EU plan on corporate governance will bolster shareholders’ duties as well as rights

Mon, May 13, 2013, 01:01

More than 300 delegates from across the European Union and further afield will travel to Ireland this week for the 12th European Corporate Governance and Company Law Conference.

The main focus will be the Commission’s Action Plan on Company Law and Corporate Governance.

One of the areas in which the European Commission legislates is company law and corporate governance, which is part of the portfolio of Michel Barnier, EU Commissioner for Internal Markets and Services. European company law is recognised by the Commission as the cornerstone of the internal market because it facilitates freedom of establishment of companies while enhancing transparency, legal certainty and control of their operations.

Since 1968, a series of company law directives have been transposed into national law, including Ireland. Initially, there were a number of great successes. For example, the public limited company, or PLC, owes its existence to our implementation of the Second Company Law Directive; much of our law relating to accounts and audit derive from the Fourth, Seventh and Eight Company Law Directives; and the ability to form a single-member private limited company came from our implementation of the Twelfth Company Law Directive.

Such directives seek to achieve harmonisation of company law and corporate governance across the EU. In many cases, they represent the lowest common denominator as harmonising laws continues to be difficult to achieve.

Spectacular failure
A recent spectacular failure was the proposal for a standard European private company, called the SPE, across the EU. The inability of member states to agree a common set of laws led to the proposal being shelved.

The recently published Action Plan on Company Law and Corporate Governance outlines the initiatives which the Commission intends to take in this area to modernise and enhance the current framework.

The plan identifies three main lines of action: proposals to enhance transparency, to engage shareholders and to support companies’ growth and competitiveness.

The sort of proposals the Commission has in mind here would be those requiring companies to provide better information to both investors and society at large on their governance, such as the rules around voting. The idea is investors will be able to make a more informed decision in selecting companies in which to invest.

While such proposals will be of limited significance to the vast majority of Irish companies which are not listed on a stock exchange, to those few Irish companies for which they will be relevant, they may have a significant impact.

There is a view, perhaps not widely propagated, that shareholders in listed companies have responsibilities as well as rights. To date, EU initiatives have been about giving shareholders in listed companies rights but there is a growing opinion that many of the spectacular failures in corporate governance leading to financial crises and insolvencies might have been tempered, if not averted, had shareholders played a greater role in corporate governance.

Of course there is a limit to what so-called retail shareholders can achieve and the initiative is directed at institutional shareholders, such as funds and others with significant clout, whose voices will be ignored by boards of directors at their peril. The Commission’s proposals here are twofold: those aimed at offering shareholders more possibilities to oversee remuneration policy and related party transactions and those imposing direct legal obligations on institutional investors, asset managers and proxy advisers.

The fact we have 27 distinct legal jurisdictions within the EU does not lend itself to mobility of companies. A company that understands its legal universe in one member state will struggle if it enters a market in another member state.

Even getting to that other member state is difficult since companies cannot currently move their registered office from one member state to another. Yes, there are ways in which companies can enter markets, whether by opening branches or by doing a cross-border merger, but these all fall short of an effective and efficient means to move registered office without having to wind up. Allowing companies to transfer their “seat” or registered office is one of the proposals in the action plan and the Commission proposes consultation.

Previous proposals have been shelved, perhaps because of political considerations such as fears that less competitive member states will see an exodus of companies to other states. If that is so, forcing companies to remain in an uncompetitive environment is hardly consistent with supporting growth and competitiveness and it is hoped that, at long last, the Commission will propose a Directive which will be of real use to many companies in Europe and which will break down the borders of our economic union.

l The 12th annual European Corporate Governance & Company Law Conference ( takes place in Dublin on May 16th- 17th

Dr Tom Courtney is a partner in Arthur Cox, chairperson of the Company Law Review Group, and was a member of the Commission’s Advisory Group on Company Law and Corporate Governance from 2005-2009.

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