(3) Future of the Company Law and Corporate Governance Action Plan: public consultation

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1 EUROPEAN COMMISSION Internal Market and Services DG FREE MOVEMENT OF CAPITAL, COMPANY LAW AND CORPORATE GOVERNANCE Company law, corporate governance and financial crime Brussels, 22 February 2006 MARKT/F2/LZ/MFS D(2005) ADG CG& CL 06/04_minutes ADVISORY GROUP ON CORPORATE GOVERNANCE AND COMPANY LAW MINUTES OF THE MEETING OF 27 JANUARY 2006 (1) Introduction (2) Approval of the agenda (3) Future of the Company Law and Corporate Governance Action Plan: public consultation The group discussed the issues contained in the document published on the DG Internal Market and Services website Consultation on future priorities for the Action Plan on modernising company law and enhancing corporate governance in the European Union. The discussion followed the order of the document. Every point was shortly presented by the Commission services. 1. THE OVERALL AIM AND CONTEXT FOR FUTURE PRIORITIES Concerning the questions on the appropriateness of the Action Plan s response to today challenges in the light of the Lisbon Agenda and better regulation, the sufficiency of tools used and the possible new initiatives in the company law and corporate governance field, the general view was that the new Action Plan should bring about initiatives that are more flexible, leave more choice to the Member States and companies and remove barriers that hinder entrepreneurship. In particular any proposal should take account of the particular needs of SMEs. In this context it was suggested that the EU should, instead of regulating, lay down principles that Member States would follow or promote, use the 'comply or explain' principle, let the market regulate more and intervene only if this mechanism fails. This flexibility would allow the EU to react and adapt quickly to global changes and developments. There was also a view that it should be considered whether any action should be taken before the results are known of the regulation that has been recently adopted and implemented in the Member States. It was suggested to look and learn from the experiences with FSAP. It was indicated that, before taking any European initiative, the practices present in the Member States should be carefully studied (e.g. as a part of the impact assessment) and explained and the Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) Office : C107 3/57 Telephone : direct line (32-2) Fax : (32-2)

2 problems to be tackled should be identified. The subsidiarity principle should be strictly followed in assessing whether a particular matter should be subject to the action at EU level. As to the particular measures it was stressed that it is important to identify priorities among the measures proposed adjusted to the current needs. There was an agreement that the reform of the capital maintenance rules is an urgent matter, especially in the light of the recent changes in the accounting area. It was also proposed to include the issue of securities lending in the future Action Plan (possible recommendation) as not all the important issues has been resolved in the proposed directive on shareholders rights. 2. ESTABLISHING THE RIGHT PRIORITIES FOR THE ACTION PLAN: MEDIUM AND LONG TERM 2.1. Corporate Governance Shareholder democracy One share, one vote A clear majority of the Members that spoke saw no need for a Commission intervention on that issue since no problem has been so far identified. It was stressed that any limitation in the freedom to deviate from a strict proportionality between contributed capital and voting power would be in contrast with the need for flexibility, and thereby with a fundamental principle of EU legislation. According to many Members, freedom of companies in this respect does not jeopardise shareholders protection: provided that there is transparency on granted corporate rights, it is up to potential (or present) investors to buy (or sell) the relevant company s shares. Thus, the issuance of different classes of shares should rather be regarded as the production of a wider range of contracts aimed at matching demands for different financial products: in this view, not all shareholders are interested in voting rights, while many investors simply prefer stability in control. Separations between cash-flow and voting rights, according to some participants, could be considered as a problem only in the context of a takeover bid, but such an issue has been already addressed by the Directive 2004/25/CE. According to one Member deviations from the one share, one vote rule should be addressed by the Commission since they hamper the checks and balances system provided for by the Company Law Action Plan. The CLAP tackled financial scandals in listed companies by means of enhanced corporate governance devices mostly based on shareholders control, rather than by adopting a governance structure more focused on financial authorities supervision. In this view, deviations from the one share, one vote rule have to be regarded as a limit to the power shareholders should be endowed with as a logical consequence of the CLAP. In any event, this Member would only support a recommendation in this field. As no common understanding exists in literature as to what should be considered a deviation from the one share, one vote rule, the Commission services asked the Members of the Group to compile a list of potential deviations present in their respective Member States in order to facilitate any future initiative in this field. It was agreed that such a list should be filed with the Commission by the end of February,

3 Rights of Shareholders As regards the issue of nomination and dismissal of directors by the shareholders, a clear majority of the Members saw no need to regulate it at EU level (since it is already available in the national laws of the Member States). Concerning shareholders communication, some Members were of the view that this issue should have been covered by the shareholders rights directive (as the directive covers also some substantive rights). According to one Member it is premature to go on with the initiative on substantive shareholders rights before measuring the effects of the directive on shareholders rights (which facilitates the exercise of shareholders rights). On the contrary, another Member welcomed this initiative and suggested that communication between shareholders and the company as well as acting in concert should be studied more in-depth and possibly covered by a recommendation. It was suggested in the context to encourage the creation of communication platforms for shareholders. These platforms would also allow them to be known by the issuing companies. One Member suggested that the issue of acting in concert is rather for the securities markets regulation than for company law. Several Members questioned the need for introducing an investigation right for shareholders at EU level (as anyway in practice it is used rarely, for marginal matters). One Member stressed the importance of this EU initiative as more shareholder control would help to diminish overprotection of managers and would allow the companies to be more competitive and attract more investments Disclosure by institutional investors of their voting policies For some Members, disclosure of their voting policies by institutional investors is important as long as the General Meeting has important powers (e.g. important to know who your constituency is) and for reasons of accountability. Hence, disclosure should only extend to those institutional investors that hold shares/exercise voting rights for others as a business. As to timing, no new regime should be introduced before the regime on cross-border voting is in place. They also underlined that this is an issue which encompasses also fiduciary law aspects. For other Members, this issue was more a matter for regulation by securities law than for company law, if it was to be regulated at all. If action were to be taken, a recommendation was considered enough. In this context, reference was made to a voting right code adopted in 2002 by the European Fund and Asset Management Association endorsing "Best Practices Recommendations of investment funds as shareholders". The implementation of this code in France has led to changes in the behaviour of institutional investors. For one Member, however, this issue was not for the intervention at European level Directors responsibilities/enhanced transparency of legal entities Director's responsibilities, for many Members is an issue of insolvency law or fiduciary duties, which should not be treated in this context. Some of these Members suggested that we look at how to protect creditors in the different markets higher up, without reaching the point of insolvency. It was also indicated that in order to attract good people to the boards (as a key principle of good management), they should not be scared by regulation on responsibilities. 3

4 Some Members took the view that directors disqualification was of interest for the protection of investors. Some Members suggested to ensure mutual recognition of national disqualification, while others opposed as there are no common rules for disqualification. The possibility to set up a register of disqualified directors was also evoked as good practice, though personal data protection regimes may be a barrier. A Member stressed the lack of harmonisation of criteria of disqualification applied by Member States. He suggested that any attempt to define them would necessitate addressing criteria on qualification of directors. On transparency of legal entities, the Commission suggested to treat it as a specific discussion point for another meeting, following developments in the anti-money laundering field Company Law Corporate restructuring and mobility The 14 th Company Law Directive on the transfer of the registered office The Group in principle supported the initiative of a possible directive on cross-border transfer of the registered office. It was stressed that there is a need for a measure that would make it easier for companies, and in particular SMEs, to compete on a crossborder basis and would bring convergence between national systems thanks to regulatory competition. However, it was suggested to examine which are the main factors for companies to move to other jurisdictions (these are usually: regulatory environment, listing requirements, employees rights, tax or environmental law) as facilitating mobility without addressing these factors might bring limited effects in practice. The Members also underlined that the possible future proposal should not allow mixing of national legal forms (i.e. it should not be possible to use a company form recognised in one Member State in another Member States) and should rather focus on facilitating the formalities of moving the company from one Member State to another, where a new company form recognised by that Member State would be adopted. There was also a suggestion that the issue of workers participation should be dealt with differently from the SE Statute and the cross-border mergers directive. It was also mentioned that the need for the directive might have diminished given the recent developments (the adoption of the cross-border mergers directive and the recent case law of the Court of Justice on the freedom of establishment) which already enough facilitate mobility of companies. One Member emphasised the importance of providing appropriate safeguards against possible abuses that the possibility of transfer of seat may enable The choice between the monistic and dualistic types of board structures The possibility to give companies the choice between monistic and dualistic types of board structures was considered a useful option, giving flexibility especially for the companies operating in those Member States where this choice is not possible in the national law. A number of Members stated that their domestic laws permit such choice and did not see any need for EU intervention if all Member States' laws would allow such possibility. A Member suggested that before any action is taken the issue at stake should be better defined. 4

5 Squeeze out and sell out Some Members were of the opinion that squeeze out rights should be provided, in particular for mid caps which are not liquid enough, without necessarily ensuring sell out rights in other cases (e.g. risk of blackmail). For other Members, sell out rights are the mirror side of squeeze out and is not appropriate to try to obtain one without the other Groups and pyramids There was a suggestion that the initiative concerning groups and pyramids could possibly be addressed together with an initiative on one share one vote. The chairman informed the Group that the study on one share one vote will cover also the issues related to groups and pyramids Legal forms of enterprises The European Company Concerning the appraisal of the usefulness of the European Company Statute and possible improvements and changes, some Members said it is too early to assess the practical implications of the Statute. Others showed little enthusiasm for the SE form as it is not a uniform European form, but amounts to 25 different kinds of SEs based in various national systems. The difficulties of listed companies to move from one Member State to another due to the different types of shares used in Member States (bearer shares, registered shares) were also signalled The European Private Company Regarding the usefulness of the European Private Company Statute in addition to already existing European and national forms, in general, the Group was of the opinion that there is a need for instruments facilitating the mobility of SMEs and provide them with flexible means to co-operate on a cross-border basis. One Member stressed the importance of a Statute designed for the needs of SMEs, allowing them to set up and operate subsidiaries in various Member States at lower cost. This Member referred to the feasibility study conducted by the Commission, which showed that business was interested in the initiative. S/he also mentioned that the regulation of the private companies would be much easier since there are less constraints put on them as compared with public companies. Besides, the possible statute foresees little reference to the national law and is optional for companies. On the basis of the general knowledge on the issue, but without having looked at the results of the feasibility study, the vast majority of Members that took the floor saw no need to introduce another European form (given the experience with the Statute for the European Company on which the agreement could not have been reached for 30 years). Some Members stressed that it is more practical to make it easier for the companies to move from one country to another. A Member noted that it would be difficult to establish a common concept of the limited liability company given that the Member States adhere to different definitions of the limited liability company. Some Members suggested that it should be considered whether the cost of creating the legislation (including lengthy negotiations and implementation process in the Member States) just to have one option is justified. The executive summary of the feasibility study is to be circulated to the Group. 5

6 The European Foundation Statute Members were not in favour of this issue being regulated by Company Law. 3. SIMPLIFICATION AND MODERNISATION OF EUROPEAN COMPANY LAW A brief exchange of views on the codification and simplification followed as a sum-up of the discussions at the previous meeting. The Members that took the floor were rather sceptical about the initiative and underlined the risk of opening all company law directives for re-discussion. One Member proposed that a working group could be created composed of the people working on the FSAP and its follow-up and those working on the review of the Action Plan. (4) Information points by the Commission services on: (a) Amendment of the 2 nd Company Law Directive (formation, maintenance and alteration of companies capital) - state of play The Commission services informed the Group that the amendment to the Directive is still open to the adoption in the first reading. However, the JURI voting, scheduled for 31/01, will be moved to 23/02 or even to March/April. It is due to the three substantial amendments tabled by the Rapporteur, Ms Kauppi, which meet considerable opposition from a majority of Member States. These amendments concern the acquisition of own shares (deletion of all optional conditions from the draft Art. 19(1) as agreed in the general approach), the financial assistance (deletion of the requirement of a prior approval by the general meeting in draft Art. 23(1)) and the exemption from reporting in case of a restriction or withdrawal of pre-emption rights (extension of the proposed exemption to cases where the shares are to be sold with a "small discount" to the market price, Art. 29(5a)). Currently there are informal discussions with the EP with a view to come to the common grounds to allow a vote in the legal affairs committee of the European Parliament and then in the plenary. (b) Study on alternative capital maintenance regime: call for tender state of play The Commission services announced to the Group that the call for tender with modified terms of reference for the study is intended to be published at the end of February/beginning of March and will hopefully meet with greater interest than the previous one. In reply to a question from some Members on the necessity of such a study especially since the issue is urgent and the process is lengthy, it was explained that the Company Law Expert Group pressured for it. Besides, according to the new requirements, impact assessment of any EU initiative must contain detail economic cost-benefits analysis which could not be conducted by the Commission due to limited resources. One Member stated that a simple repeal of the 2nd Directive's capital maintenance provisions, without any immediate replacement, would be the best 6

7 and quickest solution, since it would not require a feasibility study or an impact assessment. (c) Amendment of the 4 th and 7 th Company Law Directives state of play The Commission services informed the Members of the group about the recent developments concerning the amendment to the 4th and 7th Company Law Directives. The proposal was agreed by Parliament on 15 December 2005 (including a 20% increase in thresholds) and will be formally adopted around April/May this year. (d) Draft directive on shareholders' rights state of play The Commission services informed that the proposal will be now discussed in the Council. The European Parliament has not yet appointed the rapporteur. The first Council group meeting will take place on 13 February (e) Transparency Directive: working document on possible implementing measures state of play The Commission services informed the Members that following the publication of the working document, around 30 replies were received from interested parties. Members were also informed that the Commission would discuss on the next steps with Member States at the February meeting of the European Securities Committee. (f) Other issues In reply to a question from a Member, the Commission services informed the Group that the European Corporate Governance Forum, during its last meeting on 20 January 2006, adopted a statement on comply and explain principle and discussed its annual report, including the work program for 2006 (both documents will be soon published on the website). The Forum also discussed the issue of internal control. There was also an exchange of views on the working methods with regard to the consultation on the Action Plan and the confidentiality matters. (5) Future work Chairman announced that the Commission intents to organize a hearing on the future Action Plan (tentative date 3 May) to which the Member will be invited. He also mentioned 26 June 2006 as a tentative date for the next meeting. The whistleblowing in the context of corporate governance and securities lending were mentioned as possible topics for the next meeting in addition to the discussion on the future Action Plan. (6) Conclusion 7

8 Mariano Fernández Salas & Ludmiła Żalik 1 Secretaries to the Advisory Group 1 With the cooperation of Matteo Gargantini. 8