Corporate Governance Report

As a public company established under the laws of the Netherlands, with global depositary receipts of shares listed on the London Stock Exchange, X5 Retail Group N.V. is subject to the Dutch Corporate Governance Code adopted in 2003 and amended in 2008 (the “Code”). The full text of the Code can be viewed on X5’s website.

In accordance with the Code, a broad outline of the corporate governance structure of the Company is presented in this section, including any deviations from the Code’s principles and best practice provisions. The Company adheres to the principles and best practice provisions of the Code as far as may be reasonably expected, while complying with local legislation and applying market practices in the countries in which the Company operates.

The Management and Supervisory Boards

X5’s management and supervision structure is organized in a so-called two-tier system, comprising a Management Board and a Supervisory Board. Both the Management Board and the Supervisory Board are accountable to the General Meeting of Shareholders for the performance of their functions.

Duties of the Management Board
The Management Board is responsible for X5’s overall management. It is accountable for the Company’s pursuit and achievement of corporate goals and objectives, its strategies and policies. The Management Board is responsible for complying with all relevant legislation and regulations, for managing the risks associated with the Company’s activities, for fi nancing and external communication. The Management Board is required to report related developments to, and discusses the internal risk management and control systems with the Supervisory Board and its Audit Committee.

Composition of the Management Board
The Management Board consists of three members, the Chief Executive Officer, the Chief Financial Offi cer and the Company Secretary. In 2011 the composition of the Management Board changed: Mr. Balfe was appointed as Chief Financial Officer by the General Meeting of Shareholders on 22 February 2011, as successor of Mr. Kornilov. On 10 March 2011 Mr. Khasis left his position as Chief Executive Offi cer of the Company. His successor, Mr. Gusev, was appointed by the Annual General Meeting of Shareholders on 20 June 2011. At that same meeting, Mr. Lhoest was reappointed as Company Secretary for another four year term.

The table below shows the members of X5’s Management Board and their respective terms of appointment:

Name Year of
Birth
Position Year of Initial
Appointment
End of Current
Term of
Appointment
Andrei Gusev 1972 Chief Executive
Officer, Chairman
of Management
Board
2011 2015
Kieran Balfe 1969 Chief Financial
Officer
2011 2015
Frank Lhoëst 1962 Company
Secretary
2007 2015

Andrei Gusev, a Russian citizen, joined X5 in 2006 as M&A and Business Development Director. Prior to joining X5 Mr. Gusev worked in Alfa Group as, consecutively since 2001, Director for Investment Planning and Director for Group Portfolio Management and Control. Mr. Gusev was leading the merger process that led to the creation of X5 Retail Group. Prior to joining Alfa Group, Mr. Gusev worked many years in strategic consulting at Bain & Company and Deloitte & Touche. Mr. Gusev graduated with honors from Moscow State University, and holds an MBA degree from the Wharton School of Business at the University of Pennsylvania.

Kieran Balfe, an Irish citizen, was appointed Chief Financial Officer of X5 on 22 February 2011. Mr. Balfe has been working in Russia since 1994. Prior to his appointment at X5, Mr. Balfe was Deputy General Manager and CFO for Emerging Markets at Wrigley, a leading confectionery company. Following the acquisition of Wrigley by Mars Inc., Mr. Balfe played a key role in the integration of the two companies’ Russian operations.

Previously, Mr. Balfe was Financial Controller at Japan Tobacco International, Deputy General Manager and Finance Director at American Home Products Corporation responsible for both operational and corporate finance for Russia and the CIS countries, and Finance Director for Glencore’s copper operations in Kazakhstan. Mr. Balfe started his career as an Audit Supervisor and Audit Manager for Coopers & Lybrand, with whom he initially relocated to Moscow in 1994.

Mr. Balfe graduated from the University College Dublin with a master degree in accounting. He qualified as a Chartered Accountant in 1993 and was awarded a fellowship with the Institute of Chartered Accountants in Ireland in 2005.

Frank Lhoëst, a Dutch citizen, was appointed as statutory director and Company Secretary of X5 on 5 November 2007. Since 1991, Mr. Lhoest has held several positions at Intertrust Group, from account manager in the Netherlands Antilles to founder and director of the Intertrust office in Vienna, Austria. In 2002, Mr. Lhoest established the Intellectual Property Group of Intertrust in the Netherlands. Mr. Lhoest graduated from the Leiden University with a degree in Law.

Duties of the Supervisory Board
The Supervisory Board is responsible for advising and supervising the Management Board and the general course of affairs of X5 and its businesses. In performing its duties, the Supervisory Board takes into account the relevant interests of the Company’s stakeholders, and, to that end, considers all appropriate interests associated with the Company. Major business decisions require the approval of the Supervisory Board. The Supervisory Board also supervises the structure and management of systems of internal controls as well as the financial reporting process. The Supervisory Board meets at least four times per year.

Composition of the Supervisory Board
The General Meeting of Shareholders determines the number of members of the Supervisory Board. The Supervisory Board currently consists of seven members.

The Supervisory Board has a defined size and composition profile, which takes into account the nature of the Company’s business and activities and the desired expertise and background of the members of the Supervisory Board. The Supervisory Board generally aims for a diverse composition, but diversity is not a decisive factor when finding the most suitable candidate to fit the Supervisory Board profile. The Supervisory Board evaluates its profile annually.

According to the Rules governing the Principles and Practices of the Supervisory Board, a person may be appointed to the Supervisory Board for a maximum of three terms of four years. The Supervisory Board has prepared a retirement and reappointment schedule to prevent, to the greatest extent possible, reappointments occurring simultaneously. Both the Supervisory Board profile and rotation plan can be viewed on the Company’s website.

The table below shows the current members of the Supervisory Board and their respective terms of appointment. The terms of Mr. Ashurkov, Mr. Tynkovan and Mr. DuCharme will expire in 2012. All three board members are eligible for reappointment

Name Year of
Birth
Position Year of Initial
Appointment
End of Current
Term of
Appointment
Hervé Defforey 1950 Chairman 2006 2014
Mikhail Fridman 1964 Member 2006 2013
David Gould 1969 Member 2006 2014
Vladimir Ashurkov 1972 Member 2006 2012
Alexander Tynkovan 1967 Member 2008 2012
Stephan DuCharme 1964 Member 2008 2012
Christian Couvreux 1950 Member 2010 2014

Hervé Defforey, a French citizen, is an operating partner at GRP Partners, Los Angeles. Prior to joining GRP in 2001, Mr. Deff orey was CFO and Managing Director of Carrefour S.A., from 1993 to 2001, where he remained on the board until 2004. Previously, Mr. Deff orey was Treasurer at BMW Group and General Manager of various BMW AG group subsidiaries, and also held senior positions at Chase Manhattan Bank, EBRO Agricolas, S.A. and Nestle S.A. Mr. Defforey graduated from the University of St. Gallen, Switzerland with a degree in Business Administration.

Mikhail Fridman, a Russian citizen, serves as Chairman of the Supervisory Board of Alfa Group and is one of Alfa Group’s principal founders. He also serves as the Chairman of the Board of Directors of Alfa Finance Holdings S.A. and of TNK-BP and is a member of the Board of Directors of ABH Holdings S.A. (holding company for Alfa-Banking Group) and of VimpelCom. He is also a member of the International Advisory Board of the Council of Foreign Relations (USA). Mr. Fridman graduated from the Moscow Institute of Steel and Alloys.

David Gould, a U.S. citizen, has served as Deputy Director for Corporate Development, Finance and Control at Alfa Group Consortium since 2000. He also serves as a member of the Board of Directors of Alfa Finance Holdings S.A. and of ABH Holdings S.A. (holding company for Alfa-Banking Group). From 1992 to 2000, Mr. Gould held various positions at PricewaterhouseCoopers in Boston and in Moscow. He received his BA with honors from Colgate University in 1991 (concentration in Liberal Arts and minor concentration in Economics) and received his MBA-MS (Accounting) from Northeastern University in 1992. He qualified as a Certified Public Accountant in 1993 and as a Chartered Financial Analyst in 1999.

Vladimir Ashurkov, a Russian citizen, serves as Director of Group Portfolio Management and Control in Alfa Group. His main non-executive/ancillary positions include member of the Supervisory Board of Alfa Group, member of the Advisory Committee of Rosvodokanal, member of the Altimo Advisory Committee and member of the A1 Group Advisory Committee. Prior to joining Alfa Group, Mr. Ashurkov served as Vice President of Strategic Development in Industrial Investors Group (which owns the controlling stake in Far East Shipping Company) and gained experience in other transport and logistics companies and investment banks. Mr. Ashurkov graduated from the Moscow Institute of Physics and Technology with a Bachelor of Science (Physics) and from the Wharton School, University of Pennsylvania, with an MBA.

Alexander Tynkovan, a Russian citizen, is the founder and CEO of “M.Video”, a leading consumer electronics and home appliance retailer in the Russian Federation. Mr. Tynkovan graduated summa cum laude from the Moscow Energy Institute, majoring in Aircraft Electric Equipment.

Stephan DuCharme, a U.S. citizen, currently holds a range of positions, including advisor to the Supervisory Board at First Ukraine International Bank. Previously, he held positions with SUN Group, Alfa Group, European Bank for Reconstruction and Development (EBRD) and Salomon Brothers Inc. Mr. DuCharme has served on the Boards of Directors of CSA Czech Airlines, Alfa Bank, SUN-Interbrew Ltd. and JSC SUEK. He graduated with distinction from the University of California at Berkeley and received his MBA from INSEAD.

Christian Couvreux, a French citizen, formerly held several leadership positions at Group Casino, including the position of CEO from 1997 until 2003. He also held leadership positions at CFAO (now part of PPR), specifi cally at CFAO-Congo and La Ruche Meridionale. More recently he was a retail consultant in Asia, with a particular focus on Thailand, Vietnam and the Philippines. Mr. Couvreux holds a Master’s degree in Economic Sciences from the University of Paris and an MBA from the French business school H.E.C.

Committees of the Supervisory Board
While retaining overall responsibility, the Supervisory Board assigns certain tasks to its four permanent committees: the Audit Committee, the Nomination and Remuneration Committee, the Related Party Committee and the Strategy Committee. Each committee is composed of at least two members, at least one of whom must be independent within the meaning of the Dutch Corporate Governance Code. The members of each committee are appointed by and from the Supervisory Board. Each committee has a charter describing its role and responsibilities and the manner in which it discharges its duties and reports to the full Supervisory Board. These charters are included in the Rules governing the Principles and Practices of the Supervisory Board, which can be viewed on X5’s website.

Audit Committee. The Audit Committee assists the Supervisory Board in ensuring the integrity of X5’s financial statements, supervising internal business controls and risk management and with fi nancing and finance related strategies and tax planning. It also advises on the appointment of the external auditor by the General Meeting of Shareholders and its remuneration.

Nomination and Remuneration Committee. The Nomination and Remuneration Committee recommends the remuneration policy for the Management Board to be adopted by the General Meeting of Shareholders, prepares proposals to the Supervisory Board for remuneration of the individual members of the Management Board in line with the remuneration policy and advises the Management Board on the level and structure of compensation for other senior personnel. The Nomination and Remuneration Committee also advises on the selection and appointment of members of the Supervisory Board and the Management Board. At least annually, the Nomination and Remuneration Committee evaluates the size and composition of the Supervisory Board and the Management Board, as well as the performance of the individual members, and reports the results of these evaluations to the Supervisory Board.

Related Party Committee. The Related Party Committee advises the Supervisory Board on evaluating reported (potential) confl icts of interest and any other related party transactions which are contemplated between X5, and potentially confl icted persons or entities, including but not limited to its shareholders, members of the Supervisory Board and members of the Management Board.

Strategy Committee. The Strategy Committee advises on the general strategy of X5, including, but not limited to, the future direction of X5 and each of its affiliated businesses, overall growth and development strategy, mergers and acquisitions and financing strategy.

Composition of the Supervisory Board Committees

Name Audit
Committee
Nomination and
Remuneration
Committee
Related
Party
Committee
Strategy
Committee
Hervé Defforey Member Member Member
Mikhail Fridman
David Gould Chairman
Vladimir Ashurkov Member Member Member
Alexander Tynkovan Member Chairman Member
Stephan DuCharme Chairman Member
Christian Couvreux Chairman

Appointment, Suspension and Dismissal
The General Meeting of Shareholders shall appoint the members of the Management and Supervisory Board from a list of nominees, containing names of at least two persons for each vacancy, to be drawn by the Supervisory Board. The nomination by the Supervisory Board of the candidates is binding, and therefore the recommended candidate will be appointed by the General Meeting of Shareholders unless the nomination is dissented against by a qualified majority vote of at least two-thirds of the votes cast, representing more than one-half of the issued share capital of the Company. If the recommended candidate is rejected, the second nominee will be appointed unless similarly rejected by the General Meeting of Shareholders.

Supervisory Board members are appointed for a period of up to four years and may be re-elected twice. Members of the Management Board are also elected for a period of four years. The Articles of Association do not limit the total term of office for Management Board members.

Each member of the Supervisory Board and Management Board may, at any time, be dismissed or suspended by the General Meeting of Shareholders. A member of the Management Board may at any time be suspended by the Supervisory Board. These suspensions may be discontinued by the General Meeting of Shareholders at any time.

Remuneration
In line with the remuneration policy adopted by the General Meeting of Shareholders, the remuneration of the individual members of the Management Board will be decided by the Supervisory Board on the recommendation of its Nomination and Remuneration Committee. The remuneration of the members of the Supervisory Board is determined by the General Meeting of Shareholders. The remuneration policy for members of the Management Board, as well as the remuneration of members of the Supervisory Board is incorporated in the Remuneration Report on page 41, and is available on the Company’s website.

Reporting on Confl icts of Interest
A member of the Management Board or Supervisory Board is required to immediately report and provide all relevant information to the Chairman of the Supervisory Board (and to the other members of the Management Board, if it concerns a member of that board) on any conflict of interest, or potential conflict of interest, that he may have with the Company and that may be of material significance to him or the Company.

A decision of X5 to enter into a transaction involving a conflict of interest with a member of the Management Board or a member of the Supervisory Board that is of material signifi cance to him or the Company requires the approval of the Supervisory Board. The Related Party Committee advises the Supervisory Board on the evaluation of and decision on (potential) conflicts of interest and prepares resolutions of the Supervisory Board in relation thereto. An account of related party transactions in 2011 is included in the Report of the Supervisory Board on page 37.

In the event of legal proceedings between the Company and a member of the Management Board, the Company may be represented by a member of the Supervisory Board. In all other events in which a member of the Management Board has a conflict of interest with the Company, the Company may be represented by the Management Board, notwithstanding the discretionary power of the General Meeting of Shareholders to designate other person(s) to represent the Company upon execution of such a related party transaction.

Shareholders and Their Rights

General Meeting of Shareholders
X5 Retail Group N.V. is required to hold a General Meeting of Shareholders within six months after the end of the fi nancial year, to adopt the financial statements, to decide on any proposal concerning profit allocation and to discharge the members of the Management Board and Supervisory Board from their responsibility for the performance of their respective duties for the previous financial year, among other things.

Extraordinary meetings will be held as often as the Management Board or the Supervisory Board deems necessary. In addition, shareholders and holders of Global Depositary Receipts (GDRs) jointly representing 10% of the outstanding share capital may request the Management Board and the Supervisory Board that a General Meeting of Shareholders be held, stating their proposed agenda in detail.

The powers of the General Meeting of Shareholders are defined in the Articles of Association. Apart from the decisions taken at the Annual General Meeting of Shareholders, the main powers of the shareholders are to appoint (subject to the Supervisory Board’s right of making binding nominations), suspend and dismiss members of the Management Board and Supervisory Board, to appoint the external auditor, to adopt amendments to the Articles of Association, to issue shares and grant subscriptions for shares, to authorise the Management Board or the Supervisory Board to issue shares and grant subscriptions for shares, to authorise the Management Board or the Supervisory Board to restrict of exclude pre-emptive rights of shareholders upon issuance of shares, to authorise the Management Board to repurchase outstanding shares of the Company, to adopt the remuneration policy of the Management Board, to determine the remuneration of members of the Supervisory Board, and to merge, demerge or dissolve the Company.

The notice for a General Meeting of Shareholders needs to be published no later than the 42nd day prior to the day of the meeting. The mandatory record date, establishing which shareholders are entitled to attend and vote at the General Meeting of Shareholders, is fi xed at the 28th day prior to the date of the meeting.

One or more shareholders or holders of GDRs representing at least 1% of X5’s issued share capital or representing a value of EUR 50 million are entitled to request a matter to be included on the agenda of the General Meeting of Shareholders. Such requests, if sufficiently substantiated and received by the Company at least sixty days before the date of the meeting, can only be refused on the grounds of exceptional circumstances, to be checked against the principles of reasonableness and fairness.

All shareholders and other persons who, pursuant to Dutch law or the Articles, are entitled to attend and/or vote at a General Meeting of Shareholders are entitled to address the General Meeting of Shareholders. X5 uses the Bank of New York Mellon, the depositary for X5’s GDR facility, to enable GDR holders to exercise their voting rights represented by the shares underlying the GDRs. As described in the “Terms and Conditions of the Global Depositary Receipts”, holders of GDRs may instruct the Depositary with regard to the exercise of the voting rights connected to the shares underlying their GDRs. Alternatively, upon request of the holders of such depositary receipts, the Depositary will grant a proxy to such holders who wish to vote in person at a General Meeting of Shareholders. Persons who hold a written proxy may represent shareholders at a General Meeting of Shareholders. The written proxy must be duly executed and legalised in accordance with the applicable laws, and may be submitted electronically.

Voting Rights
Each share confers the right to cast one vote at the General Meeting of Shareholders. There are no restrictions, either under Dutch law or in the Articles, on the right of non-residents of the Netherlands or foreign owners to hold or vote the shares, other than those also imposed on residents of the Netherlands. Resolutions of the General Meeting of Shareholders will be passed by a simple majority of the votes cast in a meeting where more than 25% of the issued share capital is present or represented. If 25% or less of the issued share capital is present or represented, a second meeting should be convened and held no later than four weeks following the fi rst meeting. At the second meeting, no quorum requirement will apply. However, the General Meeting of Shareholders can only resolve on a merger or demerger with a majority of at least two/thirds of the votes cast, if less than fi fty percent of the issued capital is represented in that meeting.

Dividend Rights
Any distribution of profits to shareholders will be made after the adoption by the General Meeting of Shareholders of the annual accounts of the Company from which it appears that such distribution is permitted. The Company may only declare profit distributions insofar as its net assets exceed the sum of its issued share capital plus any legal reserves required to be maintained pursuant to Dutch law and the Articles. A loss may only be applied against such reserves to the extent permitted by Dutch law. On a proposal of the Supervisory Board, the General Meeting of Shareholders will determine which part of the profits will be added to the reserves and the allocation of the remaining profits.

On a proposal of the Supervisory Board, the General Meeting of Shareholders may resolve to pay an interim dividend insofar as X5’s net assets exceed the sum of its issued share capital and the reserves that are required to be maintained pursuant to Dutch law, as evidenced by an interim fi nancial statement prepared and signed by all the members of the Management Board. In addition, on a proposal of the Supervisory Board, the General Meeting of Shareholders may resolve to make distributions to the shareholders out of any reserves that need not to be maintained pursuant to Dutch law.

Dividends and other distributions that have not been claimed within five years after the date on which they became due and payable revert to the Company.

Significant Ownership of Voting Shares
According to the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht), any person or legal entity who, directly or indirectly, acquires or disposes of an interest in X5’s capital and/or voting rights must immediately give written notice to the Netherlands Authority for the Financial Markets (‘AFM’), if the acquisition or disposal causes the percentage of outstanding capital interest and/ or voting rights held by that person or legal entity to reach, exceed or fall below any of the following thresholds: 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%.

The following table lists the shareholders on record on 12 March 2012 in the AFM’s public register that hold an interest of 5% or more in the share capital of the Company:

Shareholder Date of Disclosure Capital Interest
and Voting Rights(1)
CTF Holdings Ltd. 2 August 2007 47.86%
Axon Trust 22 December 2009 11.43%
The Baker Trust 11 December 2009 8.42%
T. Rowe Price Associates Inc. 8 March 2012 5.03%

Securities Owned by Board Members 

The members of the Management Board and Supervisory Board and X5’s other senior management are subject to the Company’s Code of Conduct with regard to Insider Trading, which contains rules of conduct to prevent trading in X5’s Global Depositary Receipts of shares or other financial instruments when holding inside information. The Code of Conduct with regard to Insider Trading can be viewed on the Company’s website.

The Code of Conduct includes a specific section on obligations of members of the Management Board to report to the Compliance Officer in case of changes in their holding of securities in any Dutch listed company, not being X5 securities, in accordance with the Dutch Corporate Governance Code.

Furthermore, under the Dutch Financial Markets Supervision Act, members of the Management Board and Supervisory Board shall notify the AFM of X5 securities and voting rights at their disposal. These positions can be viewed on the AFM’s public register.

In addition, under the Disclosure and Transparency Rules in the United Kingdom, X5 must notify a Regulatory Information Service (RIS) of the occurrence of all transactions in X5 conducted – on their own account – and notified by members of the Management Board and Supervisory Board.

Repurchase by the Company of Its Own Shares
The Company may acquire fully paid shares, or depositary receipts thereof, in its capital for a consideration only following authorization of the General Meeting of Shareholders and subject to certain provisions of Dutch law and the Company’s Articles of Association, if:

  • Shareholders’ equity minus the purchase price is not less than the sum of X5’s issued and fully paid-in capital plus any reserves required to be maintained by Dutch law or X5’s Articles of Association; and
  • X5 and its subsidiaries would not, as a result, hold shares or depositary receipts thereof with an aggregate nominal value exceeding half of the issued share capital.

In 2011 the Management Board has been authorized to acquire up to 10% of the shares or depositary receipts thereof. This authorization is valid through 20 December 2012. In addition, the Supervisory Board has resolved that in case a purchase of shares or depositary receipts thereof by X5 would lead to X5 holding more than 5% of the shares or depositary receipts thereof, the Management Board requires the Supervisory Board’s prior approval for such purchase.

Authorization by the General Meeting of Shareholders is not required if X5’s own shares are acquired for the purpose of transferring those shares to X5 employees pursuant to any arrangements applicable to such employees.

Shares or depositary receipts thereof held by X5 or a subsidiary may not be voted on and are not taken into account for determining whether quorum requirements, if any, are satisfied.

Issue of New Shares and Pre-Emptive Rights
Shares in X5 may be issued, and rights to subscribe for shares may be granted, pursuant to a resolution of the General Meeting of Shareholders or another corporate body of X5 to which the General Meeting of Shareholders has delegated such authority for a time not exceeding five years. The General Meeting of Shareholders approved a delegation of this authority to the Supervisory Board, relating to the issuance and/or granting of rights to acquire up to 13,578,643 shares (20% of the issued share capital) through 20 December 2012.

Upon the issue of new shares, holders of X5’s shares have a pre-emptive right to subscribe for shares in proportion to the aggregate amount of their existing holdings of X5’s shares. According to the Company’s Articles of Association, this pre-emptive right does not apply to any issue of shares to employees of X5 or a group company. Pre-emptive rights may be restricted or excluded pursuant to a resolution of the General Meeting of Shareholders or another corporate body of X5 to which the General Meeting of Shareholders has delegated such authority for a time not exceeding five years. The General Meeting of Shareholders has delegated the authority to restrict or exclude the pre-emptive rights of shareholders upon the issue of shares and/or the granting of rights to subscribe for shares to the Supervisory Board through 20 December 2012.

Articles of Association
X5’s Articles of Association contain rules on organization and corporate governance of the Company. The current text of the Articles of Association is available at the Trade Register of the Chamber of Commerce and Industry for Amsterdam and on X5’s website.

The amendment of the Articles of Association of the Company requires a resolution of the General Meeting of Shareholders. The proposal to amend the Articles including the text of the proposed amendment must be made available to holders of shares and GDR holders for inspection at the offices of X5 as of the date of the notice convening the meeting of the General Meeting of Shareholders until the end of the meeting of the General Meeting of Shareholders at which the proposed amendment is voted on.

At the 2011 Annual General Meeting of Shareholders, X5’s shareholders adopted the amendment of the Company’s Articles of Association in accordance with the new Dutch bill on shareholders’ rights which came into force on 1 July 2010, implementing the European directive on the exercise of rights of shareholders in listed companies. The main amendments are reflected in the section ‘General Meeting of Shareholders’ in this report.

Anti-Takeover Measures and Change-of-Control Provisions
According to provision IV.3.11 of the Code, the Company is required to provide a survey of its actual or potential anti-takeover measures, and to indicate in what circumstances it is expected that they may be issued. No special rights of control as referred to in Article 10 of the EU Directive on takeover bids are attached to any share or GDR in X5. X5 and X5 subsidiaries may have customary change of control arrangements included in agreements, such as credit facilities, ISDA-agreements and debt instruments. Following a change of control of X5 (as the result of a public bid or otherwise), such agreements may be amended or terminated, leading, for example, to an early repayment of amounts due under existing credit facilities.

Auditor

The General Meeting of Shareholders appoints the external auditor upon nomination of the Supervisory Board. Both the Audit Committee and the Management Board make a recommendation to the Supervisory Board with respect to the external auditor to be proposed for (re)appointment by the General Meeting of Shareholders. In addition, the Audit Committee evaluates and, where appropriate, recommends the replacement of the external auditor. The Audit Committee also pre-approves the fees for audit and permitted non-audit services to be performed by the external auditor as negotiated by the Management Board. The Audit Committee shall not approve the engagement of the external auditor to render non-audit services prohibited by applicable laws and regulations or that would compromise their independence.

At least every four years, the Management Board shall together with the Audit Committee thoroughly assess the functioning of the external auditor in the various entities and capacities in which the external auditor operates. The main conclusions of the assessment shall be notifi ed to the General Meeting of Shareholders for the purpose of considering the nomination for the appointment of external auditor of the Company.

Compliance with Dutch Corporate Governance Code

X5 applies the relevant principles and best practices of the Code in the manner as described in this Corporate Governance Report. X5’s policy with respect to the implementation of the Code was last discussed with its shareholders at the 2010 Annual General Meeting of Shareholders. Since then, there have been no substantial changes in the corporate governance structure of the Company. Committed to a corporate governance structure that best serves the interests of all stakeholders, X5 continues to seek ways to improve and enhance its corporate governance standards in line with international best practices. X5 generally adheres to the Code, but does not comply with the following recommendations:

II.2.4, II.2.5: Grant of options to members of the Management Board
Under the Company’s Employee Stock Option Plan (the “ESOP”) options were granted to employees in four tranches over a period of three years, starting 2007, with varying vesting periods. The vesting requirement of the program is the continued employment of participants. The fi nal tranche of options under the ESOP vested on 19 May 2010. X5 acknowledges that in terms of vesting period the ESOP deviates from provision II.2.4 of the Code, stipulating that options should not be exercisable within three years following the date of grant. Since X5’s operational activities are mainly based in the Russian Federation and the Ukraine, and the grant of unconditional options with a shorter than three year vesting period was customary in these markets at the time the ESOP was designed, it was important for X5 to deviate on this point from the Code in order to attract and reward the best professionals in these markets.

A description of the Company’s equity-based incentive schemes is included in the Remuneration Report on page 41.

II.3.4, III.6.3 and III.6.4: Disclosure of transactions with related parties in the Annual Report
In accordance with the Code, transactions with members of the Management Board, Supervisory Board, or persons holding at least 10% of shares or depository receipts thereof in which there are signifi cant conflicting interests will be published in X5’s Annual Report. However, in deviation from the Code, a detailed statement of the relevant confl ict of interest is not published if (i) this confl icts with the law, (ii) the confi dential, share-price sensitive or competitionsensitive nature of the transaction prevents publication or could damage X5’s competitive position.

III.2.1: Independence of members of the Supervisory Board
Three out of seven members of the Supervisory Board have a substantial shareholder interest in X5, or are related to companies that are owned or controlled by companies that ultimately hold 10% or more of the shares or GDRs in X5. These members of the Supervisory Board are, therefore, not considered to be independent within the meaning of the Code. Mr. Defforey, Mr. Tynkovan, Mr. DuCharme and Mr. Couvreux are independent within the meaning of the Code.

X5 believes that the non-independent members of the Supervisory Board have an in-depth knowledge of the geographic market, of business in general and of retail specifically in the markets in which X5 operates, which is of particular advantage to X5 and its stakeholders.

III.5: Committees of the Supervisory Board and deviation from the maximum of one non-independent member of the Audit Committee
In 2009, the Supervisory Board resolved to merge the Supervisory Board’s Remuneration Committee and Selection and Appointment Committee to one ‘Nomination and Remuneration Committee’ and accordingly X5 currently deviates from the Code, which requires these two committees to be separate committees. However, in light of the respective duties, responsibilities and composition of each of the Remuneration Committee and the Selection and Appointment Committee, and for reasons of practicality, X5 believes that it was in X5’s best interest to merge these Committees.

In addition, X5 acknowledges that Mr. Gould and Mr. Ashurkov are non-independent members of the Audit Committee within the meaning of the Code whereas, pursuant to the Code, the terms of reference of each committee of the Supervisory Board may provide that a maximum of one member of each committee may not be independent. Considering Mr. Gould’s and Mr. Ashurkov’s fi nancial expertise, and for reasons of continuity, X5 believes that it is in X5’s best interest that Mr. Gould’s and Mr. Ashurkov’s membership of the Audit Committee be continued.

III.7.1: No grant of shares and options to members of the Supervisory Board
As determined by the General Meeting of Shareholders, Mr. Defforey, Mr. Tynkovan, Mr. DuCharme and Mr. Couvreux participate in the Company’s stock option plan and/or restricted stock unit plan. X5 acknowledges that the award of options or shares to members of the Supervisory Board under these plans constitutes a deviation from the Code. However, in order to attract and reward experienced individuals with a track record that is of specifi c relevance to the Company, X5 believes it is necessary to allow members of the Supervisory Board to participate in the Company’s equity-based incentive plans.

(1)In accordance with the filing requirements the percentages shown include both direct and indirect capital interests and voting rights. Further details can be obtained at www.afm.nl.