1. Introduction

Cambodian law allows for two (2) forms of limited liability company: private limited company and public limited company. A public limited company is permitted to have a large number of shareholders by issuing shares to the public and is the vehicle used to list on the Cambodian stock exchange. The two forms of company are not only differentiated by the number of shareholders permitted to own equity, but also the corporate governance mandated by law. Whereas the board of directors of a company is expected to be effective acting with loyalty, skill and care, private limited companies have less articulated requirements in law than the more thoroughly articulated regulations for governing a public limited company listed on the Cambodian stock exchange (hereafter “public listed company”). A private limited company may have more detailed internal rules in its Articles of Incorporation or by laws, however public listed companies have law that regulates their governance in greater detail. This newsletter will articulate some important corporate governance requirements for the board of directors of both public listed companies and private limited companies, and identify some interesting differences that can inform better governance in private limited companies to be implemented through Board Resolutions and/or the Articles of Incorporation or by-laws.

2. Board Composition

The individuals comprising the board of directors of a company must collectively manage the affairs of the company in the interest of the shareholders and are responsible for the long-term success of the company. They guide the company by providing strategic direction and oversight for the benefit of the shareholder(s).

The directors of both forms of company should be over 18 years of age and elected by the shareholder(s) within twelve (12) months from the initial formation of the company or from the date of the last shareholder(s’) meeting. Unless otherwise provided for in the articles, each director is elected for two (2) years and may be re-elected, with staggered terms of office so that all of their terms do not end in the same year.

In terms of board composition, a private limited company can have a minimum of one natural person of any nationality as director and no requirement exists for expertise, independence, number, or diversity of directors.

On the other hand, a public listed company has significantly greater requirements for its board composition. It must have greater expertise, diversity and independence of its board. The greater expertise requirement and quantity of board directors, along with the requirement for independent directors, allows for more considered corporate decision-making. No small group of directors should dominate the decision-making process of the board with many qualified voices in the discussion. In terms of expertise, among other factors, to qualify as a board director, one must have experience of “at least 3 years in the relevant field to his/her position as director, demonstrated leadership ability, and an ability to play a proactive role in turnaround situations.” Diversity and independence of the board are also required. The public listed company must have 5-15 board directors with at least 20% being “independent,” meaning “free of any personal or material relationship with the company’s senior officers or other employees that might reasonably be expected to interfere with the independent exercise of his/her best judgement for the exclusive interest of the company.” Furthermore, foreign nationals serving on the board need at least 6 months of work experience in Cambodia before working as an independent director, presumably giving these directors greater context to their decision-making.

3. Powers of the Board

The board of directors is accountable to the shareholders. In both forms of company the board must propose for shareholder approval the salary or other compensation for directors; amendments or annulments to the articles of incorporation; an agreement of merger or consolidation between the company and any other person; the sale of all or major part of the company’s assets; and a dissolution or liquidation of the company.

The board holds officers of the company accountable through its reserved powers to appoint and remove all officers and determine specific rights such as the salaries and other compensation of the officers.

Furthermore the law articulates the following powers reserved for the board:

1. Issue notes, bonds, debentures, and other evidences of debt of the company and fix their absolute, relative, and contingent characteristics;
2. Declare dividends in accordance with accounting principles and the terms of payment of each class of shares entitled to receive dividends;
3. Issue shares in the company;
4. Borrow money;
5. Issue, reissue, or sell security of the company;
6. Give a guarantee on behalf of the company;
7. Mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the company to secure any obligation of the company; and
8. Close account books of each financial year and propose the annual profits for submission to the shareholders and shareholders’ general meeting.

4. Duties of Directors

Public listed companies have greater articulated duties of directors which could easily be included in articles of incorporation of a private limited company. Directors of private limited companies must act reasonably and in good faith while avoiding conflicts of interests in several contracting situations whereas directors of public listed companies must approve and publicly disclose a code of conduct, and have more clearly articulated obligations, namely:

1. Acting in good faith for the benefit of the company as a whole and shareholders;
2. Using powers for a proper purpose for the benefit of the company as a whole;
3. Not delegating powers except with proper authorization and duty to exercise;
4. Exercising care, skill and diligence;
5. Properly managing any conflict related to the interest of the company;
6. Not entering into transactions in which the directors have an interest except in compliance with approved policy and procedure;
7. Not taking improper advantage of the position of Director;
8. Not making improper use of information acquired as Director;
9. Not accepting personal benefit from the third parties conferred because of the position as a director;
10. Complying with the company’s memorandum and articles of association and resolutions; and
11. Declaring conflicts of interest.

Additionally directors of public listed companies have a legal duty to undertake necessary continuing professional development to keep themselves up-to-date with corporate governance, legislative, and regulatory developments that affect the company and its business. This can ensure that the directors remain knowledgeable about their business environment in order to continue making good decisions on behalf of the company. This continuing professional development must be declared in its public annual report allowing shareholders to assess the continuing professional development of their board.

5. Meetings

Important corporate decisions will be taken at meetings by a vote of the board of directors. Both forms of company must have a meeting of the board of directors once every three (3) months. The Chairman of the board, or one third (1/3) of the total number of serving directors, may call a directors’ meeting with a quorum being at least a majority of the total number of directors. A majority of the votes of directors present decides resolutions with the corporate secretary keeping the minutes of the meeting. Any directors present who do not register dissent to decisions are implied to have given consent. Notably, a director who is not present at the meeting at which a resolution was passed is deemed to have given consent unless within (15) fifteen days after he becomes aware of the resolution he asks for his dissent to be included in official records. Votes may be taken in writing rather than in a convened board meeting, unless the Articles of Incorporation specifically prohibit this.

Unlike a private limited company a public listed company must have at least one independent director present at board meetings. Furthermore the law states that the Board must approve a policy for provision of information to the board. Directors must be provided with complete, adequate, accurate, balanced, understandable and timely information possibly including copies of disclosure documents, budgets, forecasts, and monthly internal financial statements prior to the Board meetings. Any variance between projects and actual results must be disclosed and explained.

The Board of a public listed company must also provide the shareholders with a balanced and understandable assessment of the company performance, position and prospects on a semester basis.
Shareholders who hold at least fifty one percent (51%) of shares have the right to propose an extraordinary general shareholders’ meeting and the right to propose items on the agenda of the meeting.

6. Committees

Specialized committees can help the board deliberate on more specific issues. Committees may be established by a majority of the board of directors in a written resolution that grants specific rights to the committee. Each committee must consist of one or more directors appointed by a majority of the board of directors and conduct its meetings in the same manner as the board of directors.

Committees may not declare dividends or issue shares in the company, nor seek shareholder approval for certain board duties.

The Board of a public listed company must also provide the shareholders with a balanced and understandable assessment of the company performance, position and prospects on a semester basis.
Shareholders who hold at least fifty one percent (51%) of shares have the right to propose an extraordinary general shareholders’ meeting and the right to propose items on the agenda of the meeting.

By law public listed companies must establish an Audit Committee composed of at least three (3) members and chaired by an independent director. At least one (1) member must be a financial expert. They must also establish a Risk Management Committee if assets amount to more than 200,000,000,000 riel (around USD $50,000,000) composed of at least three (3) members and chaired by an independent director. At least one (1) member must be an expert in finance and risk management.

Private limited companies have no legal mandate for nomination process of directors, however public listed companies are encouraged to have a nomination committee composed of at least three (3) members, all of whom must be non-executive directors with at least one (1) independent director, and are recommended to have a system wherein minority shareholders can nominate directors. Roles and duties of the committee are determined by the board and should include review and evaluation for the board of the qualifications of candidates for the positions of directors or senior officers. The nomination committee may also include responsibility for setting or reviewing and recommending the compensation and remuneration of the board and senior officers.

7. Corporate Secretary and Records

The company must name a company secretary who has the right to receive and keep documents related to the affairs of the company, and must store the articles and by-laws, including amendments; minutes of meetings and resolutions of shareholders; copies of all notices required to be sent or filed in accordance with the law; and a securities register at its registered office.

A private limited company has limited further guidance for the role of corporate secretary, however could incorporate into its Articles of Incorporation specific roles as established for a public listed company.

A public listed company must appoint a senior officer of the company as corporate secretary who can assure good performance, loyalty and discipline. The corporate secretary reports to the board through the Chairman and has specified roles, namely: establish an effective working relationship with the board and senior officers of the company; support the board and board committees; keep updated on developments in law and regulations that might affect the board and company operations; keep updated with corporate governance and corporate social responsibility developments; facilitate effective communication between the board and senior officers in order to support the decision making process; and arrange and manage procedures and minutes-taking for board and shareholder meetings.

8. Directors’ Rights

Whereas no explicit “directors’ bill of rights” is included in law for private limited companies, individual directors of public listed companies have the legally articulated right to:

1. Receive agendas and information sufficiently in advance, in order to prepare for Board and committee meetings;
2. Access to up to date information about the company in a timely way;
3. Disagree, in writing, with any board action or decision, and record their dissenting voice;
4. Place items onto the agenda of board meetings;
5. Access to senior officers as reasonably needed, on a mutually convenient basis;
6. Obtain in-house advice on all duties;
7. Receive transparent and adequate compensation or remuneration; and
8. Access to independent advice if required.

By clearly articulating these rights, the director becomes more empowered to perform duties on behalf of the shareholders. If not already incorporated into the Articles of Incorporation, a private limited company would do well to use these rights as a basis for empowerment of its directors.

9. Conclusion

It is evident in law, and an entirely reasonable measure, that public listed companies have more protections in place for their shareholders compared to a private limited company. These measures should increase shareholder confidence in the governance of the company. The protections can be seen in the increased legal requirements articulated in the rights and obligations of the board and officers of a public listed company. Should a private limited company wish to improve its corporate governance for the benefit of the shareholder(s), it might adopt some of the standards mentioned in this newsletter.