ASSOCIATION FOR FOREIGN INVESTMENT AND COOPERATION

ASSOCIATION FOR FOREIGN INVESTMENT AND COOPERATION CORPORATE GOVERNANCE: ARMENIA SPECIFICS

Agenda • Joint Stock Companies • Rights of Shareholders • Shareholders’ General Meeting • Corporate Management • Company Board • Executive Body • Control Commission • Dividends • Disclosure • Insiders and Conflicts of Interest

Joint Stock Companies • The joint-stock company is considered to be a legal entity,whose Charter Capital is divided into a certain number of shares. • The closed joint-stock company should not have more than 49. • The open company has more than 49 shareholders.

Vote at the shareholders general meeting Participate in management of the company Receive information on the company’s activities Make proposals at the general meeting Receive dividends from company profits Acquire allocated shares on a priority basis Sell or transfer shares to other persons Appeal to the court Rights of Shareholders Shareholders are the ultimate authority in the firm. A shareholder owning a common share is entitled to:

Minority Shareholders • 2%+ voting shares • may submit up to 2 proposals for the agenda of the general meeting • may propose candidates for the Board and Control Commission membership • 5%+ voting shares • may demand a review by outside auditors of the company’s financial-economic activities • 10%+ voting shares • may demand an extraordinary general meeting be held • may require the Control Commission to check the company’s financial-economic activities

Minority Shareholders • The shareholder is entitled to appeal to the Court the decision taken by the Company shareholders’ general meeting with the violation of the requirements of the legislation or the Company Charter, if he has not participated in the meeting or has voted against it • Shareholders, owning 1% or more common shares of the Company are entitled to submit a claim to the Court against the Company Board or Administration demanding the reimbursement of the loss caused to the Company

Purpose of the General Meeting from the Shareholders' Perspective • Way for shareholders to exercise their rights • Vote for directors and other major issues • Make first-hand judgments about quality of directors/management • Voice concerns about major issues and ask for additional information during Q&A • Corporate governance issues • Major strategic decisions • Firm policies • Financial performance • Formally suggest a course of action to management via a shareholder proposal

Purpose of the General Meeting from Management's Perspective • Get required shareholder approval for board- recommended actions • amending the Charter • electing members to the boards • approving issuance of dividends • approving issuance of new shares • Strengthen current and potential investors' image of the firm

The Shareholders General Meeting • Held annually (no more than 18 months between meetings) • Quorum required • 50% of the voting shares represented at the meeting • 30% of the voting shares represented at the meeting if there was no quorum at the first meeting

Voting • One share, one vote • Majority rule • Cumulative voting for Board elections • company has more than 500 voting shares outstanding • 1 share = 1 vote times the number of positions available • may use all votes for one candidate or may spread votes among candidates • Proxy voting

Exception to the Simple Majority Rule 75% of the votes of voting shareholders required for: • Reorganization of the Company • Approving of the Company Charter, amendments and changes in it • Liquidation of the Company, Liquidation Commission, Liquidation balances • Conclusion of large transactions, in case, when the value of assets is more than 50% of the Company assets book value

Corporate Governance Structure • Three levels of oversight in joint stock company: • Shareholders’ General Meeting • The Company Board / Chairman of the Company Board • The Executive Body / Company Executive Director

Company Board Approves long-term strategy Approves financing Approves major investments Ensures that management is operating within: the Articles of Incorporation Goals set out by General Meeting of Shareholders Legal framework Ensures the accuracy of the financial statements Management Develops long-term strategy Plans financial requirements Manages firm operations on a day-to-day basis Ensures accuracy of the financial statements Roles of the Company Board and Management

Role of the Board • Functions as governing authority between shareholder meetings • Appoints and dismisses Executive Director • Oversees activities of management and provides advice to company management • Ensures that company procedures comply with laws and regulations • Attempts to balance employee/social factors with interest of shareholders • Conducts the Shareholders’ General Meeting • Is not involved in the day-to-day management of the company

The Company Board In the company with shareholders owning more than 500 voting shares: • the Board cannot be less than 7 persons • elections of the Board through the cumulative voting • the positions of the Chairman of the Board and the Executive Director cannot be combined

The Company Board • Board members elected at the shareholders annual meeting • One-year term • Unlimited number of terms • Each shareholder can occupy only one position on the Board • Shareholders owning 10%+ voting shares are entitled to be included in the Company Board without election

The Company Board • The candidates having obtained the maximum number of votes, however not less than the simple majority of the votes represented in the meeting, are considered to be elected in the Board. • The Board members elect the chairman of the board by a majority vote of the total number of the Board members.

The Company Board • Board decisions are made by the majority votes of present at the meeting members. • Each Board member has only one vote. The transference of the voting right from one member to another is prohibited. • The quorum of the Board meeting cannot be less than half of the Board members. Decisions

The Company Executive Body The Executive Body - Executive Director or Executive Director together with the Administration, organizes the implementation of the decisions taken by the General Meeting and by the Company Board, carrying out the management of the current activity of the Company.

Role of the Executive Body • Manages day-to-day operations • Executes decisions made by Company Board/General Meeting • Develops short and long term strategies • Plans financial requirements and financial monitoring systems • Understands changing market environment • Communicates and motivates employees

Role of the Control Commission • Represents interest of shareholders and oversees auditing activity of the firm • Conducts financial review at its own initiative or upon demand of shareholders possessing more than 10% of shares • Ensures compliance of management bodies’ decisions according to laws and charter • Right to demand from company officials all necessary documents and explanations • Can convene extraordinary meeting if detects serious threat to firm

Composition of the Control Commission • Commissioners elected by shareholders for 3 years • Commissioner cannot be a member of Company Board or Executive Body • Commission cannot have less than 3 members • The chairman of the Control Commission is elected by the simple majority vote of the Control Commission members

Payment of Dividends • May be announced quarterly, half-yearly, yearly. • Paid out of the company current net profit of the given year in Drams • Dividends for the certain type of preference shares can be paid out of the Company fund specially set up for that purpose • The Company Board makes the decision on the payment of intermediate dividends (quarterly and half-yearly) • The decision on payment of annual dividends is made by the shareholders’ general meeting

Restrictions on Dividends The Company may not pay dividends if: • The Company Charter capital has not been fully paid • As of the date of the decision-making on the dividend payment the Company is in bankruptcy • The Company has not completely bought back all the shares which should be bought back • The value of the Company net assets is smaller than the sum of the Company Charter capital and the Reserve Fund, or shall become smaller because of payment

Elements of an Annual Report • Chairman's and/or Executive Director’s message to shareholders • Audited financial statements • Business unit review • Information on Board members and management • General information

Annual Report Financial Information • Includes: • Balance Sheet • Profit and Loss Statement • Cash Flow Statement • Notes to statements • Auditor's report • Summary of accounting policy • Management should comment on • Significant changes in financial results from past years • Provide information of new public offerings • Future events which may materially affect financial situation of the firm

Basic information Information on primary shareholders Board of Directors members and senior management Financial information Present and past audited statements Information on loans and bonds Business activities Competitive situation (i.e. Market share) Past capital investments Overall business strategy Planned investments Information on security issue Type of security (share, bond) Date of issue Distribution Elements of a Prospectus

Special Disclosure - Extraordinary Events Goal: Inform shareholders, the public and the regulator of major events which could substantially affect the value of the shares or the future of the business such as: • Bankruptcy proceedings • Major lawsuit • Significant changes in senior management • Takeover attempt

LARGE TRANSACTIONS The following transactions are considered to be large • One or a few interrelated transactions, which are related to the assets of the Company, and the value of which is 25% or more of the Company assets book value; • One or a few interrelated transactions, which are related to the allocation of Company common shares or preference shares to be converted into common shares and the value of which is 25% or more of the Company assets book value.

LARGE TRANSACTIONS • The decision on transactions, concerning the assets of the company the value of which is 25-50% of the company’s assets book value as the date of the decision should be taken unanimously by the Company Board. • In case, when the value of assets is more than 50% of the Company assets book value, the decision on transaction should be taken by shareholders’ general meeting by 75% vote of the shareholders participating in the meeting.

Conflicts of Interest • “Interested Party” • Board Member • Executive Management • Shareholder who, together with cooperating persons, owns 20% or more of the voting shares in the case when the stated persons, their parents, husbands, children, sisters, brothers as well as the persons cooperating with them are to be parties or agents or representatives in the transaction • Interested parties engaged in a transaction should provide data about the conflict to the Board, Control Commission and the person carrying out the Company audit

CONFLICT OF INTEREST CONSIDERATIONS • In the Company having less than 500 voting shares, the decision on carrying out the transaction where interest exists, is taken by the majority vote of the Board members, lacking interest in the transaction. • In the Company having more then 500 voting shares, the decision on the transaction where interest exists, is taken by the majority of vote of the Board independent members (who is not the Company Executive Director or member of Administration).

CONFLICT OF INTEREST CONSIDERATIONS • When the market of transaction, where the interest exists, exceeds 2% value of Company assets, the decision is taken by the general meeting of shareholders, by the majority vote of the shareholders lacking interest in the transaction • The person recognized interested, is responsible to the Company in the size of loss caused to it.

Corporate Governance Summary

ASSOCIATION FOR FOREIGN INVESTMENT AND COOPERATION