05/26/2011 11:37:00 AM EST
Conference on European Company Law: The Way Forward Stream 1 Analysis
As I mentioned in my previous blog I
would try to provide a bit more analysis on the report and discussion from the
conference. Today, I have taken time to review the first
stream and panel discussion from the conference and will highlight some of
the key points of interest and will be numbered below. First a quick mention to
the objectives that this part tries to address: 1) Allowing companies to
operate at lesser cost; 2) increase ability for cross border mobility; and 3)
improve the EU's ability to compete
1) My first point goes straight to shareholder protection. A lot of mention was
given to increasing shareholder protection to protect against
managerial/directorial opportunism and abuse.
Although I fully support review I struggle to accept the notion of increasing
protection. One must consider that increasing their protection and involvement
may not necessarily have the desired consequences. Shareholders notoriously
spread their risk across different companies. To afford them more rights may
not necessarily cause them to use them in the best interests of the company. If
directors can be opportunistic and abusive, why can't shareholders? If
shareholders conclude it is better to abuse their power in one company to
benefit themselves at another company they invest in, there may be little to
stop them doing so. Less so than a director who acts opportunistically and
abusively for sure.
Where there is a clear separation of ownership and management it can only be a
sensible conclusion to allow directors and managers to make decisions under the
duties of loyalty and care. They are well placed to be concerned with the
interests of the company as risk is unlikely to be as well spread for them and
with greater forces acting on their decision making such as, labour and
securities markets, the threat of litigation and so on they are more likely to
act within the limits determined.
The result will be one or two shareholders pre-determining all the decisions
making shareholder meetings a mere formality without sufficient checks in place
to monitor these decisions.
2) One interesting point was on the notion of transparency of shareholders. It
was debated whether companies should have transparency on who the current
shareholders are. The risk here is that this will increase anti-takeover
defences. What was used is that there still needs to be some "mist"
around takeovers at least for a short while as this can have positive corporate
governance effects. By providing full transparency in this area may harm
self-regulating areas of the market such as labour markets by allowing
directors to identify potential takeovers and create defences against that
shareholder or group for example.
3) Transparency itself was a hot topic of discussion. The benefits and
detriments where both noted as potentially increasing red tape and causing
more confusion but on the other hand making more information available will
lead to more accurate pricing and causing less confusion. One must argue that
either way, transparency potentially does little to solve problems. If anything
it just allows companies to dress things up or tell us exactly how they are
exploiting any particular group. It does not seem to deal with the cause of any
of the problems. However, transparency itself is perhaps merely one piece in
the puzzle towards creating a more efficient and competitive European market.
Interestingly the Chairman of the Legal Committee also proposed increasing red
tape. This may in itself cause less confusion.
4) It was also raised that there should be consideration to changing to
insolvency tests from minimal capital requirements with the EU. I must admit
this is not a particular area I am particularly knowledgeable in but an
interesting proposal none the less.
5) Corporate social responsibility was also raised by the Chairman of the Legal
Committee who seems quite opposed to it begin a matter for Company Law to
address. Noting again, that CSR merely increases red tape without much benefit.
He noted that it merely gives companies a chance to talk up their good deeds.
CSR it would seem should be dealt with by other areas.
6) He was also against quotas of female representation on the board, but
important to note, not against female representation on the board. He addressed
again that this is perhaps not a problem for company law as it merely deals
with the "result and not the cause". He argues this area needs to be
addressed by social policy and not company law: He opined "company law
cannot improve the world". Addressing the causes of why their is little
female representation will result in a more equal system rather than trying to
tinker with the result.
7) My own point in regards to points 5 and 6 link to the underlying argument of
whether areas such as CSR, quotas on boards etc are really a matter for Company
Law? Although it seemed the consensus was a majority verdict of "no"
it seems spreading the issues across vast masses of different areas of law can
cause considerable difficulties for business. Perhaps it would be a positive
move for lawyers (so I don't quibble too much perhaps) but finding ways of
keeping the fundamental aspects or perhaps the structure of a company in one
place can facilitate companies in a positive way. The finer details
perhaps do not have to be a matter for company law but the basics keep it all
in one place. Companies then do not need 12 different lawyers to explain 12
different areas of law.
Take s172 of the Companies Act 2006 for example. This provides that a director
is to act in the best interests of the company with regard to, amongst other
things, the interests of the environment. This section is merely giving the
director guidance on how to behave, making it clear to him his
responsibilities. However, detailing the amount of emissions a company can
produce for example is a finer detail for environmental law. By including the
basic elements of other areas within Company Law aim to assist the internal
running of a company that they cannot disregard issues of the environment but
the finer details are left to other areas of law.
8) Cross border mobility and the movement of seats was an important discussion
and it seems that the consensus is heading towards increased mobility and
removing restrictions on the transfers of seats contrary to some existing
European Court of Justice decisions.
This issue will apparently be addressed during this legislative period. It was
opined that companies are not fully able to take advantage of free movement
because of the restrictions or difficulties in transferring their seats. The
Chairman of the Legal Committee argued that he saw no good argument that
restrictions are necessary because of the avoidance of tax. He however failed
to address the possibility of abuse of moving seats may have on creditors,
employees etc if directors could move the company's seat more freely.
However, with the increase trend of cross-border activity it seems that time is
limited on difficulties and restrictions on transfer of seat and cross-border
I for one would agree that
cross-border mobility is an issue that needs to be addressed but which has no
Although this is just a brief
summary of the issues raised I found these to be of the most interest. The
entire stream above lasts two and half hours so you can imagine there are a few
more equally important issues raised by the panel and speakers. These did include
the issues of: Long term interests; allowing inquiries after a business fails
for trade unions/pension funds/shareholders; the creation of the European
private company; co-determination; group companies (although a minor point as
the issue is discussed in the second panel) and the ability to integrate the
company in the group's interest as is possible in Germany; and the
introduction of "no par-value shares"
For more commentary on directors' duties and shareholder litigation,
visit Gibbs: Law
and Life, a blog centering on directors' duties and company law,
particularly on interpretation and practicality of directors' duties in the
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