In this article we will discuss about the direct and indirect policies affecting corporate control in Europe.
Policies Directly Affecting Corporate Control:
A number of directives have already been adopted in the field of company law, independently of the White Paper. Five directives deal with company law issues in the strict sense of the word, four with accounting matters. The first directive sets general rules for the disclosure, obligations and nullity of limited companies.
The formation, domestic mergers and divisions of public limited companies are the subject of the second, third and sixth company law directives. The fourth, seventh and eighth directives deal with the annual accounts, the consolidation principles and the auditor’s qualifications of limited liability companies, with exemptions for Small And Medium-Sized Enterprises (SMEs).
The accounting and auditing directives can be considered as having made the most significant contribution towards a European framework. They made accounting a subject of Community law and stipulate that public and private limited liability companies in the EC should publish annual accounts. This is still not universally observed, as evidenced by the fact that more than 90% of German limited liability companies refuse to publish their accounts—a matter that has given rise to an infringement procedure from the Commission.
The accounting directives do, however, accommodate the basic practices in place for the moment but do not yet put in place European accounting standards, as too many implementation options are left to member states- 62 in the 4th directive, 50 in the 7th. Moreover, great differences exist between EU states with respect to the interpretation of these provisions. A recent study by the European accountants’ federation (FEE) found that the prudence principle of the 4th directive was applied in different ways in the Community.
Another series of measures, proposed a long time ago, deal with core corporate governance issues, e.g. the structure and control of public limited companies, take-over bid procedures and employee rights in limited companies. None of these measures has yet been adopted. Some were amended in 1990 (Bangemann proposals) in reaction to the publication of a study by the UK Department of Trade and Industry (DTI).
This study argued that take-overs had to be facilitated within the Community to allow companies to restructure and to adapt their size to the single market. The study demonstrated that structural differences form important impediments to cross- border cooperation of companies in the EU. In particular, it was shown that the total value of acquisition in the UK had been 2.5 times larger than the total in the rest of the Community.
Furthermore, a big share of UK acquisitions had been made in the form of contested bids, whereas this form of acquisition was insignificant in other member states. The study argued that was due to structural differences between member states regarding the rights of the employees, shareholders, management and their respective powers, the availability of information, the taxation policies, accounting practices and supervisory practices.
Commissioner Martin Bangemann reacted to the study with a series of amendments to the (draft) company law directives intended “to remove barriers to take-overs”. Four Commission proposals, described below, remain on the table of the Council.
Harmonisation of the Structure of Companies- Draft Fifth Company Law Directive:
This draft directive relates to the structure of Public Limited Companies (PLCs) with share capital. It defines the powers and obligations of the board.
It provides that PLCs shall be structured in one of two ways-
(1) The two-tier system, in which the company is managed by management under the supervision of a supervisory organ; or
(2) The one-tier system, in which the company is managed and controlled by a single board of directors and in which the actions of the executive members are supervised by the non- executives.
The draft contains provisions obliging companies to allow a form of employee participation and control of the board, depending on the sort of company and the number of employees. Other provisions concern the holding of general meetings of shareholders, proxy voting and the drawing-up and auditing of annual reports.
The 1990 amended draft removed impediments with regard to the exercise of voting rights, created more transparency for shareholders, instituted the “one share-one vote” principle and majority voting in the general assembly, rendered control on the board more effective, and limited the number of non-voting shares to a maximum of 50% of total capital in issue. The amendments did not, however, ease the proposal’s progress, as it still remains stalled in the Council.
Requirements for Mergers- Draft Tenth Company Law Directive:
This draft directive harmonises company law to ease cross- border mergers (of the share-exchange type) and defines the role of the assembly of shareholders in approving a merger. It would lift restrictions that make cross-border mergers more difficult than national mergers.
The sensitive issue of employee participation has kept this directive from making progress, which has never been able to pass a first reading in the European Parliament. More particularly, the draft allowed member states not to apply the directive if there was a problem with the provisions for workers’ participation.
Harmonisation of Takeover Bid Procedures- Draft Thirteenth Company Law Directive:
This directive defines the role of supervisory authorities during a takeover bid, the equity threshold for an obligatory public takeover bid, the protection of and requisite information that must be communicated to shareholders, the transparency of the operation and defensive measures. With the aim of ensuring equal treatment for all shareholders, the proposal obliges a bidder that acquires one- third of the voting rights of a company to make a bid for all the voting stock.
It restricts the ability of the management of the targeted company to take defensive action once a bid has been launched. Restrictions on prior-bid defences — such as dual class of shares or ceilings on the number of votes by a single shareholder — are considerably more limited.
The UK opposed the draft on the grounds that it would introduce a statutory form of take-over regulation, and argued that its self- regulatory system, embodied in the City Code on Take-overs and Mergers, was functionally satisfactory. The proposal therefore figured on the list of proposals that should be revised in line with the subsidiarity principle, as agreed at the 1992 Edinburgh Council.
It was part of the list of proposals that in the view of the Council “tended to go into excessive detail in relation to the objective pursued”. The Commission is still considering whether this proposal corresponds to the needs of business and whether takeover bids should be subject to more or less detailed regulation at Community level.
European Company Statute:
The most far-reaching proposal is the regulation on the European company statute (SE). This project is designed to provide an optional structure for companies and follows the pattern of the limited liability company.
A SE that is legally established in one member state would be allowed to conduct business throughout the EU and set up branches in other states, while being subject to the laws of its home state. Rules specify the terms of incorporation, which would apply to both public and private companies, the minimum capital (set at minimum 100,000 ecu), the board structure (one-tier or two-tier), voting rights (maintaining the possibility for voting restrictions through dual-class shares and capped voting), and the reporting requirements. The regulation is linked with a draft directive defining the rights of the employees in a SE.
Discussion of the proposal is advancing very slowly, and it is questionable whether a workable form of SE will materialise in the foreseeable future. Although the European Council and the European Commission frequently call for a final agreement on the regulation, the problem remains that it cannot result in an easier structure for companies than the one existing at national level.
So far, mainly the draft directive on employee involvement in an SE has posed problems. For some member states, it sets too high a degree of employee involvement, while it is too low for others. Germany has repeatedly stated that it will not accept a SE that would introduce a less stringent regime for worker participation than does its own legislation, as German companies would then opt for the SE.
Other member states, such as the UK and Ireland, argue in favour of harmonisation of national rules (although this does not seem much easier), rather than creating a new statute. A further problem is taxation and the allocation of tax revenues to member states.
A group of multinational companies has recently started an initiative to unblock the European company statute. They argue that differences in company structures are a heavy burden for companies operating on a European level, reducing their efficiency and affecting the competitiveness of European industry as a whole.
They furthermore assert that the worker participation issue is solved now that the European works councils directive, discussed below, has been adopted. Also UNICE, the European employers federation, has recently called for the adoption of the European company statute and the 10th company law directive.
The Commission is aware of the shortcomings in the single market. Regarding accounting, the Commission stressed in its 1994 strategic internal market programme that efforts needed to be made to improve comparability of financial reporting requirements within the Union.
This was also thought to increase the Union’s influence in the international accounting harmonisation debate. The Commission is also considering how a new approach can be found on the remaining company law directives and has commissioned studies on the subject.
Policies Indirectly Affecting Corporate Control:
Social Field:
In addition to the drafts on the rights of employees in an SE and the provisions of the 5th company law directive on worker participation, the recently adopted workers councils directive also sets procedures for consultation of employees in multinational undertakings. 11 A European works council, composed of about 30 management and employee representatives, can be set up where it is requested by the employees or their representatives.
The initiative can also come from the management of an undertaking, but it must receive the agreement of the employees. Starting in 1997, companies that do not have works councils will be required to open talks with employee representatives with a view to setting up such bodies.
Employers will have to announce and discuss all major restructuring plans and transformations of the company with the employee representatives. The directive will apply in case, a three-year period of consultation fails; when it concerns enterprises with at least 1,000 workers in the EU, of which 150 are working in another member state.
The measure was adopted on the basis of the Maastricht agreement on social policy (Social Charter), and will, thus, not apply in the UK, which fervently opposed the measure. It is estimated that the works councils directive will apply to some 450 German companies, 250 US corporations and 220 French concerns. About 100 UK companies, with big operations in continental Europe, will also be affected (compared to 300 if the rules were applicable on British territory).
A group of multinational companies maintains that the works councils directive should ease progress towards the adoption of the European company statute. They argue that they are required to establish works councils, without having a corresponding European organisational structure.
They therefore propose that the works councils directive should be applied to the SE and replace the draft directive on worker participation in SEs, thereby resolving the main stumbling block to the adoption of the SE. The procedures for consultation are, however, less stringent than those in place in Germany for example, where employee representatives occupy one- half of the seats on the supervisory board of large corporations.
Their role goes much further than the information and consultation procedures of the directive. Although the works councils directive provides an adequate platform for compromise on a European level, it will have to be seen whether Germany will accept this proposition.
Financial Field:
By far, the greatest progress towards more convergence in corporate governance at EU level has been realised through the single financial market programme. On the one hand, capital movements between member states have been liberalised. On the other, almost all the necessary legislation is in place for the free provision of financial services.
The relevant directives harmonise the basic rules to allow free branching and provision of services across borders with a single passport. The measures can be subdivided according to the different sectors.
In banking, the second banking directive follows the universal banking model, allowing banks to provide a wide variety of services from commercial to investment banking. Banks are also allowed to have relatively high shareholdings in industry. A bank can have an equity holding of 15% of its own funds in a non-financial undertaking.
The total amount of holdings in industry may amount to up to 60% of the bank’s equity. This share is higher than was the case in most EU member states. Another directive limits large exposures of a bank to a single client to 25% of the bank’s own funds.
The investment services directive gives stock brokerages similar freedoms as enjoyed by banks, allowing them to trade in securities throughout the EU under the sole control of the host country. The directive is, however, subject to some important transitional measures and will only come into force in 1996. Other measures in the securities field ease the integration of ED stock markets through the mutual recognition of listing particulars for admission and membership of stock exchanges.
To allow the Eurolist project to proceed this directive was recently amended to waive the publication of listing particulars for companies of high quality, large size and international standing, listed in the Community for at least three years and showing a good record of compliance with EU listing directives. Another directive deals with disclosure requirements in case of the acquisition or disposal of major holdings in listed companies.
The thresholds are set at 10, 20, 33, 50 and 66 per cent.12 Apart from this, the EC also agreed in 1989 to make insider trading a statutory offence, which had not previously been the case in many continental European countries.
A private initiative should contribute further to the integration of European stock markets. The European Federation of Stock Exchanges plans to start a project permitting European blue-chip companies to be listed jointly on several EU stock exchanges (the Eurolist project). It allows major companies already listed on a European stock exchange to obtain a listing on other European exchanges using a simplified procedure.
The move is intended to increase the attractiveness, liquidity and transparency of European stocks. The repeated delays in the official launch of the project, however, leaves open to serious doubt whether European stock exchanges are really prepared to cooperate. A more ambitious project, Euroquote, had to be abandoned two years ago, because participating bourses preferred to invest in their own systems rather than joining forces for the development of a unified framework.
The same fate might await the proposals to create a European stock exchange for smaller companies — EASDAQ (European Association of Securities Dealers Automated Quoting) — modelled on the American NASDAQ.
In the field of insurance and pension funds, the lifting of localisation and liberalisation of investment requirements in the life and non-life insurance directives, which came into force on 1 July 1994, is a further move towards an integrated European capital market.
A draft directive that opened markets for pension fund investment and management, however, had to be withdrawn because of the great divergence in pension-financing systems in the Community and conflicting views on prudent investment rules in the member states. The Commission now hopes to obtain similar results through a legally non-binding communication.