The Declaration on Corporate Governance (Section 289a German Commercial Code) comprises the declaration of compliance, information on corporate governance practices and a description of the Management Board and Supervisory Board procedures. Our aim is to present PAION ’s corporate governance principles as clearly and concisely as possible. You will find the complete declaration on our webpage under www.paion.com/corporategovernance.

Corporate Governance Report
The Supervisory Board and the Management Board of PAION AG are committed to the principles of the responsible management and governance of the PAION Group aimed at the long-term creation of value and set great store by these principles in their actions. In ensuring good and transparent corporate governance, the Supervisory Board and the Management Board of PAION AG follow the statutory provisions as well as the suggestions and recommendations of the Government Commission of the German Corporate Governance Code. The suggestions and recommendations set out in the German Corporate Governance Code are based on internationally and nationally recognised standards of good and responsible business management.

On 10 December 2010 and 21 February 2011, the Supervisory Board and the Management Board released an updated Declaration of Compliance with the recommendations of the Government Commission of the German Corporate Governance Code in accordance with section 161 of the German Stock Corporation Act and subsequently provided the shareholders with permanent access to it on the company’s website (www.paion.com). This website also provides for download of outdated Declarations of Compliance from previous years. PAION complies with essentially all recommendations of the Government Commission of the German Corporate Governance Code, including those in the most recently amended version of 26 May 2010 and 18 June 2009. The currently effective Declaration of Compliance is reproduced at the end of this report.

Code of Conduct
Since its foundation, PAION has developed into a company with focus on the clinical development of drugs which address indications with a high unmet medical need and that is respected throughout its sector of industry. As a listed clinical drug development company, PAION bears major responsibility towards different target groups. Doctors and patients trust in our ability to provide them with safe and effective products. Business partners, shareholders and investors must be able to rely on all of our activities and relationships with business partners and authorities remaining within the framework of the principles of integrity in business relationships. These principles were recorded in 2010 in the “Code of Conduct”. Please visit www.paion.de/en/verhaltenskodex for more information about the Code of Conduct at PAION.

Information on Company management and supervision
In accordance with the provisions of the German Stock Corporation Act, PAION AG has a dual management and supervision structure formed by two bodies, the Management Board and the Supervisory Board. The Management Board in 2010 consisted of four members, who together bore the responsibility for the company management. The Supervisory Board, comprising three members, appoints, supervises and advises the Management Board and is directly involved in decisions that are of fundamental importance for the company. The strategic objectives of the company are developed by the Management Board and co-ordinated with the Supervisory Board.

The Management Board and the Supervisory Board work closely together for the benefit of the company. The Chairman of the Supervisory Board co-ordinates the work in the Supervisory Board and chairs its meetings. The Chairman of the Supervisory Board stays in regular contact with the Management Board, in particular the Chairman of the Management Board and the Chief Financial Officer, also outside of the meetings of the Supervisory Board. In the rules of procedure of the Management Board, the Supervisory Board has laid down the duties of the Management Board to provide information and reports, the allocation of duties and co-operation in the Management Board as well as the processes and business transactions that require the approval of the Supervisory Board. The Supervisory Board consists of three members and has established an audit committee in 2010 which is headed by an independent member of the Supervisory Board who has knowledge and experience in the application of accounting principles or the auditing of financial statements. Duties and tasks of the Supervisory Board are also regulated by specific rules of procedure. Further details concerning the work of the Supervisory Board can be found in the Report of the Supervisory Board of the Annual Report 2010.

PAION AG has taken out a D&O insurance policy for the members of the Management Board and of the Supervisory Board. The insurance policy provides for a deductible for the Management Board and the Supervisory Board according to the legal requirements respectively the Corporate Governance Codex. The insurance coverage is not provided if the damages incurred in insured events are attributable to fraudulent actions, omissions or conscious breaches of duty.

Conflicts of interest on the part of members of the Management Board or the Supervisory Board are to be disclosed to the Supervisory Board without delay. No conflicts of this kind arose during the financial year 2010.

Three of the four members of the Management Board are at the same time managing directors of PAION Deutschland GmbH. Three board members are at the same time managing directors of PAION Holdings UK Ltd and its subsidiaries. Beyond that, they do not hold any other mandates on management or supervisory boards of other companies. The other positions held by members of the Supervisory Board are listed in the notes to the consolidated financial statements of the Annual Report 2010.

Compliance as a key management duty of the Management Board
Compliance, in the sense of measures to ensure adherence to statutory provisions and internal company policies and observance of these measures, is a key management duty at the PAION Group. Pursuant to Section 91 (2) of the German Stock Corporation Act, the Management Board is obligated to put in place suitable measures – especially a monitoring system – to enable the early identification of any developments that might jeopardise the survival of the company. The German Corporate Governance Code provides a clearer specification of this obligation, by stipulating that the Management Board is responsible for implementing a suitable risk management and risk control system in its company.

The Management Board of a joint stock corporation is jointly and severally liable for the dutiful performance of its organisational obligations, especially regarding risk management and risk controlling. The Management Board must define an organisational structure for the company that ensures that its operations adhere to legal stipulations to the largest extent possible and that any infringement of rights and legally protected interests of third parties is excluded as far as possible. A management board can only be exempted from liability if it can prove that it has duly performed the organisational obligations to which it is compelled.

The Management Board of PAION AG is comprised of four members. One of the organisational obligations of the Management Board is its duty to supervise the individual responsibilities within the Management Board. This is assured by the formal assignment of business responsibilities which takes account of the boundaries defining these individual areas of responsibility. The plan assigning business responsibilities forms an integral part of the rules of procedure for the Management Board, which has been approved by the Supervisory Board. In addition, regular meetings and consultations ensure that the members of the Management Board are mutually apprised of any important developments in each area of business responsibility. If any indications of deficits and irregularities arise, the Management Board as a whole adopts resolutions concerning any necessary and suitable counter-measures.

The Management Board may not delegate management tasks down through the organisation. This does not, however, extend to the large majority of all preparatory and executional tasks. The Management Board of PAION AG has delegated specific tasks to subordinate executives and members of staff in the Investor & Public Relations, Finance, Legal & Human Resources and Compliance departments as part of its efforts to comply with capital market statutes. These tasks and responsibilities are defined in the job descriptions. The members of staff that perform tasks related to compliance with capital market statutes are subject to ongoing monitoring, training and random checks.

The members of the executive boards and members of staff at the PAION Group must be made aware of certain, capital market-critical issues. These include, in particular, dealing with sensitive, confidential information and insider information. Any infringement of any pertinent capital market statutes can result in extremely negative consequences for an individual, but also for the PAION Group as a company.

Transparency and communication
Good corporate governance is distinguished by open, transparent and up-to-date communications. PAION AG ensures this by posting prompt reports on the company’s website and by forwarding without delay all relevant information for publication to the bodies designated for this (Business Register, Deutsche Börse, official journal for statutory stock market announcements (Börsenpflichtblatt), Europe-wide publication).

All ad-hoc announcements, notices in accordance with Section 15a of the German Securities Trading Act, press releases, financial reports, information on the Annual General Meeting as well as information on the company’s corporate governance can be accessed by the public on the company’s website (www.paion.com). The website also features a financial calendar that provides information on the future publication of the financial reports as well as an events calendar detailing upcoming presentations by the company. For all events and discussions, PAION AG ensures that no investor receives material information in a favourable manner and that the equal treatment of all shareholders is ensured. Information such as ad-hoc announcements, press releases, quarterly and annual reports are also made available in English.

PAION AG reports regularly and promptly on the development of its business as well as the net assets, financial position and results of operations of the group. The individual quarterly financial statements are published within 45 days after the end of the respective quarter, the consolidated financial statements within 90 days after the end of the respective financial year.

Further information about transparency and communications can be found in the Investor Relations section of the Annual Report 2010.

Shareholders and Annual General Meeting
The shareholders of PAION AG can exercise their rights at the Annual General Meeting. Each share entitles the holder to one vote. The shareholders have the possibility to exercise their voting rights themselves or by having it exercised through a proxy of their choice appointed in text form. PAION AG has made it easier for the shareholders to exercise their voting rights, with the Management Board appointing a representative to exercise the voting rights of the shareholders in accordance with their instructions. The reports and documents to be made available for inspection in connection with the Annual General Meeting are also posted on the PAION website (www.paion.com/en/hauptversammlung-2011).

Auditing of the financial statements
The consolidated financial statements of PAION AG are drawn up by the Management Board in accordance with the International Financial Reporting Standards. Following the vote of the Annual General Meeting, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, branch office (Zweigniederlassung) Cologne (“Ernst & Young”) was commissioned by the Supervisory Board to audit the annual and consolidated financial statements of PAION AG. It was agreed upon between the Supervisory Board and Ernst & Young that the auditor would report to the Chairman of the Supervisory Board or to the Chairman of the Audit Committee after this was put in place, respectively, without delay all findings and events essential for the fulfilment of the duties of the Supervisory Board that were discovered during the audit. Furthermore, the auditor is required to inform the Supervisory Board and the Audit Committee or to note so in the auditor’s report if he discovers any facts during the audit that are not consistent with the Declaration of Compliance issued by the Management Board and the Supervisory Board in accordance with section 161 of the German Stock Corporation Act. Concerning the concluding audit of the annual and consolidated financial statements by the Supervisory Board, we refer to the report of the Supervisory Board of the Annual Report 2010.

Risk management
Part of good corporate governance also involves the responsible handling of risks by the company. Details of the risk management system implemented at the PAION group are outlined in the group management report under the section “Risks and opportunities report” of the Annual Report 2010.

Remuneration of the Management Board
Structure and amount of the remuneration of the members of the Management Board are defined and on a regular basis reviewed by the Supervisory Board. Remuneration of the members of the Management Board comprises a fixed annual salary, a variable bonus, long-term performance-related remuneration components in the form of stock options and stock appreciation rights (remuneration instruments based on the share price and settled in cash), as well as taxable, non-monetary benefits and insurance contributions.

In accordance with the statutory provisions, the remuneration of each individual member of the Management Board is disclosed in the group management report under the section “Compensation report – Management Board“ of the Annual Report 2010, broken down into non-performance-related and performance-related components as well as components with long-term and sustainable incentives. Furthermore, that section contains information on the main features and the structure of the management board remuneration as well as on commitments in the event that a member’s activity on the Management Board ends. To avoid duplicating the description, reference is made to the statements in the group management report, which at the same time form an integral part of this corporate governance report.

Remuneration of the Supervisory Board
The remuneration of the Supervisory Board is laid down in the articles of association of PAION AG. Accordingly, the members of the Supervisory Board receive basic remuneration and attendance fees in addition to the reimbursement of their expenses. Performance-related remuneration for the members of the Supervisory Board is currently not envisaged. The basic annual remuneration amounts to EUR 20,000 and the attendance fee to EUR 1,500. Meetings that are held in the form of conference calls are not taken into consideration in the calculation of the attendance fee remuneration. The Chairman of the Supervisory Board receives double and the vice-Chairman one and a half times the basic remuneration and the attendance fee. Members of the Supervisory Board who are resident in a country outside Europe receive for each Supervisory Board meeting they physically attend double the basic attendance fee. The attendance fee is paid for a maximum of six meetings per year. The remuneration paid to each individual member of the Supervisory Board is presented in the group management report in the section “Compensation report – Supervisory Board” of the Annual Report 2010. To avoid duplicating the presentation, reference is made to the statements in the group management report, which at the same time form an integral part of this corporate governance report.

The members of the Supervisory Board have not received any remuneration or benefits for services rendered individually, in particular consultancy and agency services, in the financial year 2010.

Share transactions by and shareholdings of the members of the Management Board and the Supervisory Board
In accordance with Section 15a of the German Securities Trading Act, members of the Management Board, the Supervisory Board and persons associated with them are required to disclose selling or buying PAION AG shares if the value of the combined transactions reaches or exceeds EUR 5,000 in the calendar year. These transactions are published by the PAION AG immediately on the company’s website and notified to the Federal Financial Supervisory Authority. In the fiscal year 2010, no notifiable transactions were reported.

As of 31 December 2010, Dr Mariola Söhngen owned 2.59% (648,641 shares) and Dr Wolfgang Söhngen held 2.32% (582,340 shares) of the shares in PAION AG. These shares include 0.02 (6,197 shares) of both shareholders respectively that are held in each case by Dres Söhngen Beteiligungs GmbH, in which Dr Mariola Söhngen and Dr Wolfgang Söhngen hold 50% of the shares. 

As of 31 December 2010, Dr Kilpatrick held 3,609 shares (0.01%) in PAION AG.

As of 31 December 2010, Alan Goodman owned directly 0.59% (equivalent to 147,244 shares) and indirectly through Advanced Technology Management Limited, Huntingdon/Cambridgeshire, England, 3.64% (equivalent to 912,309 shares) of the shares in PAION AG.

Mr Hofer and the other members of the Supervisory Board did not own any shares in PAION AG as of 31 December 2010.

Securities-based incentive systems
PAION AG introduced a Stock Option Plan 2005, an Employee Participation Plan 2006, a Stock Option Plan 2008 and a Stock Option Plan 2010 as remuneration components with long-term incentives and risk characteristics. The Stock Option Plans and Employee Participation Plans allow for options to members of the Management Board and employees. The precise structure of these plans (e.g. waiting times and exercise hurdles) as well as the options and rights issued so far within the framework of these plans are presented in the notes to the consolidated financial statements under the sections Stock Option Plan 2005, Employee Participation Plan 2006 and Stock Option Plan 2010 of the Annual Report 2010, respectively. Furthermore, the explanations in the group management report in the section “Compensation report – Management Board” of the Annual Report 2010 contain statements on the value of the options and rights granted to the members of the Management Board. To avoid duplicating the presentation, reference is made to the statements in the notes to the consolidated financial statements and the group management report, which at the same time form an integral part of this corporate governance report.