Updating EU Company Law

More transparency in corporate governance, in areas like board diversity and remuneration, is among the goals of the Commission Action Plan on modernising company law.

Additionally, by proposing to merge all related Directives into a single instrument, the Commission wants to make EU company law more accessible and reduce the risk of future inconsistencies.

The Action Plan builds on the 2011 Commission Green Paper on EU corporate governance, stakeholder discussions and the Commission’s own analysis.

Context

European company law is a building block of the internal market. The financial crisis however has revealed serious shortcomings in this area, especially when it comes to financial companies. EU corporate governance rules apply only to companies listed on a stock exchange, while EU company law applies in principle to all EU public limited liability companies.

Corporate governance is about the relationship between a company’s management, its board, the shareholders and other stakeholders. The EU’s corporate governance framework combines legal and so-called ‘soft’ measures, such as national corporate governance codes based on the ‘comply or explain’ principle. These provide a certain level of flexibility for companies.

This soft approach however has not always been effective. This is why the Commission aims to strengthen the rules in certain areas. Furthermore, shareholders in some sectors appear to lack the motivation to hold their management to account, and certain corporate governance codes have not been adequately applied.

The Action Plan

The Action Plan sets out action in three major areas:
• Transparency
• More engagement of shareholders
• Support companies’ growth and competitiveness
It also outlines a merger of existing company law Directives to make it more user-friendly. The annex to the proposal contains a list of main initiatives.

Transparency

Board diversity, non-financial risks

Different board systems exist (single, dual, and mixed), depending on the country’s overall economic governance system.

The Commission wants to see an amendment of the accounting Directive 78/660/EEC to strengthen disclosure requirements vis-à-vis companies’ board diversity policy (e. g. gender-balance) and risk management of entire portfolio in 2013.

Corporate governance reporting

Using the ‘comply or explain’ principle, companies frequently choose the ‘explain part’ of the code in their reporting. These are often insufficient, namely for investors’ decisions. Some member states (e. g. Finland, Belgium, and the UK) have issued guidelines for companies’ explanations.

The Commission will propose a Recommendation to improve corporate governance reports, notably the quality of explanations when companies opt for such an option under corporate governance codes, in 2013.

Shareholder identification

Member states should mutually recognise existing national identification mechanisms, and establish a national transparency tool for minimum requirements if necessary.

In 2013, the Commission will propose an initiative to improve the visibility of shareholdings in Europe as part of its work programme in the field of securities law.

Transparency for institutional investors

In 2013, the Commission plans to modify the shareholders’ rights Directive to allow for more disclosure of voting and engagement policies, and voting records by institutional investors.

The Commission considers that disclosure of such information could have positive effects on investor awareness; their investment decisions; facilitate the dialogue between investors and companies; encourage shareholder engagement; and could strengthen companies’ social responsibility.

Engaging shareholders

Listed companies’ shareholders should be more actively engaged in the ‘checks and balances’ system of companies, in order to support the role of the supervisory board.

Oversight of remuneration policy

Executive remuneration and incentives should be genuinely based on principle ‘pay for performance’ to stimulate long-term value creation and to avoid unfounded transfers towards executives. Shareholders need clear, comprehensive and comparable information on executive remuneration, says the Commission.

In 2013, the Commission calls for a modification of the shareholders’ rights Directive to improve transparency of executive remuneration and grant the shareholders the right to vote on remuneration policy and report.

Oversight of party transactions

Related party transactions constitute dealings between the company and its directors or controlling shareholders. These dealings concern the appropriation of a company’s value by a related party.

The Commission aims to amend the shareholders’ rights Directive to improve shareholders’ control over related party transactions in 2013.

Regulating proxy advisors

Institutional investors often rely on proxy advisors during voting, especially in foreign companies. However, their methodology, conflict of interest and lack of competition are questioned. Currently, proxy advisors are not regulated at EU level.

In 2013, the Commission considers revising the shareholders’ right Directive to improve the transparency and conflict of interest frameworks applicable to proxy advisors.

Investor cooperation on governance issues

Throughout 2013, the Commission will work with the European Securities and Markets Authority (ESMA) to develop guidance to increase legal certainty on the relationship between investor cooperation on corporate governance issues and ‘acting in concert’ (exchange of information and cooperation between shareholders) rules.

Employee share ownership

As employee share ownership schemes could increase the proportion of long-term oriented shareholders and commitment to company, the Commission will identify the potential of trans-national employee share ownership schemes and take action to encourage this action in Europe.

Growth and competitiveness

Transfer of seat

Currently, only handful of member states allow for seat transfer without a subsequent re-incorporation. In addition, rules at the EU level are quite limited.

To address this complex issue, the Commission will conduct public and targeted consultations during 2013 to update its impact assessment on a possible measure on cross-border transfer of registered office. Based on the results, it will also consider a possible legislative measure.

Cross-border mergers

In 2013 the Commission will analyse the conclusions of an upcoming study on the application of the Directive 2005/56/EC on cross-border mergers of limited-liability companies. Based on this study and possible future needs, it will consider amendments to this Directive to address this issue.

Forms for SMEs

Due to a lack of progress on negotiations surrounding the European Private Company (SPE) Statute, the Commission will continue to explore the possibilities to simplify regulatory measures to facilitate cross-border activities of SMEs.

European company and cooperative statutes

The Commission does not plan to revise both statutes in the short term, but rather to raise awareness of them among SMEs in the EU. It will launch an information campaign on promoting the European Company statute (SE), including a comprehensive website, and will consider a launching a similar campaign on the European Cooperative statute (SCE) as well.

Groups of companies

In 2014 the Commission will propose a measure to improve both the information available on groups and recognition of the ‘group interest’ concept.

Codification of EU company law

Finally, the Commission proposes to merge existing Directives on mergers and divisions, the formation of public limited companies and the alteration and maintenance of their capital, single-member private limited companies, foreign branches and certain rules on disclosure, validity and nullity as well as interconnection of business registers.

This Commission plans to publish this proposal in 2013.