employee of a business association, whose independent board member also holds an executive office in the company.

Non-executive or non-operational are the directors who are not employed by the company or any of its connected companies. The Listing Recommendation requires non-executive (non-operational) members to be involved in the managing board, or the board of directors in a number to ensure that their opinion or decision can significantly influence the resolution made by the board as a body.

Difference in the responsibilities of directors, non-operational directors and independent directors may be detected along the factors described in questions 19 and 20.

Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

A (two-tier) board must comprise a minimum of three directors, while a (one-tier) board of directors must have at least five seats. The number of the directors is not maximised by the law; however, the Listing Recommendation sets the practical requirement that the board or the board of directors have enough but not too many seats to ensure the most efficient operations and management.

Most commonly, the directors are appointed by the shareholders’ meeting. In private companies, however, certain shareholders holding the preference shares granting them the right to do so may have the privilege to appoint and remove one or more directors. Also, in private companies, but not in public companies, the supervisory board may be vested (by the shareholders) with the powers to appoint the directors instead of the shareholders.

Legal criteria for becoming a director include basic requirements, such as the appointee being of legal age of at least 18 years, and having full legal capacity in the scope required for attending his or her functions. Beyond that, any person who:

  • has been sentenced to imprisonment by final verdict for the commission of a crime may not be a director until he or she has been exonerated from his or her criminal record;
has been prohibited by the court from holding an executive officer profession cannot be appointed as a director within the time limit specified in the prohibition order; and
  • has been prohibited by final court order from practising a profession may not serve as a director of a company that is engaged in the activity indicated in the verdict.

It is in the best interests of a company to have properly skilled and experienced directors. This is not granted by a legal rule, but the company’s statutes may require certain skills or experience for director positions. On the other hand, it is the responsibility of each director to assess (also in light of his or her potential liability in this position) whether he or she has the necessary abilities and knowledge for the position. There is no legal rule or listing regulation in respect of the age, gender, nationality or diversity of the directors; nevertheless, the statutes of a company may set forth requirements on those factors. In the latter case, public companies must disclose their relevant selection or appointment requirements or methods.

Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no legal or listing regulation requiring the separation or joining of the functions of the board chair and the CEO. Leadership in the board is left for the company’s statutes or the by-laws of the board. It is common to vest the chair of the board with powers to lead the board. Nevertheless, because the chair of the board is appointed by the directors themselves, it might be in the shareholders’ interests to grant certain powers in leading the board to another person, potentially a CEO.

Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Private companies are entirely free to set up or to avoid forming any committees. In public companies, an audit committee must operate to assist to the supervisory board or to the board of directors in supervising the financial reporting system, selecting the auditor, and cooperating with the accountant. The audit committee must be formed from at least three of the independent directors, and at least one of the members must have accounting or auditor qualification. In addition, in compliance with the relevant EU recommendation, the Listing Recommendation suggests that in public companies: a remunerations committee be operated for providing guidance and rules for the remunerations and assessment of the board of directors and that of the supervisory board; an appointments committee also be set up to assist with appointments of directors and members of the supervisory board; and a risk management committee be created. The board itself may act as the remunerations committee and as the appointments committee if the low number of seats in the board so justifies.

Beyond that, any further committee is allowed by the law if the company’s statutes provide to create them.

Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no legal or recommended minimum or set number of board meetings per year. Beyond that, if the company’s statutes or the by-laws so provide, the board may discuss matters and make decisions also out of a meeting, in writing. Nevertheless, it must be ensured in the statutes of the company or in the by-laws of the board that the board can meet and discuss actual matters, including urgent ones, as necessary.

Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

According to the relevant Listing Recommendation, board structure, practices and operations are to be made public in case of public companies.

Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Directors’ remuneration is determined by the shareholders’ meeting, taking into account the proposals of the remunerations committee, as suggested by the Listing Recommendation. Directors are usually mandated for a definite term of maximum five years, or even for an indefinite term, as provided in the company’s statutes. Each director’s mandate is set forth in the company’s statutes or in the resolution appointing the respective director. Nevertheless, directors may be removed by the shareholders any time.

According to the relevant Listing Recommendations, loans and compensatory arrangements between the company and the directors are to be approved by the shareholders’ meeting pursuant to the proposal of the board or its remunerations committee, and to be disclosed in the company’s remunerations statement. Sensitive business information is not to be disclosed; however, non-disclosure must be justified by the company.

Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

The relevant Listing Recommendation suggests that the remuneration of senior management is to be determined by the board in detail, based on the guidelines set forth by the shareholders’ meeting. Such remunerations (except for sensitive business information) are to be disclosed in the public company’s remunerations statement.

D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurance has become a common practice. Although directors may also pay the premiums, it is common that the company can pay the premiums, especially if the insurance provides coverage not only for the director’s costs but also for the company’s damage.

Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Companies can indemnify directors and officers against liabilities incurred by them in their professional capacity. Like all agreements between the company and the director, indemnity agreements concluded with the directors must be approved by the shareholders’ meeting. Furthermore, certain matters are usually excluded, such as claims enforced against the director by the company, consequences of causing damage intentionally or of fraudulent actions or crimes, indemnity to bad leavers.

Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

Upon request of the director, shareholders may decide to warrant discharge to the director, confirming that in the past (full or fragment) financial year he or she attended his or her management activities properly. Once such discharge has been warranted, the company will be able to enforce damage claims against the discharged director in relation to the discharged activities provided that the company can prove that discharge was warranted on the basis of untrue facts or data.

It is of note, furthermore, that damage claims can be enforced by the company against the directors on the basis of the decision of the shareholders’ meeting. Hence, if the shareholders fail to decide so, the company will not enforce a given claim against the director concerned.


What role do employees have in corporate governance?

An employee representative and works council operating at the company have certain negotiation and information rights in various cases, such as mergers, spin-offs, transfer of a business unit. If a collective agreement exists at the company, its provisions must be observed by the board in its proceedings, and it may have influence on corporate governance matters at the company. Furthermore, the employees have the right to take part in the company’s supervisory board: if the company has more than 200 employees, one-third of the supervisory board members must be delegated by the employees. If the company operates in a one-tier system, and therefore no separate supervisory board exists at the company, employees may exercise their participation rights within the frames of the agreement concluded between the board of directors and the works council operating at the company.

Also, certain employees may be authorised by the shareholders to take part in the management of the company, assisting the directors. Furthermore, if employees become shareholders of the company via employee stock option plans or various vesting systems, as a result they might gain insight to the company and (although usually rather slight) influence on the shareholder side.

Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

According to the relevant Listing Recommendation, the board and the supervisory board of public companies is to evaluate its own activities (as a body), as well as the activities of their individual members ever year in terms of skills, results and goals reached. The activities of the management are to be evaluated by the board. In addition, the appointments committee is also to prepare an evaluation in respect of the board, the supervisory board and the management. The committee’s evaluation of the board and the board members is to be sent to the chair of the board.

The company is to disclose the aspects and the results of evaluations in its annual report and in its reimbursement statement on its website.

Disclosure and transparency

Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

The company’s statutes are publicly available on the official company register website and on the company’s own website. By-laws are available on the company’s website.

Company information

What information must companies publicly disclose? How often must disclosure be made?

All companies must disclose their corporate data (such as registered seat, registered capital, directors, signing rights, activities, bank accounts and, in some private companies, shareholders), and must update those once any of such data has changed. Companies are required to disclose their annual financial statements.

Public companies must comply with additional disclosure requirements, including publishing their annual corporate governance report indicating all data and circumstances required by listing regulations; publishing their disclosure guidelines; disclosing their independence guidelines regarding directors and their evaluation guidelines, organisational structures, proceedings, strategic goals, business ethics, remuneration guidelines; relevant news or facts that may affect their status or their shares, etc. Disclosures are to be made in the language of the company’s registered seat and also in English.

Hot topics


Do shareholders have an advisory or other vote regarding remuneration of directors and senior management? How frequently may they vote?

Remuneration guidelines of public companies must be approved by the shareholders first. The board is to determine management’s remuneration within those guidelines. The directors’ remuneration is determined by the shareholders’ meeting. Remunerations are disclosed annually, and appear to be voted on annually. Nevertheless, any changes in remunerations of the directors, or the remunerations guidelines are to be voted on by the shareholders. Also, remunerations may be put on the agenda of the shareholders’ meeting whenever one or more shareholders representing at least 1 per cent of the votes so require.

Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Minority shareholders owning together at least 1 per cent of the votes in a public company (and 5 per cent in private companies) may amend the agenda of the shareholders’ meeting, whereby they can nominate directors and have such nominations voted on at the shareholders’ meeting. In addition, minority shareholders owning together at least 5 per cent of the votes in a company may arrange for the shareholders’ meeting to be convened with the aim and purpose specified by the minority shareholders, which may include proposals for removing the directors and nominating new directors for the company.

Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

In private companies, shareholder engagement is not specifically regulated: shareholders may be consulted regularly, or only around the annual meeting. In public companies, the board is responsible for proper communications and engagement with shareholders. Shareholders are to be duly informed of all relevant events, and board committees also engage with shareholders in accordance with their by-laws. If shareholders so require, they have the right to request information from the directors, and to access the company’s documents and registers, which the directors must satisfy (except for abuse of right by the shareholder or protecting the company’s business secret).

Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Public companies are to disclose their guidelines with respect to business ethics and policies such as the environmental and social responsibility policy.

CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Private companies are not required to provide such disclosures. Public companies do not have to directly disclose the pay ratio; however, the pay ratio may be determined from the evaluation and reimbursement data on the one hand and from the company’s financial report indicating the number and costs of employees on the other hand - as all that is to be made public under the relevant Listing Recommendation.

Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Companies are not required to disclose any gender pay gap information. Nevertheless, certain companies may choose to make this information public in relation to their sustainability disclosure.