Modernising Company Law and Enhancing Corporate Governance in the European Union (2006)

Strengthening shareholders rights, reinforcing protection for employees and creditors and increasing the efficiency and competitiveness of business are the main aims of the European Commission's Action Plan on "Modernising Company Law and Enhancing Corporate Governance in the EU"presented on 21 May 2003.

It is based on a comprehensive and prioritised set of proposals for action, covering several years. The Action Plan devotes special attention to a series of corporate governance initiatives aiming at boosting confidence on capital markets. The Plan is open to public consultation for three months. The Commission will publish a synthesis of the comments received which will be given adequate consideration

The Commission intends to launch some initiatives this year or early next year. Simultaneously with the Action Plan, the Commission has published ten priorities for improving and harmonising the quality of statutory audit throughout the EU.

Internal Market Commissioner Frits Bolkestein said: "Company law and corporate governance are right at the heart of the political agenda, on both sides of the Atlantic. That's because economies only work if companies are run efficiently and transparently. We have seen vividly what happens if they are not: investment and jobs will be lost; and in the worst cases, of which there are too many, shareholders, employees, creditors and the public are ripped off. Prompt action is needed to ensure sustainable public confidence in financial markets. The Action Plan provides a clear and considered framework combining new law where necessary with other solutions. It will help deliver the integrated and modern company law and corporate governance framework which businesses, markets and the public are calling for. The Commission is shouldering its responsibilities: Corporate Europe must shape up and do the same. Working in partnership, we have a unique opportunity to strengthen European corporate governance and to be a model for the rest of the world."

The Action Plan is the Commission's response to the Final Report, presented in November 2002, of the High Level Group of Company Law Experts appointed by Frits Bolkestein and chaired by Jaap Winter.

The Action Plan aims to be flexible in application, but firm on principles. It also seeks to help shape international regulatory developments.

The main objectives of the Action Plan are:

• to strengthen shareholders' rights and protection for employees, creditors and the other parties with which companies deal, while adapting company law and corporate governance rules appropriately for different categories of company;
• to foster the efficiency and competitiveness of business, with special attention to some specific cross-border issues.

The European regulatory framework for company law and corporate governance needs to be modernised for the following reasons: the growing trend for European companies to operate cross-border in the Internal Market, the continuing integration of European capital markets, the rapid development of new information and communication technologies, the forthcoming enlargement of the EU to 10 new Member States, and the damaging impact of recent financial scandals.

The Action Plan is prioritised over the short-term (2003-2005), medium-term (2006-2008) and long-term (2009 onwards), and indicates which type of regulatory instrument should be used for each proposal, with approximate timescales.

The Action Plan is based on a comprehensive set of legislative and non-legislative proposals, under the following headings:

The Commission does not believe that a European Corporate Governance Code would offer significant added value but would simply add an additional layer between international principles and national codes. However, a self-regulatory market approach, based solely on non-binding recommendations, is not sufficient to guarantee sound corporate governance. In view of the growing integration of European capital markets, the European Union should adopt a common approach covering a few essential rules and should ensure adequate coordination of national corporate governance codes.

The Commission sees the following initiatives as the most urgent ones:

• introduction of an Annual Corporate Governance Statement. Listed companies should be required to include in their annual documents a coherent and descriptive statement covering the key elements of their corporate governance structures and practices
• development of a legislative framework aiming at helping shareholders to exercise various rights (for example asking questions, tabling resolutions, voting in absentia, participating in general meetings via electronic means). These facilities should be offered to shareholders across the EU, and specific problems relating to cross-border voting should be solved urgently
• adoption of a Recommendation aiming at promoting the role of (independent) non-executive or supervisory directors. Minimum standards on the creation, composition and role of the nomination, remuneration and audit committees should be defined at EU level and enforced by Member States, at least on a "comply or explain" basis
• adoption of a Recommendation on Directors' Remuneration. Member States should be rapidly invited to put in place an appropriate regulatory regime giving shareholders more transparency and influence, which includes detailed disclosure of individual remuneration
• creation of a European Corporate Governance Forum to help encourage coordination and convergence of national codes and of the way they are enforced and monitored.

Other corporate governance initiatives proposed in the Action Plan cover: achieving better information on the role played by institutional investors in corporate governance; giving further effect to the principle of proportionality between capital and control; offering to listed companies the choice between the one-tier and two-tier board structures; and enhancing directors' responsibilities for financial and key non-financial statements. The Action Plan notes that there is a strong medium to long term case for aiming to establish a real shareholder democracy and that the Commission intends to undertake a study on the consequences of such an approach.

The Commission considers that a simplification of the 1976 Second Company Law Directive, on the formation of public limited liability companies and the maintenance and alteration of their capital, would promote business efficiency and competitiveness without reducing protection for shareholders and creditors.

A proposal to amend the Second Directive is therefore a priority for the short term. Such a proposal may include a partial relaxation of certain rules (applicable inter alia to contributions in kind, acquisition of own shares, or limitation/withdrawal of pre-emption rights allowing a company's shareholders to have first refusal on new shares issued).

It could also include the introduction of "squeeze-out rights", meaning that the holder of a large majority of a company's securities could compel minority shareholders to sell their stock at a fair price, and of "sell-out rights" allowing minority shareholders to compel holders of a large majority of the capital to purchase their securities at a fair price. This would go further than the proposed Directive on Takeover Bids, which offers those rights only in listed companies and only when there has been a takeover bid.

Later on, an alternative regime not based on the concept of legal capital could be offered as an option to Member States. The Commission will, in the medium term, launch a study into the feasibility of an alternative based on a solvency test.

Groups of companies, which are common in most Member States, are a legitimate way of doing business, but they may present risks for shareholders and creditors. More transparency can help minimise those risks. Initiatives aiming at improving the financial and non-financial information disclosed by groups are priorities for the short term. Such initiatives would aim to ensure better information on the group's structure and intra-group relations, as well as on the financial situation of the various parts of the group.

The Action Plan advocates a framework rule to allow those managing a company belonging to a group to implement a coordinated group policy. It underlines the need for action against abusive pyramids, defined by the High Level Group as chains of holding companies whose sole or main assets are their shareholding in another listed company.

European companies need to be able more easily to do business across national borders within the EU. The Commission intends to present in the short term a new proposal for a Tenth Company Law Directive facilitating mergers between companies from different Member States, as well as a proposal for a Fourteenth Company Law Directive on the transfer of "seat" (a company's centre of activities and/or registered office) from one Member State to another. The Action Plan also covers: simplifying some of the requirements under the Third Company Law Directive (national mergers) and the Sixth Directive (national divisions), and introducing squeeze-out and sell-out rights for all public limited liability companies (see above).

The Action Plan includes a number of other proposals, as follows:

• launching a feasibility study on the possible introduction of a European Private Company Statute, which would primarily serve the needs of SME's active in more than one Member State
• supporting in the short term the ongoing process aimed at the introduction of several European legal forms (European Cooperative, European Association, European Mutual Society), and considering in the medium term the development of a European Foundation
• increasing the disclosure requirements applicable to a series of limited liability legal entities existing at national level.

Simultaneously with the Action Plan, the Commission has published ten priorities for improving and harmonising the quality of statutory audit throughout the EU, to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts and to prevent conflicts of interest.

On 21 November 2003, the Commission announced the results of its consultation on the Action Plan. Internal Market Commissioner Frits Bolkestein said: “The results of this consultation show the strength of the consensus on the thrust of the Action Plan and on the main measures within it, which aim to deliver an integrated and modern company law and corporate governance framework. It shows that business, markets and investors all know that if companies are not run efficiently and openly, they cannot deliver the right results for their shareholders and for the wider economy. The Commission will listen carefully to what respondents are saying on the detail of the Action Plan and take their comments into account in implementing the various initiatives within it."

See local download from ECGI site of the full synthesis report from the Commission's website.

The Commission will implement the Action Plan, taking due account of the comments expressed in the consultation. It has already adopted on 18 November a proposal for Directive on cross-border mergers. Other company law proposals will follow in 2004, for the simplification and modernisation of the "2nd Company Law Directive" on capital maintenance and alteration and for a Directive on the cross-border transfer of company "seat".

As indicated in the Commission work programme for 2004, the first corporate governance initiatives under the Action Plan are expected for the second half of 2004. The Commission sees the following initiatives as the most urgent:

• a Recommendation aiming at promoting the role of non-executive or supervisory directors (nomination, remuneration and audit committees)
• a Recommendation on directors' remuneration, giving shareholders more information and influence.

As announced in the Action Plan, the Commission will ensure that open, public consultations are organised where appropriate on the major initiatives of the Action Plan.