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Company law and Corporate Governance
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EU company law:
Corporate Governance:
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Overview of EU Company Law Directives |
Directives already adopted:- First Council Directive – Disclosure (68/151/EEC)
- Second Council Directive – Capital (77/91/EEC)
- Third Council Directive – Domestic Mergers (78/855/EEC)
- Fourth Council Directive – Annual Accounts (78/660/EEC)
- Sixt Council Directive – Divison (82/891/EEC)
- Seventh Council Directive – Consolidated Accounts (83/349/EEC)
- Eighth Council Directive – Qualifications of Auditors (84/253/EEC)
- Tenth Directive – Cross border mergers (2005/56/EC)
- Eleventh Council Directive – Branches (89/666/EEC)
- Twelfth Council Directive – Single Member Limited Liability Companies (89/667/EEC)
- Directive on worker involvement in the European Company (SE) (2001/86/EC)
- Thirteenth Council Directive – Takeover Bids (2004/25/EC)
Directives coming up:- Forteenth Directive – Cross-border Transfer of the Registered Offices of Limited Liability Companies (Commission proposal expected end of 2005)
- Board responsibilities, improvement of financial information and corporate governance directive proposal COM (2004) 725
- Company capital directive proposal COM (2004) 730
Shareholders’ rights directive (public consultation up to 15.7.2005)
Documents / Links- Brief presentation of council directives in corporate law: (powerpoint, 470 KB) (by Johannes Heuschmid)
The presentation provides an overview of the most important – both already adopted and upcoming – council directives in corporate law. The purpose of each directive is explained briefly, and a link to the legal text is provided. It focuses on each directive’s impact on worker participation rights, as far as this is relevant.
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Cross-border mergers (10th Directive) |
The decision of the European Parliament in May 2005 to approve the draft Directive on the merger of companies inside the EU is set to make mergers across European borders substantially easier from 2007. At present merging is a very expensive, lengthy and, in some countries, impossible undertaking. The Council of Ministers adopted the Directive formally on 26 October 2005.
As was the case for the European Company (SE), all progress on the mergers Directive was blocked for a long time by the unresolved problem of how to protect existing employee rights to board-level involvement. The solution which has now been chosen is substantially based on the negotiating model found in the SE Directive, and to a very great extent retains the standard it sets. If one of the merging companies had representation for employees at board level, there are to be negotiations with management on the same basis as for an SE. Employees can demand the same rights at board level as existed previously in one of the merging companies – although, where there is a one-tier board structure with a single board of directors, the proportion of employee members can be restricted to one-third of the total. In addition, there is only an automatic right for employee representatives to have board-level representation when at least one-third of employees previously enjoyed these rights. (In the case of the SEs formed by merger, the threshold is 25 per cent.) An important consequence of both the mergers and SE Directives is that employee representatives on company boards will in future come from several Member States. This presents both a challenge and an opportunity.
Source: Michael Stollt - Briefing in Mitbestimmung - international edition 2005
Documents / Links
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Cross-border transfer of the registered office (14th Directive) |
The so-called 14th company law Directive will, if it comes into effect, make it possible for companies to transfer their registered offices – their legal headquarters – to somewhere else in the EU. Until now such an action was either not possible at all or required the company to be liquidated in its country of origin before it could be re-founded with its registered office in the new country. The 14th Directive would make it possible, for example, for a German GmbH (the Germany form of a limited company) to transfer its registered office to the UK, transform itself into a UK Limited company and register as such. Only after this would it lose its legal status in Germany and be removed from the German register of companies.
As with other Directives, there is the problem of how far existing employee involvement rights at board level are endangered. This is particularly the case if the new country, where the company bases itself, has no or very few equivalent rights. One possible solution in a situation like this would be for management and employee representatives to negotiate about future board level involvement; if no agreement were reached, the existing employee involvement rights would continue. This seems a sensible solution, if only to avoid the transfer of registered offices being abused as a mechanism to escape from national minimal standards for employee involvement.
Incidentally the 14th Directive will not regulate the movement of a company’s actual operational headquarters. It will only make the transfer of the registered office easier. The European Court has already decided in favour of the freedom of establishment in several judgements (the cases of Centros, Überseering and Inspire Art). At present the 14th Directive is on hold as, given the problems of ratifying the European Constitution, it does not seem wise to make too rapid progress in this politically sensitive area. In addition, the tax consequences of transferring a company’s registered office have still to be legally resolved.
Source: Michael Stollt - Briefing in Mitbestimmung - international edition 2005
Documents / Links
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Takeover bids (13th Directive) |
The 13th company law directive (2004/25/EC, adopted 21.04.2004)covers (hostile) takeovers of public listed companies. The main purposes of the directive are to protect minority shareholders, as well as other parties, such as employees, and to make takeovers more efficient by removing existing barriers.
The main implications for employees are the board’s duty to inform the employees of all the companies concerned about the takeover bid, and the right of the employees or their representatives to draft an opinion on it. Consultation of the employees must take place on the basis of the relevant national provisions, especially those deriving from other Council directives, for example, the European works council directive, the Collective redundancies directive, the SE directive and the framework directive on consultation and information.
Documents / Links
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Directive on the exercise of shareholders' voting rights |
After two public consultations, on 5 January 2006 the Commission proposed a directive on the exercise of shareholders' voting rights (COM(2005) 685 final). This directive is one measure in the follow-up to the Commission Action Plan on modernising company law and enhancing corporate governance in the European Union. The main content of the proposal is to ensure timely access of shareholders to all information relevant to general meetings, and to facilitate the exercise of voting rights by correspondence and by proxy. Furthermore, the proposal provides for the abolition of share blocking and related practices, since they constitute a major obstacle to voting, in particular for institutional investors.
After publication of the Commission proposal the directive was the subject of lively discussions in the EP committees, which resulted in over 300 proposals for amendments. In particular, the right of shareholders to ask questions at the general meeting, which was proposed by the Commission, was opposed by business circles.
From an employee perspective this proposal is ambivalent. Positive aspects could include enhanced transparency for employee shareholders, as well as better representation of interests at the general meeting. However, one should also bear in mind that the number of employee shareholders, compared to other shareholders – if they even exist at all – is generally very low. Moreover, it is questionable whether the right to ask questions will remain in the proposal. Real progress would be the establishment of a special investigation right for employee representatives, as in French or Dutch law. On this the proposal is silent, however. Moreover, the proposal is also lacking in terms of measures to ensure and enhance incentives for long-term investment. Its focus on institutional investors in particular brings with it the danger of strengthening their influence in a very Anglo-Saxon way (which is usually not very worker-friendly).
Links
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European Private Company (EPC) |
The EPC (European Private Company) statute should provide a legal form for SMEs. A feasibility study was presented to the public on 13 December 2005. The study found there was great interest in this legal form. The same conclusion could be drawn from a public hearing of the EP legal committee on 22 June 2006. Furthermore, the EP will soon provide a report on this issue, which will probably support the adoption of an EPC statute.
In the context of the EPC, employee participation will be an important subject. First of all it will be important to safeguard existing board-level participation rights. Moreover, it will be important to establish a special EPC works council along the lines of the SE directive.
It is probable that the Commission will come out with a proposal but a final decision on this matter has not yet been taken. In its summary report on the recent consultation the Commission noted: ‘About 10% of those who responded to the question suggested the inclusion of rules on employee participation in the proposed regulation. Among the respondents who referred to that issue there were proposals to either follow the rules of the SE in that respect, limit the application of the Statute to companies with fewer than 500 employees or seek a compromise.
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The jurisdiction of the ECJ on the transfer of company head offices |
In recent years the European Court of Justice has, in a series of decisions, established some principles of law in the context of freedom of establishment (Art. 43, 48 EC-treaty) and the transfer of a company’s head office to other member states which have had a profound impact on national regulation of the conflict of laws (incorporation theory and seat theory). The leading cases in this context are the following: Daily Mail, Centros, Überseering and Inspire Art. The main outcome of these decisions is the possibility for companies to transfer their head office to the member state of their choice.
The state to which the company moves its head office is not allowed to restrict this transfer. Exceptionally there are some restrictions, but they have to be in line with the strict requirements of freedom of establishment (Art. 43, 48 EC Treaty). On the other hand, the state in which the company was founded still has the power to restrict the emigration of a company (Daily Mail doctrine). Recently a new case in this context was brought before the ECJ, but there is no decision yet (see case C-210/06).
As a result of these decisions there has been a growing interest in setting up so-called pseudo-foreign companies, which are companies registered in one member state but with their head office in another member state (letter-box companies).
This practice could have a major impact on the rules on workers’ participation. More particularly this is a new loophole enabling circumvention of mandatory board-level participation rules. For example it is now possible to operate a company without any rules on board-level participation in countries where national law usually foresees board-level participation for domestic companies.
The first empirical studies on this new phenomenon of pseudo-foreign companies, however, showed that the most of these new companies are small and medium-sized companies, which do not meet the criteria of the mandatory board-level rules in the different member states. The main motivation for German company founders to choose the UK Ltd as company form was the total absence of minimum capital requirements in UK company law. It is also probable that national law will react to these new phenomena and lay down new rules on employee board-level participation for the so-called pseudo-foreign companies.
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European Parliament resolutions in the context of company law |
The European Parliament recently adopted two resolutions in the context of company law and corporate governance. These resolutions are not legally binding; they only declare the political will of the Parliament. But it is possible that they may attain indirect legal relevance through reference made by a court (that is, the European Court of Justice).
The first resolution was adopted on 15 March 2006 and concerned restructuring and employment (document reference number 2005/2188(INI)). This resolution contains under point 13 a statement regarding board-level participation in the 14th company law directive.
Furthermore, a resolution on recent developments and prospects in relation to company law was adopted on 4 July 2006 (document reference number 2006/2051(INI)). The document provides a good overview of current developments in company law and presents the European Parliament’s opinion on these issues. It contains a number of interesting statements in favour of participation, such as: ‘a statutorily regulated system of employee participation at the level of undertakings, as found in a large number of Member States, should be seen as forming an integral part of European corporate governance’ (Point F; see also: 3, 14, 33, 44).
Links:
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Introduction: Corporate governance from a trade union point of view |
The concept of corporate governance is defined in different ways. The narrow definition focuses on the control of management by shareholders. The broader definition looks at the role of stakeholders in making and implementing strategic decisions in the company. Corporate governance must be understood as a system in which there is an interplay of different regulations and market forces. Therefore corporate governance deals with multiple issues in the field of corporate law, securities regulation, corporate finance and industrial relations.
The basic issue underlying the corporate governance debate is the fundamental choice between two competing conceptions of the company (or theories of the firm): - On the one hand, there is the shareholder model, according to which the company is a private association of shareholders who come together and found a company with the intention of increasing their wealth. In this model, the clear primary responsibility of managers hired to run the company is to the shareholders, and their main task is to increase the value of the company.
- This may be contrasted with the stakeholder model, according to which the company is a community in which shareholders are only one of a number of stakeholders. Stakeholders are groups which are closely linked to the company. One important stakeholder group, especially from the trade union perspective, is the employees. According to the stakeholder conception of the firm, employees should have a “voice” in the decision-making process to ensure that a reasonable balance is achieved in the goals pursued by the company, not just the maximization of shareholder profits.
Despite scandals in the US like Enron or WorldCom, the shareholder model remains hegemonic in European policymaking circles. This model, it is argued, is the "international benchmark" for corporate governance and is used to justify the weakening of workers’ rights. However, there is little evidence of an economic need to change or adapt systems in Europe by copying the US model. EU company law initiatives should therefore endorse the emergence and evolution of a European model of corporate governance, fostering a company board orientation towards long-term value creation, high-trust labour relations, participation of employees in the company’s decision-making processes and societal responsibility.
In particular, worker participation in company decision-making is crucial for the development of the European corporate governance model from the trade union point of view. In the majority of EU member states it is obligatory to include a voice for workers in the national system of corporate governance. In 18 out of 25 EU- member states workers have the legal right to be represented on the boards of many large companies and to influence management decisions. Worker board-level participation in these countries is a fact, diverse in structure and extent, but deeply-rooted in different cultural and historically-developed environments. This fact plays an important role in the European corporate governance model and has to be recognised in future legislation.
Johannes Heuschmid, SEEurope network
Documents / Links- What is corporate governance ? - A definition.
The concept of corporate governance is defined in a number of different ways. As a rule, however, it is understood to mean the system of company management and oversight. Governance is consequently to be understood as an integral organism in which there is an interplay of different regulations and market forces. more
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The European Corporate Governance Forum |
In its 2003 Action Plan on modernising company law and enhancing corporate governance in the European Union the Commission considered it a priority to encourage the coordination and convergence of national codes through regular high-level meetings of the European Corporate Governance Forum. The Forum consists of 15 people. One of them is Emilio Gabaglio, former general secretary of the European Trade Union Confederation. He understands his role in the Forum as that of spokesman for the workers’ movement.
Documents / Links- EU Commission website (Link)
- ECGF: Annual report 2005 (pdf)
In its first annual report the Forum sets out its activities in 2005, including discussions of the following: recent developments in the Member States in the field of corporate governance; the "comply-or-explain" principle; the role and rights of shareholders in the company; and rules on internal control and risk management mechanisms. In future the Forum will focus on the controversial "one share, one vote" principle. All this is strongly focused on the shareholders’ perspective. So far, other stakeholders have not been sufficiently recognised in the Forum's work. However, the (employee) stakeholder issue will be on the agenda of the next meeting in June 2006.
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The Corporate Governance Advisory Group |
On 28 April 2005 the European Commission set up an expert advisory group to provide detailed advice on corporate governance and company law matters. In contrast to the European Corporate Governance Forum, which is concerned with the political agenda, the Advisory group is more technical in nature. The group consists of 20 non-governmental experts from various professional backgrounds with particular experience and knowledge of the subject. One member of the group is linked to the trade union movement. The group already had its first meeting; the next meeting will be in October. The main item on the agenda will probably be the shareholder rights directive.
Documents / Links
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OECD activities in the field of Corporate Governance |
Revised CG principles of the OECD
On 22/04/2004, the governments of the 30 OECD countries adopted the revised CG principles of the OECD. Chapter IV of the principles makes reference to existing rights of stakeholders established by law or mutual agreement. With regard to worker participation, the principles state only that "performance enhancing mechanisms for employee participation [such as works councils, board level representation, employee stock ownership] should be permitted to develop".
In a comment, the Trade Union Advisory Committee to the OECD (TUAC) notes certain improvements but also highlights that "much more needs to be done beyond the outcome of the review to address tomorrow’s challenges of corporate governance policy reform."
Documents:- The Guidelines are available in several languages at the OECD website
Guidelines on the Corporate Governance of State-Owned Enterprises (April 2005)
The OECD Guidelines address the State as an owner, and represent what OECD governments agree are the core elements of a good corporate governance regime for SOEs. The Guidelines also take employee board-level participation into account. In particular, Chapter VI D of the Guidelines makes reference to existing "employee board representation" rights established by law or collective agreements
Documents:
LINKS- OECD homepage on CG
- TUAC Homepage on OECD CG principles
The Trade Union Advisory Committee (TUAC) to the OECD is an interface for labour unions with the OECD. It is an international trade union organisation which has consultative status with the OECD and its various committees.
- GURN (Global Union Research Network)
The aim of the research network is to give union organisations better access to research carried out within trade unions and allied institutions.
- Committee on Workers' Capital (www.workerscapital.org)
CWC brings together representatives of the international labour movement to share information and develop strategies for joint action in the field of workers' capital, including such areas as pension trustee education, corporate and financial market governance, shareholder activism and economically targeted investment.
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